Document of The World Bank FOR OFFICIAL USE ONLY Report No: 53283-CN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION AND A GRANT FROM THE GLOBAL ENVIRONMENT FACILITY (GEF) TRUST FUND IN THE AMOUNT OF US$4.265 MILLION TO THE PEOPLE`S REPUBLIC OF CHINA FOR A SUSTAINABLE DEVELOPMENT IN POOR RURAL AREAS PROJECT May 10, 2010 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective May 2010) Currency Unit = Renminbi (RMB) Yuan (Y) Y 6.8 = US$1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS ABC Agricultural Bank of China AV Administrative Village CAPP Community Annual Project Plan CDD Community Driven Development CDF Community Development Financing CNAO Chinese National Audit Office CNY Chinese Yuan CPCO Central Project Coordination Office CPMO County Project Management Office CQ Consultants` Qualifications DA Designated Account DFID Department for International Development EIA Environmental Impact Assessment ERR Economic Rate of Return ESMF Environmental and Social Management Framework FCPMC Foreign Capital Project Management Center FM Financial Management FMM Financial Management Manual FMS Financial Management Specialist FRR Financial Rate of Return GEF Global Environment Facility ICB International Competitive Bidding IFR Interim Financial Report IPDP Indigenous Peoples Development Plan JSDF Japan Social Development Fund LGPR Leading Group for Poverty Reduction M&E Monitoring and Evaluation MIS Management Information System MLMA Migrant Labor Microenterprise Associations MLMSF Migrant Labor Microenterprise Support Financing MLSC Migrant Labor Service Center MOF Ministry of Finance NCB National Competitive Bidding NDRC National Development and Reform Commission NPV Net Present Value PADO Poor Area Development Office PAP Project-Affected People PLG Project Leading Group PMO Project Management Office PPMO Provincial Project Management Office PRCDP Poor Rural Communities Development Project (P071094) QBS Quality Based Selection QCBS Quality and Cost Based Selection QBPRP Qinba Mountains Poverty Reduction Project (P003590) RCC Rural Credit Cooperative RMS Rural Migrants Support SDPRAP Sustainable Development in Poor Rural Areas Project SIL Specific Investment Loan SLMA Sustainable Land Management and Adaptation SOE Statement of Expenditures SWPRP Southwest Poverty Reduction Project (P003639) TA Technical Assistance TCC5 China Economic Reform Implementation Project TPSW Township Project Work Station UNDP United Nations Development Programme WA Withdrawal Application Vice President: James W. Adams, EAPVP Country Director: Klaus Rohland, EACCF Sector Manager Ede Ijjasz-Vasquez, EASCS Sector Manager: Magda Lovei, EASER Task Team Leaders: Alan Piazza, SDV Ulrich Schmitt, EASCS CHINA Sustainable Development in Poor Rural Areas CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A. Country and sector issues.................................................................................................... 1 B. Rationale for Bank involvement ......................................................................................... 2 C. Higher level objectives to which the project contributes .................................................... 3 II. PROJECT DESCRIPTION ................................................................................................. 4 A. Lending instrument ............................................................................................................. 4 B. Project development objective and key indicators.............................................................. 4 C. Project components ............................................................................................................. 5 D. Lessons learned and reflected in the project design ............................................................ 9 E. Alternatives considered and reasons for rejection ............................................................ 10 III. IMPLEMENTATION .................................................................................................... 11 A. Institutional and implementation arrangements ................................................................ 11 B. Monitoring and evaluation of outcomes and results ......................................................... 13 C. Sustainability..................................................................................................................... 13 D. Critical risks and possible controversial aspects ............................................................... 14 E. Loan conditions and covenants ......................................................................................... 15 IV. APPRAISAL SUMMARY ............................................................................................. 16 A. Economic and financial analyses ...................................................................................... 16 B. Technical ........................................................................................................................... 17 C. Fiduciary ........................................................................................................................... 17 D. Social................................................................................................................................. 19 E. Environment ...................................................................................................................... 20 F. Safeguard policies ............................................................................................................. 21 G. Policy Exceptions and Readiness...................................................................................... 22 Annex 1: Major Related Projects Financed by the Bank and/or other Agencies ................. 23 Annex 2: Results Framework and Monitoring ........................................................................ 24 Annex 3: Detailed Project Description ...................................................................................... 29 Annex 4: Project Costs ............................................................................................................... 37 Annex 5: Implementation Arrangements ................................................................................. 39 Annex 6: Financial Management and Disbursement Arrangements ..................................... 42 Annex 7: Procurement Arrangements ...................................................................................... 55 Annex 8: Economic and Financial Analysis ............................................................................. 66 Annex 9: Safeguard Policy Issues .............................................................................................. 69 Annex 10: Project Preparation and Supervision ..................................................................... 74 Annex 11: Documents in the Project File ................................................................................. 76 Annex 12: Statement of Loans and Credits .............................................................................. 78 Annex 13: Country at a Glance ................................................................................................. 82 Annex 14: Incremental Cost Analysis ....................................................................................... 84 Annex 15: STAP Reviewer Comments and Team Response .................................................. 93 Annex 16: Summary of Environmental Monitoring of the SLMA Component ................... 95 Annex 17: Maps: IBRD# 36701, # 36702 ................................................................................ 104 CHINA SUSTAINABLE DEVELOPMENT IN POOR RURAL AREAS PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASCS Date: May 10, 2010 Team Leader: Alan L. Piazza Country Director: Klaus Rohland Sectors: General agriculture, fishing and Sector Managers: Ede J. Ijjasz-Vasquez and forestry sector (45%); General water, Magda Lovei sanitation and flood protection sector (20%); Agricultural marketing and trade (20%); Roads Project ID: P099751 and highways (15%) Environmental Assessment: Partial Themes: Rural services and infrastructure Assessment (B) (50%); Poverty strategy, analysis and Lending Instrument: Specific Investment Loan monitoring (25%); Other environment and (SIL) natural resources management (25%). Global Supplemental ID: P101844 Team Leader: Ulrich K. H. M. Schmitt Lending Instrument: Specific Investment Loan Sectors: General agriculture, fishing and Focal Area: M-Multi-focal area forestry sector (80%); Agriculture research and Environmental Assessment: Partial extension (10%); Water supply (10%) Assessment Themes: Rural services and infrastructure Supplement Fully Blended?: Yes (30%); Poverty strategy, analysis and monitoring (20%); Climate change (20%); Vulnerability assessment and monitoring (20%); Natural disaster management (10%). Project Financing Data [X] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: IBRD loan US$100 million; GEF grant US$4.265 million equivalent Total Bank financing (US$m.): 104.27 million Proposed terms: US Dollar denominated, commitment-linked variable spread loan, with level repayments of principal, with a 30-year repayment including 5-year grace period. Financing Plan (US$m) Source Local Foreign Total BORROWER/RECIPIENT 44.66 10.22 54.88 International Bank for Reconstruction and 82.00 18.00 100.00 Development Global Environment Facility (GEF) 3.27 1.00 4.27 Total: 129.93 29.22 159.15 Borrower: People`s Republic of China Responsible Agency: International Cooperation Division Foreign Capital Project Management Center State Council Leading Group Office of Poverty Alleviation and Development 25th Floor, Tower A, Disan Zhiye Building, No. Jia 1, Shuguang Xili Chaoyang District Beijing, China 100026 Tel: (86-10) 5822-2230 Fax: (86-10) 5822-2250 fcpmc@public2.bta.net.cn IBRD Loan Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 2014 2015 2016 Annual 10.00 20.00 20.00 25.00 20.00 5.00 Cumulative 10.00 30.00 50.00 75.00 95.00 100.00 GEF Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 2014 2015 2016 Annual 0.50 0.70 1.00 1.00 0.70 0.37 Cumulative 0.50 1.20 2.20 3.20 3.90 4.27 Project implementation period: Start September 14, 2010 End: June 30, 2015 Expected effectiveness date: September 13, 2010 Expected closing date: December 31, 2015 Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated substantial or high? [X]Yes [ ] No Ref. PAD III.D. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Project Development Objective. Ref. PAD II.B. The project's development objective is to explore and pilot more effective and innovative ways of providing poverty reduction assistance to the poorest communities and households in Henan Province, Shaanxi Province and Chongqing Municipality (the Project Provinces) through community driven development and participatory approaches. Global Environment Objective. Ref. PAD II.B. The Global Environment objective is to pilot sustainable land management and adaptation measures to address vulnerability to climate change in poor rural areas in the Project Provinces. Project description Ref. PAD II.C., Technical Annex 3 1. Component 1: Community Driven Development (CDD). (Total cost US$96.6 million) The CDD component will support the development of basic rural infrastructure in poor villages through the provision of investment support and related technical assistance for the construction and improvement of, inter alia, village access roads, drinking water supply systems, rural sanitation infrastructure, electrification, communication infrastructure, school building construction and repair, small-scale agriculture production infrastructure, and basic housing repair. 2. Component 2: Community Development Financing (CDF) and Capacity Building for CDD and CDF. (Total cost US$35.7 million) This component would address the current lack of basic income sources in remote villages and provide technical assistance and capacity building through two subcomponents: (a) Provision of CDF Financing to community cooperatives to finance CDF subgrants and/or CDF subloans in support of household-level productive activities, including improved and diversified crop production, animal husbandry, and other income generating activities. (b) Provision of technical assistance and capacity building support at the village level to support the Project`s CDD and CDF activities, including: (i) information dissemination, mobilization of villagers, formulation of community annual investment plans and village medium-term development plans; and preparation, technical evaluation, implementation and inspection of the above-mentioned CDD activities; and (ii) the development, implementation, management and supervision of productive activities, including farmer training in technical and vocational skills, infrastructure operation and management, and skills training for women; support for extension services in the areas of access to market information, and awareness campaigns about off-farm labor opportunities for farmers. 3. Component 3: Rural Migrants Support (RMS). (Total cost US$10.4 million) The rural migrant support component would address the challenges associated with China`s on-going large scale rural-to-urban migration through three subcomponents: (a) Carrying out activities to improve the condition of rural migrant workers in urban areas in Chongqing, including construction or improving migrant worker dormitories and migrant workers service centers, provision of vocational training and job placement assistance, and establishing migrant community service centers to provide social services. (b) Provision of Migrant Laborers Microenterprise Support (MLMS) financing to Migrant Laborers Microenterprise Associations to finance MLMS subgrants and/or MLMS subloans in support of migrant workers and migrant workers` microenterprises. (c) Strengthening the monitoring and evaluation system relating to the welfare of migrant workers, carrying out research to examine the relationship between migration and poverty alleviation, and conducting training and study tours to strengthen the capacity of the Chongqing municipal government in administering migrant workers` affairs. 4. Component 4: Sustainable Land Management and Adaptation (SLMA). (Total cost US$4.265 million) This component is expected to be cofinanced by the GEF, and would include three subcomponents: (a) Designing and implementing SLMA pilot activities based on community participation through promoting adaptation measures in small infrastructure and agricultural improvement projects; and providing technical assistance to communities and township technical staff in the design, implementation, and monitoring of these SLMA pilot activities. (b) Disseminating the experience of implementation of the SLMA pilot activities and promoting the integration of SLMA intervention in the Project`s CDD activities. (c) Supporting policy studies analyzing the linkages between poverty, vulnerability to climate change, and adaptation; and conducting consultation workshops to facilitate experience exchanges among agencies with responsibilities in land and water resources management, agriculture, forestry, and other aspects of climate change adaptation. 5. Component 5: Project Management, Monitoring and Evaluation. (Total cost US11.9 million) The project management and monitoring and evaluation component would include two subcomponents: (a) Strengthening the capacity of the Project implementing agencies at all levels in project management, monitoring, and evaluation through the provision of office furniture and equipment, vehicles (where applicable), related technical assistance, workshops, and international training and study tours. (b) Designing and implementing a comprehensive project management information system, including reporting progress, financial management and impact monitoring and evaluation, and domestic training (including workshops) and study tours. Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 9 Environmental Assessment (OP/BP 4.01) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Significant, non-standard conditions (Ref. PAD III.E) for: Withdrawal Conditions: 1. No withdrawals will be made for the CDFs (under categories 1.2, 2.2 and 3.2 in the table in Annex 6 para. 11) unless the Bank will have approved the CDF Manual. 2. No withdrawals will be made for the MLMSF financing (under category 1.3 in the table in Annex 6 para. 11) unless the Bank will have approved the MLMSF Manual. Covenants applicable to project implementation: 1. The Borrower will maintain throughout the period of implementation of the Project the Central Project Coordination Office (CPCO) with powers, functions, staff and resources, satisfactory to the Bank. 2. Throughout the period of implementation of its respective Project components, each of the Project Implementing Entities will maintain, and cause to be maintained, the following organizations with terms of reference, powers, functions, staffing and other resources acceptable to the Bank: (a) at the provincial level, a Provincial Project Leading Group (PPLG) and a Provincial Project Management Office (PPMO), (b) at the municipal level in Shaanxi and Henan, a Municipal Project Leading Group (MPLG) and a Municipal Project Management Office (MPMO), (c) at the county level, a County Project Leading Groups (CPLG) and a County Project Management Office (CPMO), (d) at the township level, Township Project Working Stations, (e) at the administrative village level, Project decision making committees and Project supervision committees, and (f) at the natural village level, Project implementation groups and Project supervision groups. 3. The Project Implementing Entities will apply and cause the Project counties and Project villages to apply, in the implementation of the Project, the CDD Manual, the CDF Manual, the SLMA Manual, and the MLMSF Manual, all in a manner satisfactory to the Bank. 4. Not later than three months from the Effective Date or such later date as the Bank may agree, the recipient will, through the CPCO, provide to the Bank for its approval, a simplified version (in Chinese) of the SLMA Manual to cover a description of the implementation steps for village assessments, pilot designs and implementation, and monitoring and evaluation requirements. I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. China`s success in reducing extreme poverty over the last quarter century has been remarkable. World Bank estimates indicate that the number of poor in China consuming less than a $1.25 per day (an international poverty line using the 2005 International Comparison Program results) declined by more than 600 million poor from about 835 million in 1981 to 208 million in 2005.1 Over this same period, global poverty declined by some 500 million poor from 1.9 to 1.4 billion (excluding China, global poverty increased). About 80% of China`s poor reside in the western and central provinces. Nearly all of these poor are rural inhabitants, although some poor rural migrants reside (at least on a temporary basis) in urban areas. 2. Despite this tremendous success in reducing poverty, China`s remaining poor still account for the second largest national concentration of extreme poor in the world after India. A number of assessments have concluded that as China`s poverty rate has declined, it has become increasingly difficult to overcome remaining poverty. The Chinese government has ambitious plans to assist the rural poor, and recently reconfirmed its plans to lift 148,000 officially- designated poor villages out of poverty by 2010. Substantial poverty reduction funding, from three main channels, underpins the implementation of these ambitious plans. However, institutional constraints attached to the use of these available poverty reduction funds limits the amount of funding that can actually reach the poor villages and households, and this may badly hamper the realization of the national poverty reduction plans. Moreover, the poor have only limited control of the funds that do reach the local level, and often cannot use these funds for the roads, drinking water systems, and other sorts of basic rural infrastructure needs which are most desired by the poor. The key institutional constraints which hamper the effective utilization of poverty reduction funding are: · About half of available poverty reduction funds are provided through the Leading Group for Poverty Reduction`s (LGPR) subsidized credit (tiexi daikuan) program. However, these funds are channeled through the Agricultural Bank of China (ABC), and it is known that ABC provides very little of these funds to poor households since ABC (a) does not have outreach to the poor areas, and (b) believes that the absolute poor are too risky and expensive to lend to. Instead, most annual tiexi daikuan funding is either directed to large scale infrastructure construction, or to county-level enterprises, or is not utilized. · The remaining poverty reduction funds are provided on a grant basis through NDRC's Food for Work Program (yigong daizhen) and MOF's poverty assistance program. Unfortunately, only some of these funds reach below the township level, and are not sufficient to provide the village-level roads, drinking water systems, small scale water resource development, and other basic infrastructure which comprise some of the most effective poverty reduction measures available. 3. In addition to these institutional constraints, new challenges for rural poverty alleviation are emerging. A large share of the rural poor in China reside in remote and inaccessible 1 See Chen and Ravallion, 2008. Official government and other alternative estimates indicate similarly sharp declines in the number of poor in China during 1981-2005. 1 mountain regions and often ecologically fragile environments. Here, agriculture production conditions are generally poor and alternative livelihood opportunities are typically very limited or nonexistent. The continued dependence on subsistence farming, which in addition to limited land availability is often characterized by inadequate farming techniques and land and water resource management practices, makes the remaining rural poor highly vulnerable to the expected effects of climate change, particularly in semi-humid to semi-arid transition areas. Frequent natural disasters, such as droughts and floods, changing seasonal weather patterns, and the limited knowledge of sustainable resource management, risk assessments and cropping diversification options may significantly increase livelihood risks for this segment of the population. 4. Finally, more than 140 million rural inhabitants have found or are seeking off-farm employment in China. Including some 100 million other family members, the total number of rural migrants in 2006 was about 230 million. While this massive labor migration has played a vital role in increasing rural incomes and reducing poverty, large numbers of these rural migrants comprise a growing vulnerable and disadvantaged population residing in urban areas. Subject, in many cases, to dismal living conditions, unsafe working conditions, and very limited access to social services for themselves and their families, there is widespread concern that this emerging population is contributing to mounting social tensions in urban areas. There is also concern that, whether they accompany their parents to the urban areas or remain in their home villages, many of the children of these migrant laborers do not receive sufficient adult supervision and may suffer developmental challenges. B. Rationale for Bank involvement 5. The rationale for Bank involvement in the project is to assist government in overcoming the institutional and administrative barriers to the effective use of poverty reduction program funding so that (a) a greater share of available funds actually reach the poorest communities, and (b) the villagers themselves play a greater role in determining the poverty reduction measures and forms of assistance they adopt. Overcoming these organizational constraints is also considered to be a prerequisite to the greater adoption of participatory and Community Driven Development (CDD) approaches and the increased engagement of NGOs and civil society in poverty reduction work. Bank engagement in the project will also contribute to the accelerated development of new forms of assistance for rural migrants as they transition to small towns and urban areas in order to improve their well-being and help facilitate the continued outflow of labor from rural areas. 6. The project will integrate and scale-up experience from the recently completed CDD Pilot Program supported by a Japan Social Development Fund (JSDF) Grant (TF054747) and Community Development Financing (CDF) Pilot supported by the China Economic Reform Implementation Project (TCC5; P085124). The CDD Pilot Program, operated in 15 administrative villages within each of four provinces, and provided subgrants to local communities on a competitive basis. The local communities identified their development priorities, developed subproject proposals, competed with other groups within the administrative village for funding and, if selected for funding, subsequently managed (and were accountable for) funds and implementation progress. The CDD Pilot Program, which made financial grants 2 available to participating villages for (a) Community Small-Scale Infrastructure and Public Services and (b) CDF funds, closed on June 30, 2009. The TCC5 CDF Pilot was implemented in 12 villages in two counties in Henan and Sichuan provinces. The CDF funds are governed by the community with the full participation of poor farmers. 7. The Bank, in partnership with the Global Environment Facility (GEF), has been one of the leading agencies in supporting China in the development of innovative adaptation measures to tackle increased vulnerability to climate change. To date, the focus of Bank engagement has been on adaptation needs in productive irrigated agriculture and water management in the Huang-Huai-Hai River basin through the Mainstreaming Climate Adaptation in Irrigated Agriculture Project (GEF SCCF; P084742). The project will build on this experience and expand the adaptation agenda beyond lowland productive agriculture into remote areas of high rural poverty. In these areas, subsistence agriculture is the often the most important livelihood source and adaptation of current land and water management practices is critical to increasing the poor`s coping range to climate change. The project will develop and pilot innovative but simple adaptation measures which complement the project`s infrastructure and livelihood support activities and which can be implemented at the village level as part of the project`s community- development approach. Through piloting community-based adaptation activities, the project will seek to support the Government in linking long-term sustainable land management, climate change risk management, and adaptation, and in integrating these aspects into the CDD approach and the national poverty reduction programs. C. Higher level objectives to which the project contributes 8. The proposed operation directly supports Pillar 2 (reduce poverty, inequality and social exclusion) of the China: Country Partnership Strategy. The limitations of the existing institutional and administrative arrangements of China`s poverty reduction program are recognized within government, and the challenges of easing rural migrant`s transition to urban employment are also of great concern to government and within civil society. The key government agencies are therefore keenly interested in testing new approaches to overcome these limitations and to facilitate increased rural labor migration on a sustainable basis. In the past, LGPR has made effective use of previous Bank-supported projects (including the Southwest and the Qinba Mountains Poverty Reduction Projects; see para. 25 below) in assisting the design of new poverty reduction strategies (a Quality Assessment Group (QAG) study deemed the Southwest Poverty Reduction Project to be best practice for its policy and institutional developmental impact). Similarly, LGPR now views the project as a means of large scale testing of possible new poverty reduction approaches to be implemented following the conclusion of the ongoing Rural Poverty Alleviation and Development Program: 2001-2010. 9. The project is consistent with China`s 11th Five-Year Plan and Western Region Development Strategy and contributes to China`s obligations under the UN Framework Convention on Climate Change (UNFCCC), UN Convention to Combat Degradation (UNCCD), and UNCCD National Action Plan for Desertification Control. The project is consistent with the GEF Climate Change Operational Strategy and its strategic objective on Adaptation (through supporting pilot projects that identify and implement suitable adaptation measures; build adaptive capacity; reduce vulnerability and increase ecosystem resilience to the adverse impacts 3 of climate change). The project is also in line with the GEF Land Degradation Focal Area Strategy and the strategic objectives of improving local livelihoods and mainstreaming sustainable land management into national policies. II. PROJECT DESCRIPTION A. Lending instrument 10. The project is proposed as a Specific Investment Loan (SIL). The previous Bank- supported poverty reduction projects undertaken in collaboration with LGPR have also been SILs, and this instrument has proven extremely effective in assisting the design of new poverty reduction strategies. In addition to Chinese Government counterpart funds, the project will seek grant co-financing from the GEF Grant to complement the project`s poverty interventions through providing assistance in improved and more sustainable land management, climate change risk management, and adaptation in poor and ecologically fragile rural areas. B. Project development objective and key indicators 11. Project development objective. The project`s development objective is to explore and pilot more effective and innovative ways of providing poverty reduction assistance to the poorest communities and households in Henan Province, Shaanxi Province and Chongqing Municipality (the Project Provinces) through CDD and participatory approaches. By bringing project funding down to the community level and enabling the communities and households to determine the use of those funds, the project will help resolve the problems of (a) only a limited portion of available poverty reduction funding reaching the local level, and (b) institutional priorities and administrative constraints predetermining what poverty reduction activities actually take place at the local level. In addition, by improving access to housing, vocational and other training, and health and other social services, the project will help to overcome the dangerous working and living conditions and other difficulties confronting rural migrants living in urban areas and help expand the rural poor`s access to off-farm employment. 12. The Global Environment objective is to pilot sustainable land management and adaptation measures to address vulnerability to climate change in poor rural areas in the Project Provinces. 13. Key indicators. Progress towards the achievement of the project`s development objective will be monitored through the following indicators: (a) the acknowledgement by Government of the importance of CDD and participatory approaches for future poverty alleviation and rural development work, and (b) the satisfaction rate among beneficiaries regarding the (1) project impact on income levels and well-being, and (2) CDD approach. Progress towards the achievement of the project`s intermediate outcomes will be monitored through a set of indicators which include: (a) the funds transferred to project villages and to the poorest natural villages under component one, (b) women`s participation rate in village project management groups under component one, (c) the share of infrastructure works with satisfactory quality and specific arrangements for maintenance and management under component one, (d) the number of villages which have completed CAPPs under component one, (e) the share of poorest households which benefit from CDFs under component two, (f) the number of vocational 4 trainings completed and the employment rate after such training under component three, (g) the number of Migrant Workers Service Centers established and the provision of services provided by such Centers under component three, and (h) whether an effective and comprehensive project management and M&E system has been established within six months of project effectiveness under component five. For the GEF financed component, outcome indicators will include: (a) the share of pilot villages which (1) successfully complete village assessments and resource mapping and identified adaptation needs, and (2) implement innovative adaptation measures, (b) the number of adaptation innovations introduced into the CDD menu, (c) the number of indicators formulated covering land management, climate change vulnerability, adaptation and coping range, and (d) carbon stock increases across all pilot SLMA villages. 14. These indicators will be measured through various quantitative and qualitative methods (see Annex 2), including output indicators routinely collected by the project`s computerized Management Information System (MIS), and impact indicator surveys conducted at project start- up, mid-term and at the end of implementation. C. Project components 15. Community-Driven Development (CDD) Approach. The Government views greater local autonomy and community participation in development activities as key elements of an effective rural poverty reduction program. This new thinking is reflected in China`s 11th Five- Year Plan and a number of participatory poverty reduction approaches have already been tested in Bank-supported CDD pilot projects. While these pilots primarily introduced international experience into China, notably from Indonesia and the Philippines, LGPR has also further developed and adapted these pilots to specifically take account of the varying local conditions and demands in China`s poor areas. Building on this wide array of implementation experience, the Government is now fully confident to expand the CDD approach through the project on a much broader scale with the aim of building community capacity and more effectively implementing poverty reduction measures in remote poverty pockets. Specifically, the project`s CDD approach will seek to give poor rural communities: (a) the opportunity to improve access to local infrastructure and public services; collectively manage and be accountable for project financial resources; and take ownership of development; (b) more effective community organization and management capacity and esteem; and (c) an improved relationship with local government agencies to become more responsive to a community`s priorities. 16. The CDD approach will build on a number of key principles that have proven to be best suited to the Chinese context and have led to good poverty alleviation results in the pilots. First, communities will be responsible for participatory development planning. Communities will also be fully informed of the available project financial resources at project start-up. Prioritization and decision making on key project investments will be done through a process of consultations and competitive project selection within the framework of existing institutions, such as village committees and village meetings. These institutions will be supported and supplemented by community facilitators, village supervision and monitoring committees, and project implementation groups. By implementing CDD activities through existing institutions, the project will avoid creating parallel implementing structures and ensure the long-term sustainability of the investments. Second, communities will be responsible for the 5 implementation of project investment activities. This will include procurement and contract management, the organization of villagers` contributions, construction supervision, and monitoring and reporting. Communities will take responsibility for managing project funds through the operation of village-level accounts that will be set up in the name of each administrative village at nearby financial institutions. Third, county and township governments will take on a service provider function and will support communities through technical staff of line departments to help ensure the (a) adherence to technical design standards and quality of project investments; (b) adequate supervision of construction implementation; and (c) completion certification and reporting. 17. Community Annual Project Plans (CAPPs) are the project`s practical tool for CDD implementation. Under the project, each community (administrative village) will first formulate a medium-term (that is, a 3 to 5-year) village development plan. This participatory village development plan will reflect the communities` development priorities and will require confirmation and approval from township and county authorities. Once such confirmation has been secured, it will be broken down into CAPPs (or annual work plans) that include the specific investment activities to be implemented in a given year. CAPPs will be prepared by the community and reviewed on an annual rolling basis for each project administrative village and project funding will be disbursed against CAPPs on a defined schedule. CDD implementation, including the preparation of village development plans and CAPPs, will be guided by an Operations Manual that also defines the roles and responsibilities of the involved institutions, describes the project cycle and fund management arrangements, and lays out a governance and monitoring framework. 18. Project Summary. The project will promote the active involvement of villagers in community development processes, enabling them to collectively identify and prioritize local needs, prepare and select investment activities in a fair, equitable and transparent manner, and develop their own collective capacities for implementation, project management, monitoring and maintenance. In addition, the project will (a) assist rural migrants residing in urban areas to overcome the dangerous working and living conditions and other difficulties they face in the urban environment, and (b) provide additional assistance to rural communities to identify and analyze climate change adaptation risks and address such risks through improved and more sustainable management of the surrounding natural and land resources. 19. The total investment of the project will be about US$159.1 million including financing from the World Bank (US$100 million), the Government of China and provincial and local funds (US$54.9 million), and a GEF Grant (US$4.265 million). The project will comprise the following five components: 20. Component 1: CDD (total cost of US$ 96.6 million). The CDD component will reach out to poor villages and address the lack of basic rural infrastructure and the persistently poor enabling environment for participation in economic development. The component will support the development of basic rural infrastructure in poor villages through the provision of investment support and related technical assistance for the construction and improvement of, inter alia, village access roads, drinking water supply systems, rural sanitation infrastructure, electrification, communication infrastructure, school building construction and repair, small- 6 scale agriculture production infrastructure, and basic housing repair. Implementation will be demand-driven to ensure that infrastructure investments will meet the needs that have been identified by the villagers themselves as most urgent preconditions for improved well-being. 21. Component 2: Community Development Financing (CDF) and Capacity Building for CDD and CDF (total cost of US$ 35.7 million). The CDF component will address the current lack of basic income sources in remote villages by providing small block grants to communities to support household-level productive activities, and provide technical assistance and capacity building through two subcomponents: (a) Provision of CDF Financing to community cooperatives to finance CDF subgrants and/or CDF subloans in support of household-level productive activities, including improved and diversified crop production, animal husbandry, and other income generating activities. (b) Provision of technical assistance and capacity building support at the village level to support the Project`s CDD and CDF activities, including: (i) information dissemination, mobilization of villagers, formulation of community annual investment plans and village medium-term development plans; and preparation, technical evaluation, implementation and inspection of the above-mentioned CDD activities; and (ii) the development, implementation, management and supervision of productive activities, including farmer training in technical and vocational skills, infrastructure operation and management, and skills training for women; support for extension services in the areas of access to market information, and awareness campaigns about off-farm labor opportunities for farmers. The CDF approach will draw on the experiences of a number of CDD and CDF pilots which have recently been implemented and tested in China. No withdrawals for the CDFs (under categories 1.2, 2.2 and 3.2 in the table in Annex 6 para. 11) will be made unless the Bank has approved the CDF Manual including the financial terms of repayment, interest rate, and other obligations. 22. Component 3: Rural Migrants Support (RMS) (total cost of US$ 10.4 million). The Rural Migrant Support (RMS) component will address the challenges associated with China`s on-going large scale rural-to-urban migration, a defining factor of China`s urbanization process, with the objective of exploring a replicable model which could be scaled-up nationwide. The identified challenges include unsafe housing conditions and harsh living environments, lack of vocational training for better and more stable job opportunities, absence of financial assistance to migrant workers to start their own businesses, very limited access to basic social services such as legal assistance and health care, and relatively weak capacity of administrating migrant workers affairs, including a weak monitoring and evaluation system. The component will be implemented in Chongqing (in Wanzhou District, Fuling District, Yunyang County, Youyang County, and in the Chongqing Municipality itself) where there are large concentrations of migrant workers, and will include three subcomponents: (a) Carrying out activities to improve the condition of rural migrant workers in urban areas in Chongqing, including construction or improving migrant worker dormitories and migrant workers service centers, provision of vocational training and job placement assistance, and establishing migrant community service centers to provide social services. 7 (b) Provision of Migrant Laborers Microenterprise Support (MLMS) financing to Migrant Laborers Microenterprise Associations to finance MLMS subgrants and/or MLMS subloans in support of migrant workers and migrant workers` microenterprises. (c) Strengthening the monitoring and evaluation system relating to the welfare of migrant workers, carrying out research to examine the relationship between migration and poverty alleviation, and conducting training and study tours to strengthen the capacity of the Chongqing municipal government in administering migrant workers` affairs. An updated RMS Manual will be provided to the Bank for review and approval by December 31, 2010. In addition, no withdrawals for the MLMSF financing (under category 1.3 in the table in Annex 6 para. 11) will be made unless the Bank has approved the MLMSF Manual including the financial terms of repayment, interest rate, and other obligations. 23. Component 4: Sustainable Land Management and Adaptation - SLMA (total cost of US$ 4.265 million). The SLMA component will be co-financed by the GEF, and include three subcomponents: (a) Designing and implementing SLMA pilot activities based on community participation through promoting adaptation measures in small infrastructure and agricultural improvement projects; and providing technical assistance to communities and township technical staff in the design, implementation, and monitoring of these SLMA pilot activities. (b) Disseminating the experience of implementation of the SLMA pilot activities and promoting the integration of SLMA intervention in the Project`s CDD activities. (c) Supporting policy studies analyzing the linkages between poverty, vulnerability to climate change, and adaptation; and conducting consultation workshops to facilitate experience exchanges among agencies with responsibilities in land and water resources management, agriculture, forestry, and other aspects of climate change adaptation. Not later than three months from the Effective Date or such later date as the Bank may agree, the recipient will, through the CPCO, provide to the Bank for its approval, a simplified version (in Chinese) of the SLMA Manual to cover a description of the implementation steps for village assessments, pilot designs and implementation, and monitoring and evaluation requirements. 24. Component 5: Project Management and Monitoring and Evaluation (total cost of US$ 11.9 million). The project management and monitoring and evaluation (M&E) component will facilitate the efficient implementation of the project and the coordination between the various government agencies at the national, provincial and local levels, and will include two subcomponents: (a) Strengthening the capacity of the Project implementing agencies at all levels in project management, monitoring, and evaluation through the provision of office furniture and equipment, vehicles (where applicable), related technical assistance, workshops, and international training and study tours. (b) Designing and implementing a comprehensive project management information system, including reporting progress, financial management and impact monitoring and evaluation, and domestic training (including workshops) and study tours. 8 D. Lessons learned and reflected in the project design 25. The project is the fifth in a series of grassroots poverty reduction projects undertaken by LGPR with the support of the World Bank.2 This series of projects (beginning with the Southwest Poverty Reduction Project3 in 1995) has sought to address the current key issues and challenges in China`s most severely affected poor areas, and followed detailed poverty studies (beginning with China: Strategies for Reducing Poverty in the 1990s,4 which was released at an International Poverty Reduction Conference in Beijing in 1992) undertaken jointly by the World Bank, LGPR, and a number of international partners (UNDP, DFID, and others). This twenty year process of detailed analysis and large scale operationalization has been extremely successful and productive. As summarized below, several key lessons have been learned during this process and are carefully reflected in the project design. 26. Central and provincial government leadership and support. Consistent with their development objective of trialing new solutions to household and village level poverty in China`s very poorest areas, these poverty reduction projects have been both highly complex and extremely innovative. As highlighted in the Implementation Completion Reports of the first two of the poverty reduction projects (World Bank, 2003 and 2005b), the most important lesson from this process has been that strong central and provincial government leadership and support has been essential to the successful design and implementation of these highly complex and innovative operations. In contrast, when central government leadership and support subsequently waned, at least one of the more recent poverty reduction projects has consequently faced substantial challenges in achieving its development objectives. The proposed (Poverty 5) project benefits from a substantial revitalization of central government leadership and support, and the central government has already played a key role in the success of project design. 27. Ownership of the project innovations. Another key lesson of this two decade process is that the direct involvement of senior government staff in the analysis, design, and operationalization of innovative poverty reduction measures has proven to be very important to the ownership and eventual nationwide adoption of new poverty reduction strategies. The 1997 QAG review of SWPRP concluded, for this reason, that that project`s actual and potential impact at the highest policy levels can already be characterized as best practice (Uma Lele, 1997). This lesson has played a key role in the design of the project. Most importantly, central and provincial government staff have played the lead role in the design of the project`s CDD approach and are highly committed to its success. 28. Counterpart financing and repayment responsibility. In the ongoing Poor Rural Communities Development Project (PRCDP), local county governments and poor rural households were required to take on principal responsibility for the provision of counterpart funding and repayment of the IBRD Loan. This significant project design flaw has hampered the 2 This series includes the Southwest Poverty Reduction Project (SWPRP, or Poverty 1, P003639), Qinba Mountains Poverty Reduction Project (QBPRP, or Poverty 2, P003590), and Poor Rural Communities Development Project (PRCDP, or Poverty 4, P071094) which began in 1995, 1997 and 2005 respectively. 3 World Bank, 1995. 4 World Bank, 1992. 9 achievement of that project`s development objective and undermined follow-through on the participatory approach. Most importantly, the participatory approach has clearly documented that the poorest ethnic minority communities most desire improved access to road transport, drinking water, basic education, and basic health, but the counterpart funding and Loan repayment arrangements have so far resulted in the bulk of project investment being directed to only agricultural production activities (and the provision of only extremely limited funding, in many cases, for rural infrastructure, basic education, and basic health). The project fully reflects this lesson in that the local county governments have a limited role in providing counterpart financing and project communities will receive project funds on a grant basis. These financial arrangements represent a significant breakthrough in China`s poverty reduction program and are essential to achieving the project`s development objective of empowering the poor communities themselves to determine how best to overcome poverty. 29. Capacity building. Given the above-average complexity of this series of poverty reduction projects, effective project management capacity building has been essential. Each of the earlier projects included explicit institution building components which have served to strengthen the project management system at all levels (from the Central Project Management Office all the way down to village Work Stations). This lesson has been fully internalized by LGPR system and early capacity building at all levels is designed into the project and began during project preparation. E. Alternatives considered and reasons for rejection 30. A variety of alternative project concepts and components were considered during the project preparation process. These alternative designs and components were rejected mostly because these activities were already being successfully undertaken by other government programs and donor-supported projects, but also to reduce overall project complexity. The final package of project components comprises a very challenging but still doable set of large scale experiments which address the two most important issues now facing China`s rural poverty reduction program. 31. The initial project proposal centered entirely on vocational training for poor rural migrant workers. This alternative was eventually rejected because a major government program is already addressing this important need. Similarly, during project identification, the option of including basic rural education and basic rural health components was considered. This alternative was rejected because of China`s tremendous progress on basic rural education and the major government basic rural health programs being designed and trialed in recent years. Another very appealing proposed component was the subcontracting of project activities or services to NGOs or other elements of civil society. This approach was initially piloted in Jiangxi Province through a program supported by the Asian Development Bank. This program is now being expanded through the other government programs, and was therefore dropped from the project. 32. As part of the project`s focus on facilitating the successful transition of rural migrants away from the farm, a small town development component was included in the project design through the latter stages of preparation. This component was rejected very late in the project 10 preparation cycle both in order to reduce project complexity and also because its very small scale sharply reduced the likelihood of generating significant results. III. IMPLEMENTATION A. Institutional and implementation arrangements 33. Project leadership and management system. Based on the experience of this series of grassroots poverty reduction projects (see para. 25), a complete project leadership and management system is being established for the project and will be further strengthened through the project`s management and M&E component. At the central level, a Central Project Coordination Office (CPCO) has been established within LGPR's Foreign Capital Project Management Center (FCPMC). CPCO played a vital role during project preparation, and will continue to undertake this key coordination role throughout the life of the project. At the provincial level, Project Leading Groups (PLG) have been established to (a) mobilize the institutional, technical and financial resources and support for the preparation and implementation of the project, and (b) provide the critical coordination and monitoring function for project implementation. The PLGs include staff of the provincial Planning Commissions, Finance Bureaus, Poverty Alleviation and Development Offices (PADO), and other related agencies. In addition, provincial PMOs (PPMO) have been established, and the PPMOs have the lead responsibility for ensuring effective and timely project preparation and implementation, as well as internal M&E. The PPMOs will review and prepare provincial annual work plans and budgets, semi-annual progress reports, mid-term and final completion reports, and plans for research, training and study tours. The annual work plans will set forth the activities proposed to be implemented in the following calendar year, and will be provided to the Bank not later than November 15 of each preceeding year (beginning with the 2011 Annual Work Plan to be provided to the Bank on November 15, 2010). The semi-annual progress reports will be submitted to the Bank within three months of the end of the reporting period, and will include (a) an updated results monitoring table indicating the progress made by the project thus far towards achieving its anticipated output and impact indicators (see Annex 2), and (b) a summary of compliance with the Bank`s safeguards policies. 34. PLGs and PMOs have also been set up at the county level. The several county-level technical bureaus directly involved in the project will, in close cooperation with the participating township governments and their offices at the administrative village level, play a key role in the day-to-day implementation of the project. The county level PLGs, PMOs and technical bureaus have together played a key role in project design and preparation, and will play the most important role in project implementation and M&E. Past experience has clearly shown that successful implementation depends most critically on the capabilities of the county PMOs (CPMO). Since most of the CPMOs have not previously been involved in such large scale, complex, and innovative projects, the project's institution building component will focus on strengthening capacity at this key level of the PMO system. 35. Township Project Work Stations (TPWS) will be established at the township level. The TPWS will be responsible for the day-to-day execution of the project in their corresponding areas. The project's institution building component will also help strengthen planning and implementation capacity at the township level. The project encourages community empowerment, and most project activities will be implemented at the administrative village and 11 natural village levels. Therefore, a complete project implementation and management system will be established at the administrative and natural village levels. At the administrative village level, the village committee plays a leading role and will be responsible for (a) project mobilization and coordination in its corresponding areas, (b) signing contracts for civil works and consulting services on behalf of natural villages, and (c) fund management and assisting natural villages with project fund application and withdrawal. In addition to the village committee, the Project Decision Making Committee and Project Supervision Committee will be established. The Project Decision Making Committee is responsible for reviewing and approving project proposals. The Project Supervision Committee is responsible for M&E and supervision. Community assistants will play a key role in assisting the administrative village committee and CPMO in community mobilization, project implementation, organizing relevant technical and knowledge training targeted at community project management organizations, and undertaking M&E of project implementation progress, achievements and impacts. At the natural village level, Project Implementation Groups and Project Supervision Groups will be established and will be responsible for project implementation and supervision, including project implementation and fund use. The project's institution building component will also help strengthen planning and implementation capacity at the village level. 36. CDF component. Under the CDF component, block grants will be provided to the beneficiary Administrative Villages (AV) for supporting productive activities among its members. The members of the recipient AVs that are interested in receiving financial support will establish formal associations that will serve as the entities responsible for the management of these funds within the AV. In accordance with local legislation, Community Cooperatives seem to be the best form of association for managing this community development financing. The Community Cooperatives are non-profit social public welfare organizations which must be registered with the Civil Affairs Department or the Industry and Commerce Bureau as a social group or an unofficial non-enterprise organization. Eligible farmers in the AVs voluntarily apply for Community Cooperative membership. In turn, the cooperatives will provide sub-grants and/or sub-loans to their members (groups or individual households) for productive purposes. 37. RMS component. The Chongqing PPMO, together with the Youyang and Yunyang County PMOs and Fuling and Wanzhou District PMOs, will take lead responsibility for the design, implementation and monitoring of the RMS component. Under this component, Migrant Laborers Microenterprises Associations (MLMA) will be established by migrant laborers to receive and manage the block grants received from the project. The MLMA will then provide sub-grants and/or sub-loans to its members to support microenterprises. These MLMAs will be registered to be become formal legal entities. Before being eligible for grant assistance from the project, migrant laborers will have to become a member of the Association and receive necessary training regarding microenterprises operations. The MLMAs, as migrant laborers` mutual-help associations, will also provide its members with specifically designed capacity building services to promote the efficient use of project funds. 38. Sustainable land management and adaptation component (SLMA). The SLMA component will be implemented within the overall SDPRAP implementation structure. The CPCO, PPMOs, and CPMOs will each appoint one full-time staff member to facilitate implementation of SLMA activities in the selected pilot villages. CPCO will be responsible for the central level subcomponent 4(c). The CPCO, PPMOs and CPMOs will recruit technical assistance to support the implementation of village resource assessments and mapping, design of 12 pilot activities, training, environmental and vulnerability monitoring as well as national studies and consultations. Component implementation arrangements are described in the SLMA Manual that has been prepared by CPCO. B. Monitoring and evaluation of outcomes and results 39. The project M&E system will comprise both an "internal" physical monitoring and information system, and an "external" independent impact assessment system. Through a computerized MIS system, the internal system will (a) monitor disbursement and recovery of project funds and physical progress of the project, and (b) include surveys of a small number of project households with Village Monitoring Groups and other measures to gauge the quality and success of the participatory and CDD approach. The independent impact assessment system will monitor (a) villagers` and communities` satisfaction with the participatory and CDD approach, and (b) the project's impact on poverty and well-being. This independent mechanism for monitoring and evaluating the project will be vital to get a clear and unbiased picture of project impact, and will measure changes in absolute and relative poverty and vulnerability in project areas. The M&E approach to be piloted under the SLMA component includes two elements: (a) an environmental impact monitoring, consisting of a carbon stock index monitoring, vulnerability to climate change baseline assessment and monitoring, and land management monitoring, and (b) implementation progress and outcome monitoring. A detailed M&E plan that describes the environmental monitoring approach, including the measurement in carbon stock changes, is included in the SLMA Component Report and SLMA Manual. Monitoring of outcomes and intermediate outcomes will be conducted under the project`s overall Results Framework. C. Sustainability 40. The experience of this series of poverty reduction projects indicates that overall project sustainability is high. Most importantly, the sustainability of the core policy objective (that is, of assisting with the evolution of the national poverty reduction strategy) has proven to be very high. Government ownership of the poverty reduction measures which have been piloted on a large scale through these past projects has been very strong, and the lessons learned from these projects have been fully reflected in national poverty reduction strategy. In particular, successful pilots have been scaled-up and/or included as part of updated national poverty reduction strategy, and ineffective approaches have been dropped or redesigned. 41. Experience has also shown that the higher level of ownership of the planning and implementation process by communities and villagers, and the degree to which the project infrastructure provided becomes broadly owned, provides a sound basis for subsequent effective ownership and maintenance. Operation and maintenance of project community works and services, including roads, drinking water systems, electrification, communications systems, and other small works, do require community-level commitment and funding. Past experience shows that project communities directly benefit from these works and services and are therefore highly committed to their maintenance during and beyond the project implementation period. County and township governments also have a demonstrated capability of assisting villages with the operation and maintenance of these community works and services. 13 42. In addition, the experience of this series of poverty reduction projects has shown that project communities acquire increased cohesion and voice through the participatory and CDD approaches. The PRCDP project, in particular, has demonstrated that communities which develop an integrated village development plan through a participatory process become increasingly vocal in seeking assistance for their development plans and goals, and more actively pursue their communities` development objectives within and outside of the project context. The JSDF-supported CDD Pilot Program undertaken as part of PRCDP has documented that CDD Pilot communities (in comparison with non-Pilot communities) achieve increased capacity for own development through their hands on involvement in community planning and development. This increased capacity for own development has been sustained beyond the completion of the CDD Pilot Program. Similarly, the communities engaged in the CDF Pilots have achieved increased capacity and continue to revolve the community CDF funds beyond the completion of the CDF Pilots. SDPRAP will build upon this favorable experience, and it is expected that empowered community implementation groups with increased development capacity will sustain themselves beyond project completion. D. Critical risks and possible controversial aspects 43. The major project risks are summarized in Table 1. The most significant risks relate to financial management of the CDD activities. The risk rating after the application of risk mitigation measures reduces these financial management risks to substantial. However, the overall project risk rating is moderate. There are no possible controversial aspects to the project. Table 1. Risk Mitigation Matrix Risks Risk Mitigation Measures Risk Rating Risk to project development objective Inadequate high-level support for LGPR and provincial governments in charge of the key elements of the CDD approach. design of the CDD approach. Moderate Strong LGPR support and leadership for the project. Integrity of CDD approach Project counties` responsibility for provision of undermined by counterpart funding counterpart funding either very limited or, at least, kept or Loan repayment arrangements. to the minimum possible. Low Communities receive project funds on a grant basis. Risk to component results CDD FM. First large scale CDD Well prepared Financial Management Manual (FMM) Substantial project in China. The number of was finalized before project negotiations, and will communities involved and the even provide useful guidance to project financial staff. greater number of scattered project Some good practice from other CDD projects in the activities bring great challenges to Region has been introduced into the design of the project financial management project, which can also strengthen its internal control procedures. FM Internal Control. Strict Project FMM was finalized before project negotiations Substantial internal control procedures, to specify the reporting procedures and detailed FM covering requesting, reviewing, guidance and supervision policies. approval, certification, supervision and reporting, have not been established within project yet. 14 Funds Flow. Bank accounts will be An advance payment system for the CDD component, Substantial opened for each beneficiary of about 50% of approved costs, will also shorten the community and World Bank funds disbursement cycle. Service standards have been set (as well as some counterpart funds) up for application reviewing and funds delivery will be delivered to these bank procedures. accounts directly from county finance bureaus to implement the CAPPs. SLMA component: This is a Full commitment from central and provincial agencies Moderate complex component designed to has been secured. Technical assistance will be pilot innovative interventions at recruited to assist in the implementation of village central and local levels. Previous assessments and design of pilot activities. Strong experience in adaptation activities central level coordination will ensure that experiences specifically at the local level is very from pilot implementation will be carefully monitored limited. Successful implementation and evaluated prior to project-wide dissemination. The will require a more than total investment under this component is very small as proportional attention of the compared to overall project investment. implementing agencies. Overall risk rating Moderate E. Loan conditions and covenants 44. Withdrawal conditions include: a) No withdrawals will be made for the CDFs (under categories 1.2, 2.2 and 3.2 in the table in Annex 6 para. 11) unless the Bank will have approved the CDF Manual. b) No withdrawals will be made for the MLMSF financing (under category 1.3 in the table in Annex 6 para. 11) unless the Bank will have approved the MLMSF Manual. 45. Project implementation covenants include: a) The Borrower will maintain throughout the period of implementation of the Project the Central Project Coordination Office (CPCO) with powers, functions, staff and resources, satisfactory to the Bank. b) Throughout the period of implementation of its respective Project components, each of the Project Implementing Entities will maintain, and cause to be maintained, the following organizations with terms of reference, powers, functions, staffing and other resources acceptable to the Bank: (a) at the provincial level, a Provincial Project Leading Group (PPLG) and a Provincial Project Management Office (PPMO), (b) at the municipal level in Shaanxi and Henan, a Municipal Project Leading Group (MPLG) and a Municipal Project Management Office (MPMO), (c) at the county level, a County Project Leading Groups (CPLG) and a County Project Management Office (CPMO), (d) at the township level, Township Project Working Stations, (e) at the administrative village level, Project decision making committees and Project supervision committees, and (f) at the natural village level, Project implementation groups and Project supervision groups. c) The Project Implementing Entities will apply and cause the Project counties and Project villages to apply, in the implementation of the Project, the CDD Manual, the CDF 15 Manual, the SLMA Manual, and the MLMSF Manual, all in a manner satisfactory to the Bank. d) Not later than three months from the Effective Date or such later date as the Bank may agree, the recipient will, through the CPCO, provide to the Bank for its approval, a simplified version (in Chinese) of the SLMA Manual to cover a description of the implementation steps for village assessments, pilot designs and implementation, and monitoring and evaluation requirements. IV. APPRAISAL SUMMARY A. Economic and financial analyses 46. A traditional methodology has been used to conduct the economic analysis. The future stream of costs and benefits have been estimated for various project activities, and then the net present value (NPV) and an economic rate of return (ERR) have been derived based on the net benefits. The data for calculating the ERR were collected by the provincial PMOs in August 2008 within a sample of project counties. 47. Project net benefits have been quantified for the CDD, CDF and RMS components. These three major components comprise 60%, 22% and 7% respectively of total project cost, and together comprise about 90% of total project investment. The project-wide ERR has been calculated as the average of the individual ERRs weighted by their shares of project investment. The benefits of the project management and M&E component are difficult to quantify and hence an ERR has not been calculated for this component. 48. Several conventional and conservative assumptions have been made in the economic analysis. First, per capita income in the project and non-project areas has been assumed to increase at 5% annually in the first ten years, and then remain unchanged thereafter. Second, the estimated benefits (revenues) are extrapolated over a 20-year period. Third, the capital discount factor is 0.1. Detailed calculations, including methodologies, specific assumptions, crop budgets, and activity models are provided in the project files. 49. The overall economic rate of return of the project is estimated to be around 31% (see Table 2 below). It should be noted that, due to the conservative assumptions made and for reasons summarized below, the estimated ERR is likely to underestimate the real benefits of the project and hence the ERR should be regarded as the lower bound of the real ERR. However, even from the lower bound perspective, the economic viability of the project is well justified. Table 2. Rates of Return Activity Project as a whole CDD CDF RMS ERR 31% 32% 53% 22% 50. No effort was made to estimate the financial rate of return (FRR). After three decades of very successful market-oriented economic reform, the price distortions due to the government interventions have been largely eliminated. Rich and strong evidence shows that an integrated domestic market has now been established and it is increasingly integrated with the international 16 market. On this basis, it is believed that there is no need to separately calculate a project FRR in order to capture the impact of price distortions. B. Technical 51. The project`s CDD approach is highly innovative in the Chinese context, and rollout of this approach on the project`s large scale will be a major challenge for project management. However, the very small scale of the infrastructure expected to be constructed under the project indicates that there are no significant technical challenges for design and construction. All the project`s expected infrastructure comprise very basic and proven technologies to be undertaken at a very small scale at the community level, and the technical departments of the county and township governments have the technical capacity to provide all of the necessary technical guidance and support. Nevertheless, past experience has shown that even very basic technologies can be very poorly implemented in remote and isolated instances where the county and township governments` technical departments did not provide basic technical support. (Examples of this in the PRCDP project include the improper design of two simple small scale irrigation schemes resulting in a substantial loss of function, and the lack of drains and culverts leading to road failure during the rainy season.) These isolated cases can be reduced to a minimum through improved coordination with the county and township governments` technical departments, and through rigorous application of the Yanshou (works inspection and acceptance) procedure already popularized in this series of projects. C. Fiduciary 52. Loan repayment responsibility. Unlike SWPRP, QBPRP and PRCDP (that is, the earlier poverty reduction projects supported by the World Bank in China), responsibility for loan repayment in the project will not be borne by the poor rural communities and farmers. Instead, subnational governments (that is, provincial, prefectural and county) will be responsible for loan repayment and the loan will be transferred on a grant basis to communities and end users. In Henan, 30% of the loan will be repaid by the provincial government, 30% by the prefectural governments, and 40% by the county governments. In Shaanxi, the Provincial and prefectural governments will repay 100% of the loans and no loan repayment responsibility will be left to the county governments. In Chongqing, the Municipal Government will repay 67% of the loan and the county and district level governments will be responsible for the remaining 33% of repayment. 53. Responsibility for counterpart funding mobilization. Counterpart funding accounts for about one-third of total project cost. In Henan, responsibility for mobilizing counterpart funding is evenly split between the provincial and prefectural governments. In Shaanxi, the arrangement for counterpart funding mobilization is similar to that for loan repayment. In Chongqing, the Municipal Government has taken unprecedented steps to reduce the burden as far as possible, but the project counties will still be responsible for providing the majority of the necessary counterpart financing. The distributions of loan repayment and counterpart funding responsibilities are summarized in the Table 3. 17 Table 3: Loan Repayment and Counterpart Funding Responsibilities Loan repayment responsibilities (%) Counterpart funding mobilization (%) Province Prefecture County Province Prefecture County Henan 30 30 40 50 50 0 Shaanxi 2 98 0 2 98 0 Chongqing 67 33 16 84 54. Financial Management. The financial management (FM) assessment, based on guidelines issued by the Financial Management Sector Board on November 3, 2005, concluded that the project meets the minimum Bank financial management requirements, as stipulated in OP/BP 10.02. In the FM Specialist`s (FMS) opinion, the project will maintain adequate financial management arrangements acceptable to the Bank and, as part of the overall arrangements that the borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the Loan and GEF Grant will be used for the purposes for which they are granted. Financial management risk is the risk that World Bank Loan/Grant proceeds will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under the project, the FM risk rating proposed for this project is Substantial. 55. Procurement. Procurement for the project will be carried out in accordance with the World Bank`s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 and revised October 2006; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The nature of the CDD approach requires more flexible and practical procurement procedures and arrangements. For this purpose, within the principle of community participation in procurement, as contemplated in the Bank Procurement Guidelines (Para. 3.17), the simplified procurement procedures, including local competitive bidding, local shopping, and community force account, have been agreed for the CDD component (Annex 7). 56. The procurement capacity assessment undertaken by Bank fiduciary staff reviewed the implementing agencies` organizational structure and functions, past experience, staff skills, quality and adequacy of support and control systems, and the legal and regulatory framework. The procurement capacity at the central and provincial levels is strong, but procurement capacity at the community level is quite weak. To address the weak capacity at the community level and minimize the risks for the CDD component, a procurement action plan has been established. 57. Procurement Plan. For the CDD component, it is unlikely that the project communities will be able to prepare annual Procurement Plans in advance. The detailed CAPP Procurement Plans will instead be prepared by communities only after specific CAPP activities have been selected. On this basis, the guidance for procurement planning has been provided in Section 5 (Procurement Procedures) of the CDD Manual. The consolidated Procurement Plans will be maintained at both township Work Stations and county PMOs and will be disclosed to the public. For all other project components, provincial PMOs have developed an initial Procurement Plan 18 for project implementation, providing the basis for the procurement methods for the first 18 months of project implementation. For the SLMA component (to be financed by the GEF), the Procurement Plan specifies the procurement activities needed for pilot village implementation. The Plan will also be available in the project`s database and in the Bank`s external website. The Procurement Plan will be updated in agreement with the project team, annually or as often as required, to reflect the actual project implementation needs and improvements in institutional capacity. 58. World Bank prior review. All contracts in excess of US$300,000 for goods, contracts in excess of US$1 million for civil works, all direct contracting contracts, all contracts for consultant services in excess of US$100,000 for firms and US$50,000 for individual consultants, and all contracts awarded under single source selection will be subject to prior review by the Bank. All other contracts including all contracts under the CDD component will be subject to ex-post review by the Bank. The post review sampling ratio will be one out of twenty contracts. D. Social 59. Project area and beneficiaries. The project will directly improve the income levels and well-being of about 715,300 absolute poor in 25 counties and districts in Chongqing, Henan and Shaanxi (see Map IBRD 36701). Of these 25 counties and districts, 21 are nationally designated poor counties and 3 are provincially designated poor counties. As summarized in Table 4 below, the project area comprises 770 administrative villages, of which 673 are designated poor villages. Women comprise about 46% of the project area population, and the CDD approach encourages and enables women to have a voice in the discussion of community development priorities. Final proposals competing for project funding will represent the voices of both genders. Table 4. Project Beneficiaries by Province and County Number Number of of Direct Ethnic Designated Province Counties Beneficiaries Minorities Women Poor Villages People / Share People / Share of Number People of Total Total Number Shaanxi 10 205,450 60 / 0.0% 97,616 / 47.5% 414 Henan 10 414,657 1,822 / 0.4% 188,925 /45.6% 223 Chongqing 5 95,191 44,227 / 46.5% 41,929 / 44.0% 36 Total 25 715,298 46,109 / 6.4% 328,470 / 45.9% 673 60. Indigenous peoples. As summarized in Table 4, Shaanxi and Henan have very small numbers of ethnic minority people in the project area. Ethnic minority people comprise only 0.3% of the project beneficiary population in Shaanxi and Henan, and there are no communities or other concentrated groupings of ethnic minority people in any of the project villages in these two provinces. Chongqing, on the other hand, has an ethnic minority population of 44,227 or about 46.5% of the total Chongqing beneficiary population. The Tujia and Miao ethnic minority group people comprise the majority of the (a) population in Qianjiang District and Youyang County in Chongqing Municipality, and (b) ethnic minority people in the entire project area. 19 According to the social assessment report, the minority people in all the project counties and communities visited have equal rights over arable land, forest and other resources. They also enjoy a number of preferential policies including the right to have two children and lower requirements for college-entry scores. In addition, the CDD process will ensure that Tujia, Miao and other ethnic minority people enjoy equal rights in community development and decision making. 61. Outreach to poorest villages. The principal social issue is achieving effective and appropriate outreach to the poorest and most disadvantaged villages and households in the project area. The project preparation process has directly addressed this challenge. An intensive social assessment (Zheng, 2007) has been carried out and helped identify the poorest communities and clarify the special characteristics of poverty and needs of the poorest people. The CDD procedures developed during project preparation helps empower community to control over resources and manage project planning and implementation. 62. This project area selection process is illustrated in the map of Ruyang County of Henan (see IBRD 36702). Of Ruyang`s 13 townships, 216 administrative villages and 426,000 total population, the project area includes just 6 townships, 28 administrative villages, and 33,000 inhabitants (or less than 8% of total County population). The project area is concentrated in the County`s outlying mountainous area where the elevation is mostly between 500 to 800 meters and agricultural production is subject to lower temperatures, less rainfall, lower quality arable land and other serious disadvantages. Rural per capita income in the project area is at most two- thirds of the county average. In addition, some 335 project natural villages do not have road access, about 12,000 project area people do not have guaranteed access to safe drinking water, 175 project natural villages do not have a telephone connection, and more than 16% of the project area population is illiterate or semiliterate. E. Environment 63. The project is classified as Category B due to the type, location, sensitivity, and scale of the project and the nature and magnitude of its potential environmental impacts. FCPMC prepared the Environmental and Social Management Framework (ESMF) following the relevant policies, laws and regulations of the Chinese central government and local governments. The ESMF complies with the safeguard policies of the World Bank, will assist with avoiding or minimizing the potential negative environmental and social impacts of the project activities, and helps to ensure improvement of the livelihoods of farmers and the sustainable economic and social development of the project poor areas. 64. In accordance with the experience of this series of poverty reduction projects in China, the ESMF analyzed the possible environmental and social impacts of the components to be financed, proposed corresponding mitigation measures, explicitly defined activities to be and not to be supported, and the avoidance of locations unsuitable for activity implementation in order to reduce negative environmental and social impacts. Meanwhile, the ESMF made provisions for a mechanism to satisfy the Bank`s safeguard requirements including the organizational structure, an evaluation system, a monitoring system, and capacity building. 65. The project will bring about positive impacts and benefits to the environment and the targeted communities in the project areas, and have minimal adverse impacts. To maximize 20 environmental benefits and minimize potential negative impacts, checklists of environmental and social impacts were designed, and mitigation measures were prepared for each subcomponent. All adverse environmental impacts can be avoided, reduced and minimized, provided the mitigation measures developed in the ESMF are properly implemented. 66. In addition to the consultation conducted to obtain inputs into project design, and in accordance with the stipulations of the safeguard policies of the World Bank, a participatory public survey of was conducted including a questionnaire survey, expert consultation, and a workshop. 67. The information pertaining to the Environmental Impact Assessment (EIA) of the three provinces of this project was released through public media including local newspapers and websites. The Resettlement Policy Framework was released at the LGPR website and through relevant domestic websites and that of the World Bank (see Annex 9). F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [] Natural Habitats (OP/BP 4.04) [] [X] Pest Management (OP 4.09) [] [X] Physical Cultural Resources (OP/BP 4.11) [] [X] Involuntary Resettlement (OP/BP 4.12) [X] [] Indigenous Peoples (OP/BP 4.10) [X] [] Forests (OP/BP 4.36) [] [X] Safety of Dams (OP/BP 4.37) [] [X] Projects in Disputed Areas (OP/BP 7.60)* [] [X] Projects on International Waterways (OP/BP 7.50) [] [X] 68. Involuntary Resettlement. It is expected that limited and scattered land acquisition will be required for a variety of small infrastructure activities proposed in the community infrastructure and public service component. However, no physical relocation of people is anticipated. Nevertheless, an overall project resettlement policy framework has been developed to guide future planning efforts in case any resettlement or other land acquisition is needed. 69. Indigenous Peoples. Among the project`s 25 counties and districts, Qianjiang District and Youyang County in Chongqing Municipality are designated minority autonomous areas which comprise concentrated populations of ethnic minority peoples including Tujia and Miao. Minority groups make up about 72.9% and 84% of the total population in Qianjiang and Youyang respectively. Consultation with minority groups was carried out through the process of the social assessment and broad community support for the project has been obtained. The safeguards review process concluded that OP 4.10 is triggered but that no separate Indigenous Peoples Plan (IPP) is needed since the majority of beneficiaries are minorities. Annex 9 explains how the elements of IPP have been integrated into the overall project design. * By supporting the project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 21 G. Policy Exceptions and Readiness 70. The project is consistent with all applicable Bank policies and will not require any exceptions. 22 Annex 1: Major Related Projects Financed by the Bank and/or other Agencies CHINA: Sustainable Development in Poor Rural Areas Project Sector Issue Project Latest Supervision ISR Ratings (bank-financed projects only) Bank Financed Implementation Development Progress Objective Poverty China ­ Poor Rural Communities MS MS reduction and Development Project (P071094) livelihoods Philippines - KALAHI-CIDSS Project MS MS (P077012) Indonesia - Kecamatan Development S S Project 3B (P092019) CDD Pilot JSDF Grant (TF054747) CDD Pilot Program CDF Pilot TCC5 (P085124) CDF Pilot Program Bank Financed Closed OED Assessment of Outcome Poverty China - Southwest Poverty Reduction S reduction and Project (P003639), Closed 4/30/2004 livelihoods China - Qinba Mountains Poverty S Reduction Project (P003590), Closed 12/31/2004 Vietnam ­ Northern Mountains Poverty Reduction Project (P059936), Closed 12/31/2007 Agriculture, China ­ Second Loess Plateau Watershed Irrigation Rehabilitation Project (P056216), Closed 6/30/2005 Agriculture and Mainstreaming Climate Change Under implementation Adaptation Adaptation in Irrigated Agriculture Project (P084742) Other Donor Agencies IFAD Dabieshan Area Poverty Reduction Programme 23 Annex 2: Results Framework and Monitoring CHINA: Sustainable Development in Poor Rural Areas Project Results Framework PDO Project Outcome Indicators Use of Project Outcome Information Explore and pilot more effective and Chinese Government acknowledges Determine whether project has been innovative ways of providing importance of CDD and successful in (a) influencing national poverty reduction assistance to the participatory approaches for future policy, (b) empowering project poorest communities and households poverty alleviation and rural communities` to determine their own in Henan Province, Shaanxi development work. development, and (c) improving the Province and Chongqing income levels and well-being of Municipality (the Project Provinces) 80% satisfaction rate among beneficiaries. through CDD and participatory beneficiaries regarding (a) project approaches. impact on income levels and well- being, and (b) CDD approach. Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component One: CDD Funds transferred to project villages Determine whether there is a need to Widespread participation of villagers as % of available approved funds. adjust procedures or plans for in design, implementation and participatory approach and planning management of development plans. Funds transferred to the poorest or encourage increased participation. natural villages at least equal to the Improvement in access to drinking average for all natural villages in the Assess and evaluate whether project water, power, roads, and other basic community. is in accordance with the needs and infrastructure and services. desires of the communities and Women as % of participants in villagers. Poorest households` dangerous village project management groups. housing (or cave dwellings) Assess the quality of construction. improved. % of infrastructure works found to be satisfactory in the yanshou quality review. % of project activities with specific arrangements for maintenance and management. Villages which have completed their multiyear development plans as % of all project villages. Component Two: CDF 70% of poorest households benefit Evaluate whether CDF is operating Empowered communities (better from CDF. successfully. capacity of self-governance and self- development) through managing CDF and increased farmers` income Evaluate whether poor farmers have through successfully utilizing benefited from CDF assistance. assistance provided by CDF. Evaluate whether the training plan and capacity building program are 24 feasible and practical. Component Three: Rural Number of vocational trainings Evaluate the performance of the Migrants Support completed (person/times). integrated approach to migrant New and innovative approaches service provision and identify areas targeted at providing better services Employment rate after vocational for improvement. to rural migrants are introduced, training. piloted, and ready for scaling-up. Two Migrant Workers Service Centers established, and annual increase in provision of services to members. Component Five: Management Effective and comprehensive project Determine whether institution and M&E management and M&E system building program has helped Establish the project management established within 6 months of establish sufficient capacity for and M&E system at all levels. project effectiveness. successful project management and M&E. Increase staff capacity and training at all levels, and improve project implementation performance. GEF Global Objective To pilot sustainable land management and adaptation measures to address vulnerability to climate change in poor rural areas in the Project Provinces. Component Four: Sustainable Land Management and Adaptation (GEF global objective) Increased capacity of local 70% of all pilot villages successfully To determine whether adjustments governments and communities to completed village assessments and are needed in village assessment implement sustainable land resource mapping and identified tools and to identify ­ through management and adaptation adaptation needs. evaluation of pilot implementation ­ activities. suitable adaptation activities for 50% of pilot villages implement inclusion into the menu of CDD innovative adaptation measures eligible activities project wide. based on application of new assessment tools. Number of adaptation innovations introduced into CDD menu. Pilot indicators for sustainable land Number of indicators formulated To strengthen inter-sector management, climate change covering land management, climate coordination and facilitate vulnerability, and adaptation change vulnerability, adaptation and recognition of poverty-vulnerability- formulated for consideration in coping range. adaptation linkage in national national poverty monitoring. poverty agenda. Improved carbon sequestration in Carbon stock increased by 5 percent SLMA pilot villages across all pilot SLMA villages; equivalent to an estimated total of 96,000 tons of carbon (or 400,000 tons of carbon for total project area). 25 Arrangements for results monitoring 1. The project M&E system will comprise both an "internal" physical MIS system, and an "external" independent impact assessment system. Through a computerized MIS system, the internal system will (a) monitor disbursement and recovery of project funds and physical progress of the project, and (b) include surveys of a small number of project households with Village Monitoring Groups and other measures to gauge the quality and success of the participatory and CDD approach. The independent impact assessment system will monitor (a) villagers` and communities` satisfaction with the participatory and CDD approach, and (b) the project's impact on poverty and well-being. This independent mechanism for monitoring and evaluating the project will be vital to get a clear and unbiased picture of project impact, and will measure changes in absolute and relative poverty and vulnerability in project areas. Grant funding is being sought to help cover the costs of (a) quantitative household surveys undertaken at project start-up, mid-term and at the end of implementation, and (b) annual qualitative analyses of villagers` and communities` satisfaction with the participatory and CDD approach. The M&E approach to be piloted under the SLMA component includes two elements: (a) an environmental impact monitoring, consisting of a carbon stock index monitoring, vulnerability to climate change baseline assessment and monitoring, and land management monitoring, and (b) implementation progress and outcome monitoring. A detailed M&E plan that describes environmental monitoring approach is included in the SLMA Component Report and SLMA Manual and summarized in Annex 16 of this document. Monitoring of outcomes and intermediate outcomes will be conducted under the project`s overall Results Framework. 26 Arrangements for results monitoring Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Data Collection Responsibility for Instruments Data Collection Satisfaction rate among 0% 50% 60% 70% 80% 80% Baseline, Mid-Term, and MIS system and PMO and beneficiaries regarding (a) post-completion independent independent M&E project impact on income levels quantitative and systems and well-being, and (b) CDD qualitative surveys approach. Intermediate Outcome Indicators Funds transferred to project 0% 10% 25% 50% 65% 75% Baseline, Mid-Term, and MIS system and PMO and villages as % of available post-completion independent independent M&E approved funds. quantitative and systems qualitative surveys Funds transferred to the poorest none Equal Equal Equal Equal Equal natural villages at least equal to the average for all natural villages in the community. Women as % of participants in village committees. 0% 15% 20% 25% 30% 33% % of infrastructure works found to be satisfactory in the 0% 75% 80% 85% 90% 95% yanshou quality review. % of project activities with specific arrangements for 10% 25% 65% 75% 0% 50% maintenance and management. Villages which have completed their multiyear development 0 10% 30% 90% 95% 60% plans as % of all project villages. % of poorest households 0% 50% 55% 60% 65% 70% (a) Annual and (b) MIS system and PMO and Baseline, Mid-Term, and independent independent M&E benefit from CDF. post-completion quantitative and systems qualitative surveys 27 Number of vocational trainings 0 0 5,000 10,000 15,000 20,000 Annual MIS system PMO system completed (person/times). Employment rate after Annual MIS system PMO system 40% 50% 60% 70% 80% 0% vocational training. Two Migrant Workers Service 0, 0 0,0 2,0 2,+15% 2,+30% 2, +45% Annual MIS system PMO system Centers established, and annual increase in provision of services to members. SLMA (GEF) Component Intermediate Outcome Indicators 70% of all pilot villages 0 20 40 60 70 70 Annual MIS system PMO system successfully completed village assessments and resource mapping and identified adaptation needs. 50% of pilot villages 0 5 20 35 50 50 Annual MIS system PMO system implement innovative adaptation measures based on application of new assessment tools. Number of adaptation 0 0 0 Actual Actual Actual Annual Provincial PMO system Workshops and innovations introduced into Consultations CDD menu. 0 0 Actual Actual Actual Number of indicators 0 Annual National Workshops CPCO (FCPMC) formulated covering land management, climate change vulnerability, adaptation and coping range. Carbon stock increased by 5 0 0 0 0 5 5 Year 4 of project Carbon stock baseline PMO system percent across all pilot SLMA implementation and one-time update in villages; equivalent to an year 4 estimated total of 96,000 tons of carbon. 28 Annex 3: Detailed Project Description CHINA: Sustainable Development in Poor Rural Areas Project Component 1: CDD 1. CDD approach and objectives. The Government views greater local autonomy and community participation in development activities as the key factors of an effective rural poverty reduction program. This new thinking is reflected in China`s 11th Five-Year Plan and a number of participatory poverty reduction approaches have been tested in World Bank-supported CDD pilot projects. While these pilots primarily introduced international experience into China, notably from Indonesia and the Philippines, LGPR has also further developed and adapted these pilots to take into account the specific local conditions and needs in China`s poverty areas. In particular, the pilots sought to increase the active participation of communities and farmer households into the process of existing poverty alleviation programs; accelerate community capacity building in self-organization, administration, and management; and improve funding availability for community development at the grassroots level. 2. Having carefully evaluated international and domestic implementation experiences, the Government is now fully confident to introduce a CDD approach through the Sustainable Development in Poor Rural Areas Project (SDPRAP) on a much broader scale and with substantial investment funding. The specific objectives of this approach will be to give poor rural communities the opportunity to: (a) improve access to local infrastructure and public services; collectively manage project resources; and take ownership of development; (b) be more effective in community organization and management capacity and esteem; and (c) improve the relationship of communities with local government agencies for them to become more responsive to community priorities. On a broader policy level, successful CDD implementation under the project is expected to yield significant influence on China`s longer-term rural poverty alleviation strategy where the CDD is expected to form one of the key strategic pillars. 3. CDD public services investments. The CDD component will address the lack of basic rural infrastructure and the persistently poor enabling environment for participation in economic development. Although specific investment needs cannot be determined prior to implementation, it is expected ­ based on field findings during preparation ­ that this component will provide support for the development of basic rural infrastructure in poor villages through the provision of investment support and related technical assistance for the construction and improvement of, inter alia, village access roads, drinking water supply systems, rural sanitation infrastructure, electrification, communication infrastructure, school building construction and repair, small-scale agriculture production infrastructure, and basic housing repair. Implementation will be demand-driven to ensure that infrastructure investments will meet the needs that have been identified by the villagers themselves as most urgent preconditions for improved well-being. Therefore, a number of activities that are not directly related to the expressed needs of communities but are part of higher level development plans will not be supported. Such activities excluded from the project are: county and township roads, major dam construction, biogas development or industrial activities. 29 4. CDD implementation principles. SDPRAP`s CDD approach is based on key principles that have been tested in pilots and have led to encouraging outcomes with regard to community capacity and ownership and improved livelihoods. First, communities need to be informed of the resources available for project investments and be responsible for participatory village development planning. Second, communities need to be fully responsible for the implementation of project investment activities. This should include procurement and contract management, the organization of villagers` contributions, construction supervision, and monitoring and reporting. Communities should also take responsibility for managing project funds through the operation of village-level accounts. Third, in community development, county and township governments should be less focused on top-down planning and targets but take on service provider functions and support communities during implementation through technical staff of line departments. Such services should not interfere in community decision making, but help ensure the (a) adherence to technical standards and quality of project investments; (b) adequate supervision of construction implementation; and (c) completion of certification and reporting. Based on these principles, a CDD Operations Manual has been developed by LGPR that: (a) clearly defines the roles and responsibilities of all involved institutions and stakeholders in project implementation; (b) describes the project cycle as well as fund management arrangements; and (c) lays out a community-based governance and monitoring framework. 5. CDD institutions, implementation cycle, and M&E. The CDD component will be implemented within the framework of existing institutions at the village level thereby avoiding the creation of parallel implementing structures. Administrative villages will be the basic management and implementation unit for all CDD investments. Village institutions will be supported by qualified community facilitators, which will be stationed in each village and be trained and supervised by county PMOs. Community facilitators will be responsible for assisting the village institutions in all administrative, implementation management and communication matters and be the link between villages and townships and counties. 6. Administrative Village Committees will be responsible for village mobilization, facilitation of decision making in natural villages, consolidating of project investment priorities, management of project accounts, contract signing and procurement, and record keeping. Under the village committee, each village will establish elected project decision making committees, and supervision committees, and implementation and monitoring groups at the natural village level. Project implementation will include: (a) information dissemination, the mobilization of the villagers, and the formulation of village development plans (medium-term) and CAPPs based on a competitive screening of investment proposals and selection of natural village for priority implementation; (b) the preparation and technical feasibility evaluation of selected CAPP activities; (c) CAPP implementation; and (d) completion acceptance inspections. Project information, including project funds per village, selected CAPP activities, contract information, and financial statements will be disclosed at the county, township, and village levels. The CDD approach will also include an appeal mechanism. Component 2: CDF and capacity building for CDD and CDF 7. There are two major bottlenecks which constrain the growth of income of China`s poverty-stricken farmers. The first bottleneck is the near complete absence of financial assistance to support household-level production activities. This is particularly true in the project 30 area where commercial banks had completely withdrawn at least one decade ago, and no new financial institutions have moved in to fill the vacuum. The second bottleneck is the lack of targeted capacity building activities (such as applied technology training, general extension services, and simple project management and marketing training) to build up farmers` long-term development potential. The CDF component will directly tackle these two bottlenecks. 8. The CDF component will use funds from the project in order to provide financial support to household`s production activities. These funds will be transferred to the communities as block grants and hence communities will not bear repayment obligations. The CDF will promote the full devolvement of all implementation, management and supervision responsibilities to participating villages, with informed and self-determined choices for productive activities. CDF, as farmers` mutual-help cooperatives, will also provide farmers with targeted capacity building services and consequently increase the utilization efficiency of funds provided by the CDF. All capacity building activities will be demand-driven and cover both on-farm and off-farm employment needs. In general, community cooperatives will be established at the administrative village level. However, if the population size of an administrative village is too large for one community cooperative, it can also be established at the natural village level. 9. Subcomponent 2.1 CDF Financing. The subcomponent will provide CDF Financing to AVs to finance CDF sub-grants and/or CDF sub-loans in support of productive activities, including improved and diversified crop production, animal husbandry, and other income generating activities. The members of the AV interested in receiving this funding for productive purposes will establish a Community Cooperative as the formal entity responsible for managing the funds and to provide sub-grants and/or sub-loans to its members (groups or individual households). 10. Subcomponent 2.2 Technical assistance and capacity building support for CDD and CDF. The subcomponent will provide technical assistance and capacity building support at the village level to support the Project`s CDD and CDF activities, including: (i) information dissemination, mobilization of villagers, formulation of community annual investment plans and village medium-term development plans; and preparation, technical evaluation, implementation and inspection of the above-mentioned CDD activities; and (ii) the development, implementation, management and supervision of productive activities, including farmer training in technical and vocational skills, infrastructure operation and management, and skills training for women; support for extension services in the areas of access to market information, and awareness campaigns about off-farm labor opportunities for farmers. Component 3: Rural Migrants Support 11. More than 140 million rural inhabitants found or were seeking off-farm employment in China in 2006 and the number is steadily increasing, according a nationwide census conducted in 2007. In Chongqing, the migrant rural labor reached 8.5 million in 2006 and accounted for 57% of total rural labor force. While this massive labor migration has played a vital role in increasing rural incomes and reducing poverty, large numbers of these rural migrants comprise a growing vulnerable and disadvantaged population residing in urban areas. Subject to a low degree of job security, absence of financial assistance to support migrants to start their own businesses, dismal 31 living conditions, unsafe working conditions, and very limited access to social services for themselves and their families, there is widespread concern that this emerging population is contributing to mounting social tensions in urban areas, which might undermine the government`s efforts in building social harmony. Priority demands of migrant workers have been clearly identified. Based on a survey conducted in Chongqing specifically for the project design, 96% of migrant laborers hope to receive vocational training; 95% express a strong desire for improving their living conditions; 84% hope they can receive assistance in job placement; 77% ask for better social protection; 41% demand education services for their children; 39% need social services in their home villages; and 24% ask for financial support to start their own businesses. 12. Design of the component is closely linked to the on-going national experiment on integrated urban-rural development in Chongqing, and it is expected that lessons accumulated from the component`s implementation may have high-level policy implications. The component will focus on moving-in areas and squarely address the challenges facing migrants. The component will be implemented in five project areas, but with different focuses in each area which complement each other. For example, in the Chongqing downtown area, the focus will be on exploring better vocational training mechanisms and conducting a research activity to examine the relationship between labor migration and poverty reduction. In Fuling District, the focus of the component will be on searching for effective and efficient ways to provide financial assistance to support migrants` microenterprises. In Yunyang and Wanzhou counties, the component will encourage the establishment of Migrants Professional Association and provide better services to migrants through the Associations. 13. Subcomponent 3.1 Rural migrants support. This subcomponent will support carrying out activities to improve the condition of rural migrant workers in urban areas in Chongqing, including construction or improving migrant worker dormitories and migrant workers service centers, provision of vocational training and job placement assistance, and establishing migrant community service centers to provide social services. 14. Subcomponent 3.2 MLMS support to migrants' microenterprises. One of the major constraints facing migrant laborers in move-in areas is the serious lack of financial assistance to support the startup of their own small businesses. A survey conducted in Chongqing during the project design period indicates that about 24% of migrant laborers ask for financial support to help them establish and operate their own microenterprises (see para 11). These migrant laborers belong to a group of people with strong entrepreneurial motivation and skills, and the success of their microenterprises will not only benefit themselves but will also generate more employment opportunities for the move-in area. Therefore, finding an effective way to overcome the financial barrier facing these entrepreneurial migrant laborers will have a significant impact on the social and economic development of the move-in areas. 15. The MLMS subcomponent will pilot an innovative model to tackle this financial barrier. The component will provide MLMS financing to Migrant Laborers Microenterprise Associations to finance MLMS subgrants and/or MLMS subloans in support of migrant workers and migrant workers` microenterprises. These funds will be transferred from the District and County PMOs, through Migrant Labor Service Centers (MLSC), to the Migrant Labor Microenterprises 32 Associations (MLMAs) as block grants to support microenterprises of Association members. These MLMAs will be registered to be become legal entities. Before being eligible for grant assistance from the project, migrant laborers will have to join the Association to become a member and receive necessary training regarding microenterprises operations. The Associations, as migrant laborers` mutual-help cooperatives, will also provide its members with specifically designed capacity building services to promote the efficient use of project funds. 16. In each sub-district, an Approval Committee will be established with 7 members (including representatives from the relevant government agencies, Banking sector, PMO, and MLMA). In addition, an independent Monitoring and Inspection Committee (with 3 or 4 members) will be set up in each sub-district to ensure the transparency and accountability of MLMAs` operations and to handle complaints from members. Special attention will be given to the poorest, disabled, and female migrant laborers. 17. Subcomponent 3.3 RMS M&E, research, and administration. This subcomponent will support strengthening the monitoring and evaluation system relating to the welfare of migrant workers, carrying out research to examine the relationship between migration and poverty alleviation, and conducting training and study tours to strengthen the capacity of the Chongqing municipal government in administering migrant workers` affairs. Component 4: Sustainable Land Management and Adaptation (GEF co-financing) 18. The SLMA component aims at (a) building the capacity of local governments and communities to analyze land degradation and climate change risks and vulnerability and to implement innovative adaptation measures to address such risks, and (b) supporting the formulation of pilot indicators for sustainable land management, climate change vulnerability, and adaptation for consideration in national poverty monitoring. The SLMA component will provide technical assistance and training in the application of field assessment tools (such as village resource mapping, climate change and land degradation vulnerability analyses, environmental baseline assessment and carbon stock index) that have been developed and tested during preparation. It will further provide investment support for small-scale infrastructure and equipment to pilot innovative but simple adaptation measures. Upon completion of such pilots, the component will facilitate the project-wide dissemination of lessons learned and support communities to take adaptation measures into consideration when making investment decisions under the CDD component. The component will also support national level coordination and policy dialogue between LGPR and other agencies on sustainable land management and adaptation. Implementation of the component will be guided by a detailed SLMA Implementation Manual that has been prepared during project preparation. The component will be implemented along three subcomponents: Subcomponent 4.1: Pilot design and implementation. This subcomponent will support the design and implementation of sustainable land management and adaptation (SLMA) pilot activities based on community participation through promoting adaptation measures in small infrastructure and agricultural improvement projects; and provide technical assistance to communities and township technical staff in the design, implementation, and monitoring of the SLMA pilot activities. The sub-component will be implemented in approximately 80 pilot 33 villages (or 10 percent of all project villages) covering 24 counties and will include the following specific activities: (a) Capacity-building in SLMA through technical assistance teams that will provide training on the purpose of the SLMA pilot program and on village assessment and planning tools. Target groups include the village facilitators and the county and township technical staff and community members; (b) Participatory village assessments in each pilot village, including mapping of village resources and identification of preferred options for adaptation pilots with the active participation of the communities. Adaptation measures will vary across provinces and locations and fall into two main categories: small infrastructure and agricultural improvements (including animal husbandry, forestry, and land management). It is expected that small infrastructure will often relate to water resource or village waste management in Chongqing and Henan, and to land management in Shaanxi. Similarly, it is expected that agricultural improvements will relate to the introduction of new farm and forage varieties to increase diversity and drought resistance, small equipment to manage climate hazards, and improvements of soil fertility. It is also expected that community assessments will lead to identify innovative small infrastructure projects other than in land, water and waste management. Following the eligibility confirmation of village-selected innovations, technical specialists will advise on technical design and specifications; (c) Implementation of Pilot Activities and Technical Training to be undertaken by pilot beneficiaries with technical assistance support; (d) Participatory Monitoring as listed in the monitoring and evaluation plan; and (e) Management of SLMA Pilots including training courses for PMO staff at the provincial, county and township levels and for community representatives in the management of the component. Subcomponent 4.2: Dissemination and CDD integration. This subcomponent will support the dissemination of implementation experiences of the SLMA pilot activities and promote the integration of SLMA intervention in the Project`s CDD activities. Specifically, it will support training and extension activities across all project communities. Its purpose is to strengthen capacity in the project provinces to integrate vulnerability to land degradation and climate change with community-driven poverty reduction. Activities will include: (a) Evaluation workshops to review lessons learnt during the SLMA pilots and to expand menu of CDD activities to include successful adaptation activities. Such adaptation activities may be village assessments and village resource maps; innovative small infrastructure; and innovative agricultural inputs and investments; (b) Media and other communication products, including the production of posters, video stories for dissemination through DVDs or local TV programs, booklets and village signboards for the dissemination of pilot results; and (c) SLMA and CDD Training Programme covering topics related to SLMA for local staff and community members and facilitators in CDD methods. This program will aim at encouraging innovation into SDPRAP activities to tackle possible future risks vulnerability to climate change and natural disasters. The trainers will be provincial and county-level specialists who will have developed expertise in SLMA through the initial pilots. The main target groups for the training courses will be local government staff and community representatives with responsibilities in planning, poverty reduction, agriculture, forestry, and land and water resource management. It is expected that the trainings will focus on the use of village resource maps and assessments, others on water and waste management related innovations, and others on agricultural innovations. Subcomponent 4.3: Consultation and coordination. This subcomponent will support policy studies analyzing the linkages between poverty, vulnerability to climate change, and adaptation; 34 and consultation workshops to facilitate experience exchanges among agencies with responsibilities in land and water resources management, agriculture, forestry, and other aspects of climate change adaptation. Specific activities will include: (a) A policy study on poverty, vulnerability to climate change and adaptation, and on related policy implications for consideration in the post-2010 poverty reduction agenda in China. The study will also cover the potential role of CDD approaches in lifting barriers to sustainable land management and to climate change adaptation; (b) Consultation workshops to promote exchange and coordination between LGOPR and other relevant agencies with mandates and responsibilities in land and water resource management, agriculture, forestry and other aspects of climate change adaptation; and (c) Coordination among the project provinces regarding all aspects of SLMA critical to the success of the component. Subcomponent 3 will be managed by FCPMC in close coordination with LGPR and with the provincial PMOs. Component 5: Project Management and Monitoring and Evaluation 19. Overview. Establishing an efficient and effective project management system is one of the key determining factors to project success. It requires strong support of all levels of government, a highly capable project management offices at all levels and a powerful and timely monitoring and evaluation system. To this end, the project management system of the project is built upon the successful models of the SWPRP and QBPRP projects. Institution building is emphasized at all stages of the project to ensure that the project will meet its goals and objectives. For this reason, it is essential to set up a workable project management organizational structure, strengthen institutional capacity building at each project management level and establish an effective project monitoring and evaluation system. 20. Project management organizational setup. The project management organizational setup is designed taking consideration of the institutional complexities involved in the project. Project management, implementation and technical support of local and international experts systems are built up, in which project management procedures such as project coordination, reporting, procurement and disbursement of counterpart funding are defined in terms of division of roles and responsibilities of project management institutions at all levels. 21. The established project management structure is based on the government administrative system and local social, economic and political conditions. Project management offices are set up at the provincial, prefecture, county, township and village levels. In addition, stakeholders will be able to participate at each level of the project management, which is a prerequisite for project management transparency and accountability. 22. Institutional capacity building. Improving the conditions of the infrastructure of the project management offices at each level is important for such a comprehensive and complex project to function effectively. For this reason, sufficient office facilities are to be rented or constructed and equipped. It is also necessary to improve the skills of the staff especially at county and township levels in project management. Properly designed training programs on the project`s procedures and requirements, project management requirements, working experience exchanges, project inspection, monitoring and acceptance check (that is, the Yanshou system), 35 computer training and hosting conferences and organizing study tours and so forth will serve this purpose. 23. Institutional sustainability is of concern upon the completion of the project due to closure of project offices and movement of staff especially at the county and township levels. The experience of SWPRP and QBPRP shows that, through capacity building, these staff will have become an asset in poverty reduction. During the course of project design and implementation, consideration needs to be given to developing mechanisms for sustainable institutions, where the staff will be able to continue their contribution to poverty reduction work in their local areas when the project is completed. 24. Project monitoring and evaluation. Monitoring and evaluation (M&E) is of great importance for achieving the objectives of the project and ensuring that the project will be managed more efficiently and effectively. The M&E system consists of two parts, the internal physical monitoring and information system and the independent impact assessment system. The internal physical monitoring and information system to be set up is based on previous work in the SWPRP and QBPRP projects and further refined in the PRCDP project. It will be used in checking and monitoring the project support made to each productive activity, evaluating investment efficiency, measuring the impact of investment on poverty reduction and thus will ensure financial accountability. 25. The independent impact assessment system will include both a quantitative program based on baseline, mid-term and post completion surveys of project and non-project households, and a qualitative program which will be driven by the expressed views of the primary beneficiaries. 26. The component will include two subcomponents: (a) Strengthening the capacity of the project implementing agencies at all levels in project management, monitoring, and evaluation through the provision of office furniture and equipment, vehicles (where applicable), related technical assistance, workshops, and international training and study tours. (b) Designing and implementing a comprehensive project management information system, including reporting progress, financial management and impact monitoring and evaluation, and domestic training (including workshops) and study tours. 36 Annex 4: Project Costs CHINA: Sustainable Development in Poor Rural Areas Project (USD million) Table 1: Total Project Project Cost By Component Government (figures include contingencies) IBRD Loan GEF Grant Funding Total 1. CDD Grants 57.0 39.6 96.6 2. CDF 30.3 5.4 35.7 2.1 CDF Financing 25.5 4.4 29.9 2.2 Community Capacity Bldg 4.8 1.0 5.8 3. Rural Migrants Support 7.9 2.5 10.4 4. SLMA 4.3 4.3 5. Project Management and M&E 4.6 7.3 11.9 Front-end Fee 0.3 0.3 Total Project Costs 100.0 4.3 54.9 159.1 Table 2: Chongqing Project Cost By Component Government (figures include contingencies) IBRD Loan GEF Grant Funding Total 1. CDD Grants 11.2 9.0 20.1 2. CDF 4.0 0.6 4.6 2.1 CDF Financing 3.0 0.4 3.4 2.2 Community Capacity Bldg 1.0 0.2 1.2 3. Rural Migrants Support 7.9 2.5 10.4 3.1 Rural Migrants Support 0.7 0.2 0.9 3.2 MLMSF Financing 3.4 0.9 4.3 3.3 M&E and Research 3.8 1.4 5.2 4. SLMA 1.0 1.0 5. Project Management and M&E 0.9 0.2 1.1 5.1 Int`l Training and Capacity Bldg 0.4 0.4 5.2 Domestic Training and M&E 0.5 0.1 0.5 5.3 Vehicles 0.2 0.2 Front-end Fee 0.1 0.1 Total Project Costs 24.0 1.0 12.3 37.3 37 Table 3: Henan Project Cost By Component Government (figures include contingencies) IBRD Loan GEF Grant Funding Total 1. CDD Grants 23.9 11.4 35.3 2. CDF 10.2 4.9 15.1 2.1 CDF Financing 8.5 4.0 12.5 2.2 Community Capacity Bldg 1.8 0.8 2.6 3. Rural Migrants Support 4. SLMA 1.4 1.4 5. Project Management and M&E 1.7 3.9 5.7 5.1 Int`l Training and Capacity Bldg 0.5 0.5 5.2 Domestic Training and M&E 0.8 3.9 4.7 5.3 Vehicles 0.5 0.5 Front-end Fee 0.1 0.1 Total Project Costs 36.0 1.4 20.2 57.6 Table 4: Shaanxi Project Cost By Component Government (figures include contingencies) IBRD Loan GEF Grant Funding Total 1. CDD Grants 21.9 19.3 41.2 2. CDF 16.0 16.0 2.1 CDF Financing 14.0 14.0 2.2 Community Capacity Bldg 2.0 2.0 3. Rural Migrants Support 4. SLMA 1.6 1.6 5. Project Management and M&E 2.0 3.1 5.1 5.1 Int`l Training and Capacity Bldg 1.1 1.1 5.2 Domestic Training and M&E 0.9 2.0 2.9 5.3 Vehicles 1.1 1.1 Front-end Fee 0.1 0.1 Total Project Costs 40.0 1.6 22.4 64.0 Table 5: Central Project Coordination Office Project Cost By Component Government (figures include contingencies) IBRD Loan GEF Grant Funding Total 1. CDD Grants 2. CDF 3. Rural Migrants Support 4. SLMA 0.3 0.3 5. Project Management and M&E Front-end Fee Total Project Costs 0.3 0.3 38 Annex 5: Implementation Arrangements CHINA: Sustainable Development in Poor Rural Areas Project Institutional and implementation arrangements: 1. Central level. At the central level, a Central Project Coordination Office (CPCO) has been established within LGPR's Foreign Capital Project Management Center (FCPMC). CPCO played a vital role during project preparation in (a) coordinating all communications between the World Bank, the Central Government agencies involved in preparation, and the provincial PMOs, (b) managing the participation and outputs of a number of national experts, (c) ensuring that all of the many preparation activities were completed on a timely basis, (d) according to the needs and requirements of the provincial PMOs, organizing and carrying out capacity building activities, including training and study tours, (e) assisting with SLMA component preparation work, including grant withdrawal and reimbursement, and (f) organizing and coordinating external M&E. CPCO will continue to undertake this vital coordination role throughout the life of the project. 2. Provincial and prefectural levels. At the provincial level, Project Leading Groups (PLG) have been established to (a) mobilize the institutional, technical and financial resources and support for the preparation and implementation of the project, and (b) provide the critical coordination and monitoring function for project implementation. The PLGs include staff of the provincial Planning Commissions, Finance Bureaus, Poverty Alleviation and Development Offices, and other related agencies. In addition, provincial PMOs (PPMO) have been established, and the PPMOs have the lead responsibility for ensuring effective and timely project preparation and implementation, as well as internal M&E. The three PPMOs are equipped with sufficient full time staff to satisfy the needs of project management. The Shaanxi PPMO and Henan PPMO already have a great deal of proven capability and experience with internationally- assisted poverty reduction project design, implementation and M&E. The complexity and innovativeness of the project requires that the capacity of the PPMOs should be further strengthened through the institution building component of the project. In Shaanxi and Henan, prefectural PMOs have also been established to coordinate work within the project prefectures and to monitor and assist with project fund withdrawal and reimbursement. The PPMOs will review and prepare provincial annual work plans and budgets, semi-annual progress reports, mid-term and final completion reports, and plans for research, training and study tours. The annual work plans will set forth the activities proposed to be implemented in the following calendar year, and will be provided to the Bank not later than November 15 of each preceeding year (beginning with the 2011 Annual Work Plan to be provided to the Bank on November 15, 2010). The semi-annual progress reports will be submitted to the Bank within three months of the end of the reporting period, and will include (a) an updated results monitoring table indicating the progress made by the project thus far towards achieving its anticipated output and impact indicators (see Annex 2), and (b) a summary of compliance with the Bank`s safeguards policies. 3. County level. PLGs and PMOs have also been set up at the county level. The several county-level technical bureaus directly involved in the project will, in close cooperation with the participating township governments and their offices at the administrative village level, play a key role in the day-to-day implementation of the project. The county level PLGs, PMOs and 39 technical bureaus have together played a key role in project design and preparation, and will play the most important role in project implementation and M&E. Successful implementation depends most critically on the capabilities of the county PMOs. Moreover, since a Community Assistants mechanism will be introduced into the project, the county PMO and Organization Departments will be responsible for the appointment and evaluation of community assistants, who will be recruited from university graduate village cadres. Since most of the county PMOs have not previously been involved in such large scale, complex, and innovative projects, the project's institution building component will focus on strengthening capacity at this key level of the PMO system. 4. Township level. SWPRP, QBPRP and PRCDP have demonstrated that the extension of the PMO system to the township level is absolutely crucial to effective project implementation and outreach to the poorest natural villages and households. Building on this experience, the project will establish Township Project Work Stations (TPWS) at the township level. The TPWS will be responsible for the day-to-day execution of the project in their corresponding areas. The project's institution building component will also help strengthen planning and implementation capacity at the township level. 5. Administrative village and lower levels. The project encourages community empowerment, and most project activities will be implemented at the administrative village and natural village levels. Therefore, a complete project implementation and management system will be established at the administrative village level and natural village level. At the administrative village level, the village committee plays a leading role and will be responsible for (a) project mobilization and coordination in its corresponding areas, (b) signing contracts for civil works and consulting services on behalf of natural villages, and (c) fund management and assisting natural villages with project fund application and withdrawal. In addition to the village committee, the Project Decision Making Committee and Project Supervision Committee will be established. The Project Decision Making Committee is responsible for reviewing and approving project proposals. The Project Supervision Committee is responsible for M&E and supervision. Community assistants will play a key role in assisting the administrative village committee and county PMO in community mobilization, project implementation, organizing relevant technical and knowledge training targeted at community project management organizations, and undertaking M&E of project implementation progress, achievements and impacts. At the natural village level, Project Implementation Groups and Project Supervision Groups will be established and will be responsible for project implementation and supervision, including project implementation and fund use. The project's institution building component will also help strengthen planning and implementation capacity at the village level. 6. CDF component. Under the CDF component, block grants will be provided to the beneficiary AV for supporting productive activities among its members. The members of the recipient AVs that are interested in receiving financial support will establish formal associations that will serve as the entities responsible for the management of these funds within the AV. In accordance with local legislation, Community Cooperatives seem to be the best form of association for managing this community development financing. The Community Cooperatives are non-profit social public welfare organizations which must be registered with the Civil Affairs Department or the Industry and Commerce Bureau as a social group or an unofficial non- enterprise organization. Eligible farmers in the AVs voluntarily apply for Community 40 Cooperative membership. In turn, the cooperatives will provide sub-grants and/or sub-loans to their members (groups or individual households) for productive purposes. 7. Migrant labor support component. The Chongqing PPMO, together with the Youyang and Yunyang County PMOs and Fuling and Wanzhou District PMOs, will take lead responsibility for the design, implementation and monitoring of the Migrant Labor Support Component. Under this component, Migrant Laborers Microenterprises Associations (MLMA) will be established by migrant laborers to receive and manage the block grants received from the project. The MLMA will then provide sub-grants and/or sub-loans to its members to support microenterprises. These MLMAs will be registered to be become formal legal entities. Before being eligible for grant assistance from the project, migrant laborers will have to become a member of the Association and receive necessary training regarding microenterprises operations. The MLMAs, as migrant laborers` mutual-help associations, will also provide its members with specifically designed capacity building services to promote the efficient use of project funds. 8. Sustainable land management and adaptation component (SLMA). The SLMA component will be implemented within the overall SDPRAP implementation structure. The CPCO, PPMOs, and County PMOs will each appoint one full-time staff member to facilitate implementation of SLMA activities in the selected pilot villages. CPCO will be responsible for the central level subcomponent 3. The CPCO, PPMOs and County PMOs will recruit technical assistance to support the implementation of village resource assessments and mapping, design of pilot activities, training, environmental and vulnerability monitoring as well as national studies and consultations. Component implementation arrangements are described in the SLMA Manual that has been prepared by the CPCO. 41 Annex 6: Financial Management and Disbursement Arrangements CHINA: Sustainable Development in Poor Rural Areas Project Introduction 1. A Financial Management Specialist (FMS) member of the Task Team has conducted an assessment of the adequacy of the project financial management system for the China Sustainable Development in Poor Rural Areas Project. The assessment, based on guidelines issued by the Financial Management Sector Board on November 3, 2005, concluded that the project met the minimum Bank financial management requirements, as stipulated in OP/BP 10.02. In the FMS` opinion, the project will be able to maintain adequate financial management arrangement acceptable to the Bank and, as part of the overall arrangements that the Borrower has in place for implementing the operation, it will provide reasonable assurance that the proceeds of the Loan and GEF Grant are used for the purposes for which they are granted. Financial management risk is the risk that World Bank Loan/Grant proceeds will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under the project, the FM risk rating proposed for this project is Substantial. 2. Funding sources for the project include the Bank Loan, GEF Grant and local counterpart funds. The Bank Loan proceeds and the GEF Grant funds to finance implementation activities at provincial level will directly flow to project Designated Accounts (DAs) to be set up at and managed by the provincial Finance Bureaus. For the portion of the GEF funds to implement centrally managed activities, these GEF funds will be disbursed to one segregated DA (only for the GEF Grant funds) to be set up at and managed by MOF. The Bank Loan agreement will be signed between the Bank and MOF, and on-lending agreements for the Bank Loan will be signed between MOF and the project provinces. The GEF Grant agreement will be signed between the Bank and MOF. Counterpart funding all comes from the central government and local governments at different levels and the beneficiaries are not required to contribution either money or labor to the project. 3. The total project investment is about USD 159.1 million (IBRD: USD 100 million; Government: USD 54.9 million; and GEF: USD 4.265 million). The project`s development objective is to explore and pilot more effective and innovative ways of providing poverty reduction assistance to the poorest communities and households in the forms they themselves most desire and with greater positive impact. There will be about 770 Administrative Villages (AV) to be involved in the project. 4. No outstanding audits or audit issues exist with any of the implementing entities involved in the project. However, the task team will continue to be attentive to financial management matters during project supervisions. 42 Audit Arrangements 5. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with International Auditing Standards and the Government Auditing Standards of the People's Republic of China. The Audit Service Center for Foreign Loan and Assistance Projects of the Chinese National Audit Office (CNAO) and the three provincial (Shaanxi, Chongqing, and Henan) audit offices have been identified as auditors for the project. Annual audit reports will be issued by the above-mentioned audit center and provincial audit offices. The Bank currently accepts audit reports issued by CNAO or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible. 6. The annual audit report of project financial statements will be due to the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the Loan and Grant agreements. The responsible agency and timing are summarized as follows: Audit Report Submitted by Due date Project financial statements for 3 PPMOs: Shaanxi, June 30 of each calendar each province (for each Chongqing, and Henan year province, there will be one consolidated audit report combining both the Loan and GEF Grant) Project financial statements for FCPMC June 30 of each calendar national level (GEF Grant only) year Risk Assessment and Mitigation 7. The following risks with corresponding mitigating measures have been identified during the assessment: Risk Risk Incorporated Risk Risk Conditions of Rating Mitigating Measures Rating after Negotiations, before Mitigating Board or Mitigating Measures Effectiveness Measures Inherent Risk Country Modest Continuous dialogue with Modest level related government entities and technical assistance from the Bank will help the government to improve its public sector financial management. In the short- term, annual audit requirements will reduce the 43 risk that project funds are not used for their intended purposes. For those areas where government system cannot be used, Bank`s specific requirements will be embedded into project financial management system. Entity Level High The Chongqing PMO`s Substantial . limited experience with Bank financed projects and the limited previous experience of project counties and communities all increase the FM risk. However, guidance and supervision from the provincial/municipal level can, to some extent, mitigate this weakness. In addition, well designed training sessions will be provided to project financial staff during project implementation. Project High The number of communities Substantial Y, Completed Level involved and the scattered project activities with large transaction volume and small dollar disbursements contributes to project financial management risk. In order to mitigate the high risk, a well prepared Financial Management Manual (FMM) was finalized before project negotiations. The FMM will provide useful guidance to project financial staff. Good practices from other countries will be introduced into the project, which can also strengthen its internal control procedures. For example, communities` participation, transparent procedures and complaint handling systems from other CDD projects in the region. Control Risk 44 Budgeting High The CAPPs prepared by the Substantial communities should be approved by the related government entities before they can implement the project activities. The standard project annual plan and project progress report have been designed for the project, which should assist project budget preparation and execution. Each PMO is required to conduct variance analysis on a semi- annual basis. The report should be furnished to the Bank before project supervision mission. Accounting Substantial It was determined that the Modest county PMO will be the lowest level for project accounting. They will follow the accounting policies and regulations documented in the FMM. Although the communities are required to account for their activities, it is only for capacity building and sustainable development purposes. A separate Financial Management manual has been prepared for the communities. Internal High Strict internal control Substantial Y, Completed. Control procedures covering request, review, approval, certification, supervision and reporting have been established within the project. A project FMM will be finalized before project negotiations to specify the reporting procedures and detailed FM guidance and supervision policies. Funds Flow High A bank account will be Substantial opened by each beneficiary AV. Bank funds and some of the counterpart funds will 45 be delivered directly by the county Finance Bureau to these community bank accounts. Advance payment of 50% for CDD component will enable the AVs to start project activities easily. Further advances from DA to the operating accounts opened and managed by county Finance Bureaus will also shorten the disbursement cycle. Service standards have been set up for application reviewing and funds delivery procedures. Financial Substantial The format and contents of Modest Reporting financial statements have been stipulated by MOF. Separate manuals have been prepared for the overall project and the CDD and CDF components which will provide detailed instruction on preparation of financial reports. In addition, the FM training plan has been prepared and all project financial staff will be trained during project implementation. Auditing Modest The external auditor, Audit Modest Service Center for Foreign Loan and Assistance Projects of China National Audit Office (CNAO) and the three provincial audit offices have extensive experience with previous Bank projects. Overall High Substantial Therefore, the overall FM risk-rating of this project, taking into account of the mitigating measures, is Substantial. The FMS will monitor the project FM risk during project implementation. 46 Disbursement Arrangements 8 Four disbursement methods will be applied under the project: advance, reimbursement, direct payment and special commitment. Given the number of project implementing entities involved, it was decided that the project will use traditional disbursement methods rather than report-based disbursement. However, the project will benefit from innovative disbursement arrangements, such as an advance payment of 50% of the costs of the implementation of the approved CAPPs under the CDD component. Statement of Expenditures (SOE) for the expenditures against the contracts are indicated in the table below: Expenditure Category Contracts Less than US$ Equivalent CDD subgrants (Component 1) All CDF subgrants and/or subloans All (Component 2) MLMSF subgrants and/or subloans All (Component 3) Works 1,000,000 Goods 300,000 Consulting services 100,000(firm)/50,000(individual) Training and workshop All The list of payments against the contracts, and records evidencing eligible expenditures (for example, copies of receipts and supplier invoices), for the contracts subject to the Bank`s prior review are indicated in the table below: Expenditure Category Contracts equivalent to or more than US$ Works 1,000,000 Goods 300,000 Consulting services 100,000(firm)/50,000(individual) 9 Multiple Designated Accounts (DA) will be established for the project. One is a segregated US dollar account opened at a commercial bank acceptable to the Bank and managed by MOF for the GEF Grant funds. This segregated DA will be used for disbursement for centrally implemented activities under the SLMA (GEF) component. In addition, there will be six US dollar DAs accounts opened at commercial banks acceptable to the Bank and managed by each provincial Finance Bureau, in which the funds from the IBRD Loan and GEF Grant will be deposited (three provincial DAs for the Loan and three for the GEF Grant funds). The ceiling of the provincial DAs will be specified in the Disbursement Letter issued by the Bank. Applications for requesting advance into the DAs can be submitted to the Bank at any time, and no supporting documents are required so long as the outstanding advances do not exceed the ceiling established in the Disbursement Letter. 10 For the IBRD Loan, advances may be made from the DA to the operating accounts managed by the county Finance Bureaus. In principle, the ceiling for further advances for each 47 operating account should not be more than 30% of the amount of the county approved annual project budget. The actual amount of each operating account will be negotiated and agreed between the provincial Finance Bureau and county Finance Bureaus. The use of further advances should be reported by submission of SOEs or records (for example, invoices) evidencing eligible expenditures to the provincial Finance Bureau, and be reconciled with the Designated Account on a monthly basis. If any misuse of the advance in operating account by county Finance Bureau is found by government entities, external auditors and the Bank, the county will be asked to return the funds back to the DA and will not be allowed to use further advance. 11 The Bank Loan and GEF Grant will be disbursed against eligible expenditures as summarized in the following table: Loan Percentage of Percentage of allocated GEF Grant Expenditures Disbursement Category Expenditures Amount (in USD) to be to be financed (in USD) financed 1. Chongqing 1.1 CDD Grants 11,160,000 55% 1.2 CDF Financing, and Goods, Services, and IOC under Subcomponent 2B 4,040,000 88% 1.3 RMS MLMSFs, and Goods (except vehicles), Works, Consultant Services, and IOC under Subcomponent 3A and 3B 7,870,000 76% 1.4 SLMA\a/ 960,000 100% 1.5 International Training, Goods (except vehicles), and Consultant Services under Subcomponent 5A 370,000 100% 1.6 Domestic Training, Goods (except vehicles), Works, Services and IOC under Subcomponent 5B 500,000 94% 2. Henan 2.1 CDD Grants 23,940,000 68% 2.2 CDF Financing, and Goods, Services, and IOC under Subcomponent 2B 10,240,000 68% 2.3 SLMA\a/ 1,440,000 100% 48 2.4 International Training, Goods, and Consultant Services under Subcomponent 5A 960,000 100% 2.5 Domestic Training, Goods (except vehicles), Works, Services and IOC under Subcomponent 5B 770,000 16% 3. Shaanxi 3.1 CDD Grants 21,870,000 53% 3.2 CDF Financing, and Goods, Services, and IOC under Subcomponent 2B 16,030,000 100% 3.3 SLMA\a/ 1,600,000 100% 3.4 International Training, Goods (except vehicles), and Consultant Services under Subcomponent 5A 1,080,000 100% 3.5 Domestic Training, Goods (except vehicles), Works, Services and IOC under Subcomponent 5B 920,000 31% 4. Central Project Coordination Office 4.1 SLMA\a/ 265,000 100% Front-end fee 250,000 Total 100,000,000 4,265,000 \a/ The GEF contribution to the project totals US$5 million and includes a project preparation grant of US$280,000, a GEF agency fee of US$455,000, and a GEF project implementation grant of US$4,265,000. Only the project implementation grant is reflected in the Project Appraisal Document and relevant cost tables. For the purpose of this Table, (a) IOC refers to Incremental Operating Costs as defined in the Loan Agreement, (b) Services refers to consultant and non-consultant services, (c) International Training refers to international training as defined in the Loan Agreement, and (d) Domestic Training refers to domestic training as defined in the Loan Agreement. 12 Retroactive Financing. Retroactive financing will be applied for this project for all eligible expenditures under all components other than the SLMA Component 4. Withdrawals for eligible expenditures up to an aggregate amount not to exceed a total amount of USD10 million may be made for payments made within 12 months prior to the date of the Loan Agreement, but on or after May 27, 2009. 13 Each provincial Finance Bureau and MOF will be directly responsible for the management, maintenance and reconciliation of the DAs activities of the project. The flow of funds and withdrawal applications (WAs) are as follows: 49 Suppliers CFB MFB PFB W B Comm unities CPMO MPMO PPMO Funds delivery: Application review: CFB: county Finance Bureau MFB: municipal Finance Bureau PFB: provincial Finance Bureau CPMO: county Project Management Office MPMO: municipal Project Management Office PPMO: provincial Project Management Office Note: Since there is no municipal level in Chongqing, the application will be submitted directly by the county to the province and the reimbursed funds will be delivered from the province directly to the county. 14 Given the innovations that will be introduced into the project (that is, CDD, CDF and Migrant Labor Micro-enterprises Support Financing (MLMSF)), the detailed disbursement procedures and requirements have been designed to ensure that project funds are available on a timely basis. Separate draft manuals have been prepared for each activity to standardize the operating procedures and provide guidance to lower level entities. These manuals were finalized before negotiations and have been included in the project`s overall documentation. 15. For the CDD component, the CDD subgrants will be disbursed to the beneficiary AV in accordance with the approved CAPP without any repayment responsibility by the AV (the loan portion will be repaid by the Province). A bank account will be opened by each beneficiary AV in the local RCC (Rural Credit Cooperative) or other township level financial institution that is acceptable to the Bank. Given the communities` need for bridge funds to facilitate their start-up of project CDD activities, it was agreed that 50% of the portion to be financed by the Bank will be delivered to each community once the community`s CAPP proposals are approved by related government entities. The remaining 50% will be delivered to these communities after project activities are completed and certificated by related government entities. A tailored SOE form has been designed for disbursement of CDD component (see below). 50 SOEs for CDD component # CDD Total Disbursement Total Current Disbursement Cumulative Remarks activity investment percentage amount Advance Last disbursement financed payment payment until this by the application WB 16. For the other community demand driven activities under Components 2 and 3 (CDF and MLMSF), the Bank funds will be delivered to the beneficiary communities (AVs` community cooperatives and the MLMAs, respectively) in the form of grants with no repayment from these recipient AVs (the loan portion being borne by the provinces and prefectures). There are clear requirements in the respective manuals regarding the eligibility of these associations to apply for the CDF and MLMSF funds. The Loan proceeds will be delivered to the associations registered in line with domestic procedures once these requirements are met and then used for the intended purposes in accordance with the request approved by the PMO. Financial Management and Reporting Arrangements Strengths 17. FCPMC has managed several World Bank projects. It has extensive experience in project financial management and disbursement, which will benefit the implementation of this project. The three provincial Finance Bureaus also have experience with managing designated accounts and are familiar with the disbursement requirements and procedures for Bank financed projects. At the provincial level, the Shaanxi provincial PMO has implemented poverty reduction projects before. Similarly, the Henan provincial PMO is currently implementing the IAIL III project financed by the Bank. Therefore, both PMOs have substantial experience with Bank projects. The exception is the Chongqing Municipality`s PMO, which has never implemented a World Bank-supported poverty alleviation project. Weaknesses and Action Plan 18. Delivering project funds on a timely basis to bank accounts established in the name of the community will be a substantial challenge. This is the first time for most of the project counties to implement a Bank project. The following action plan for addressing these weaknesses have been identified: Significant weaknesses Actions Responsible Completion Person Date Substantial innovations will be Tailored and praticable FCPMC January 21, introduced as result of the CDD FMM to be drafted, 2010 approach into the project and all these reviewed by the Bank and (completed) are very new to project entities. finalized. 51 Most project financial staff do not FM training plan to be FCPMC and have experience with Bank projects, prepared and all project provincial and the capacity of lower level staff is financial staff to be trained PMOs unsatisfactory. before and during project implementation. Implementing Agencies 19. The details of the institutional arrangements are presented in Annex 5 of the PAD. Appropriate financial staff have been assigned within each PMO. Budgeting 20. Each community is required to prepare its CAPP proposal and the CAPP proposals are to be submitted to related government entities for approval. Once the proposals are approved, the county PMO is responsible for preparing the county`s annual plan. The standard project annual plan has been designed so that the preparation and consolidation of annual plan is simplified. 21. In order to ensure that the project activities could be implemented as planned, it was agreed that each PMO will conduct variance analysis on a semi-annual basis. The standard project progress report has been designed for the project. The report should be furnished to the Bank before each project supervision mission. Accounting 22. The administration, accounting and reporting of the project will be set up in accordance with Circular #13: Accounting Regulations for World Bank Financed Projects issued in January 2000 by MOF. The circular provides in-depth instructions for accounting treatment of project activities and covers the following: Chart of Account Detailed accounting instructions for each project account Standard set of project financial statements Instructions on the preparation of project financial statements The standard set of project financial statements mentioned above has been agreed between the Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the following: Balance sheet of the project Statement of sources and uses of fund by project components Statement of implementation of Loan agreement Statement of implementation of Grant agreement Statement of designated account (Loan) Statement of designated account (GEF Grant) Notes to the financial statements 52 23. The PPMOs and each CPMO will be managing, monitoring and maintaining their respective project accounting records for the components they execute. Original supporting documents for project activities will be retained by PPMOs and CPMOs. MPMOs will only be responsible for consolidation of financial statements prepared by CPMOs, which will then be submitted to the PPMOs. In addition, PPMOs and CPMOs will prepare their own financial statements, which will then be reviewed and consolidated by PPMOs before being submitted to the Bank for review and comment on a regular basis. Villages will retain copies of village level documentation. 24. Adequate project accounting staff with educational backgrounds and work experience commensurate with the work they are expected to perform is one of the factors critical to successful implementation of project financial management. Based on discussions, observation and review of educational background and work experience of the staff identified for financial and accounting positions in the implementing entities, the task team noted that the financial staff are qualified and appropriate for the work they are expected to assume. However, given that most financial staff do not have previous experiences with Bank projects, the tailored training courses should be provided to all the project financial staff before or during project implementation. 25. To strengthen financial management capacity and achieve consistent quality of accounting work, the task team has suggested that a Project FMM be prepared as a part of the Project`s operational documentation. The FMM will provide detailed guidelines on financial management including internal controls, accounting procedures, fund and asset management, withdrawal application procedures, financial reporting and auditing arrangements, and other key aspects. A uniform FMM has been prepared by FCPMC and submitted to the Bank and three provincial PMOs for comments. The improved FMM was finalized before project negotiations and will be distributed to all the relevant financial staff before project effectiveness. 26. Each PMO will individually decide whether they will utilize computerized financial management information software or manually record and maintain the project accounting books depending on their actual situation and cost-benefit considerations. The task team will monitor the accounting process, especially during the initial stages, to ensure that complete and accurate financial information will be provided in a timely manner. 27. It has been determined that the county PMO will be the lowest level for project accounting. The CPMOs will follow the accounting policies and regulations documented in the FMM. Although the communities are required to account for their activities, it is only for capacity building and sustainable development purposes. A separate FM manual has been prepared for the CDD component, and the financial staff of county PMOs will be mainly responsible for providing training to the communities in line with the requirements of CDD FM manual. 28. Separate FM manuals have also been prepared for Component 2: CDF and Component 3: Rural Migrants Support. 53 Internal Control and Internal Auditing 29. The project will follow the internal control rules stipulated by MOF. MOF's requirements have been integrated into the project FMM. 30. There is no formal independent internal audit department for the project. However, this will not impact the project`s financial management since the management and monitoring from various levels of Finance Bureaus and PMOs, which reviews each withdrawal application, and annual external audit, will serve as the mechanism to ensure that financial management controls are functioning appropriately. 31. In order to empower the communities and strengthen their project management capacity, it was agreed that a bank account will be opened by each beneficiary AV in the county or township RCC (or other financial institution acceptable to the Bank) for receiving the funds disbursed for the implementation of the community CAPPs. Consistent with the objective of strengthening their capacity, these accounts will have to be managed by each community. However, since the government entities have expressed some concerns about the security of project funds, it was agreed that the particular situation of each county will be taken into account and proper disbursement procedures will be designed to minimize the risk of misuse of the funds. It is expected that, in special cases, payments made from these bank accounts (for goods and services needed for the CAPP activities) might need to be countersigned by authorized representatives of both community and township working station. Financial Reporting 32. The format and content of Interim Financial Reports (IFR) have been agreed between the Bank, FCPMC and each province. As agreed, the interim financial reports will be prepared and submitted to the Bank for review on semi-annual basis. 33. Each CPMO and PPMO will prepare the project financial statements on their implemented components, which will then be used by the PPMOs for preparing consolidated project financial statements to be submitted to the Bank for review and comment on a semiannual basis. The interim unaudited consolidated project financial statements should be prepared and furnished to the Bank by the PPMOs not later than 90 days after the end of each semester, in form and substance satisfactory to the Bank. Financial Covenants 34. No specific financial covenants are applicable to the project except for those standard financial covenants such as the project audit and interim financial reports. Supervision Plan 35. The supervision strategy for this project is based on its FM risk rating, which will be evaluated on regular basis by the FMS in compliance with FM Practice Manual (FMPM) and in consultation with the task team leader. 54 Annex 7: Procurement Arrangements CHINA: Sustainable Development in Poor Rural Areas Project A. General 1. Procurement for the project will be carried out in accordance with the World Bank`s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 and revised October 2006; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The description of various items under different expenditure categories is presented below. For each contract to be financed by the Loan and the GEF Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank as presented in the Procurement Plan. The first Procurement Plan will cover the initial 18 months of the implementation period and will be updated at least annually, or as often as required, to reflect the actual project implementation needs and improvements in institutional capacity. B. Procurement Arrangements I. Procurement of Works, Goods and Services under Component 1 (CDD): 2. The Project will provide grants to Administrative Villages (AV) to support the implementation of Community Annual Project Plans (CAPP). A CAPP will cover priority investments intended to be implemented by the corresponding AV in the period of one year of project implementation. These CAPPs will include basic community infrastructure and public service activities selected by these communities through participatory CDD processes and consistent with the long term (multi year) development plan for the community. Although the menu of activities is open to new proposals reflecting the needs of any particular AV, the CAPPs will typically include: village access roads, small scale irrigation facilities, village power supply, biogas, land improvement, village broadcasting facilities, rehabilitation of dangerous housing, construction/rehabilitation of village schools and of village health facilities, rehabilitation/modernization of village cultural facilities, and the technical services needed for the design and implementation of these small works. The project will accept CAPP proposals from all 770 administrative villages in the 25 project counties in Henan and Shaanxi provinces and Chongqing Municipality. 3. Negative List. Although the menu of eligible activities to be included in the CAPPs is open, to accommodate for innovative proposals that will reflect the practical needs and the current priorities of a particular community, there is short negative list of activities that will not be accepted for support. These are the following: Activities that may damage natural habitats, such as logging and reclamation of wetlands; Activities that may bring negative impact to cultural heritage (either protected by law or recognized by local traditions); Industrial activities with potential environmental considerations; County and township roads and cement paved rural roads; 55 Large scale dams, weirs and dykes (more than 10 meters high); Any activity within a water resource protection area; Planting plants or rearing animals of foreign origin without passing ecological safety inspection; Mining; Religious facilities; Any activity related to tobacco (planting, cropping or processing); Activities that used banned chemicals (pesticides, insecticides, etc.). 4. The nature of Community Driven Development (CDD) requires more flexible procurement procedures and arrangements for implementation by the AVs. For this purpose, within the principle of Community Participation in Procurement of the Bank Procurement Guidelines (Para. 3.17), the following simplified procurement procedures are agreed and elaborated in the Procurement Section of the CDD Manual. (a) Local Shopping for Procurement of Goods. Under this procedure, quotations will be solicited by the AVs from at least three qualified suppliers on the basis of simplified documents specifying the goods to be procured. In order to ensure economy and efficiency, the request for and submission of quotations should be in writing. Quotations should be opened by the project implementation group at the same time and to the extent possible in the presence of the community implementation committee. As a general rule, the responsive supplier who offers the lowest price should be awarded the contract. The threshold for local shopping for procurement of goods is below the equivalent of US$50,000 per contract. (b) Local Shopping for Procurement of Civil Works. Just as in the case of shopping for the procurement of goods, quotations will be obtained by the AVs through the invitation of at least three qualified contractors to submit quotations on basis of simplified quotation requests. The request will describe the scope of the works, detail specifications including drawings if applicable as well as desired completion time. Quotations should be opened by the project implementation group at the same time and to the extent possible in the presence of community implementation committee. As a general rule, the contractor who offers the lowest price should be awarded the contract. The threshold for local shopping for procurement of civil works is below the equivalent of US$50,000 per contract. (c) Local Competitive Bidding. Open competitive bidding procedures will be limited to local advertising using such media as local newspapers or radio stations in the project county or district. The threshold for local competitive bidding is above the equivalent of US$50,000 per contract. The invitation for bids should spell out the works or goods to be purchased, the criteria for selection, and the deadline for submission of bids. Minimum time of bid preparation and submission should be no less than 20 days. Bids will be opened publicly, and subsequently evaluated by the community evaluation committee. Bids will be examined to determine whether they meet the minimum specifications and qualifications mentioned in the bidding documents. Bids that meet the minimum requirement specified in the invitation will be retained for further evaluation and the bidder who meets the minimum requirements and offers the lowest bid will be selected. 56 The award and amount of the contract should be announced by the AV Decision Committee to all bidders. (d) Direct Contracting. Under this method a supplier or a contractor will be chosen without using any of the competitive methods described above. This method will be used where there is only one source. To the extent possible the contract price agreed upon should not exceed local market rates or standard estimates as issued by county PMOs. Justification for direct contracting should be included in the Procurement Plan. (e) Community Participation. Under this method, communities will mobilize their own labor and use their own equipment to carry out the works. Works to be constructed under community force account should include a detailed description of the works, a set of technical specifications, and a supervision team to check of quality and quantities. Payments will be made based on the estimated cost as defined in the approved CAPP, against completed works as certified by the community monitoring and supervision committee. (f) Selection of Consultants. Consultant services will be required by the AVs under Component 1 to ensure that they receive the technical support needed for the successful implementation of the community development activities. These consulting services will typically include: village assessments and preparation of the CAPPS, technical services for the design of the infrastructure investments, technical supervision of the implementation and/or the certification of completion, as well as other technical assistance needed to solve specific issues arising during implementation. Most services will be provided by small local consulting firms and/or specialized individual consultants, as follows: (i) Selection of Consulting Firms. These consulting contracts will have a maximum amount of US$20,000 equivalent per contract, while the majority are expected to be under US$10,000 per contract. The selection will follow Consultants` Qualifications (CQS), in conformity with paragraph 3.7 of the Consultants Guidelines (the Guidelines). Chinese universities and design and research institutes can be shortlisted if they comply with paragraph 1.11 of the Guidelines. Given the very small size of the contracts and the dispersion of these contracts across the project areas, the short lists of consultants will be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Guidelines. Under the circumstances described in paragraph 3.10 of the Guidelines, consultants may also be selected and awarded on a sole-source basis (SSS), subject to the Bank`s prior approval. (ii) Selection of Individual Consultants. Individual consultants could be selected and contracts awarded in accordance with the provisions of paragraphs 5.2 through 5.3 of the Guidelines. Under the circumstances described in paragraph 5.4 of the Guidelines, individual consultants may be selected and awarded on a sole-source basis, subject to the Bank`s prior approval. 5. Disclosure. Project communities will disclose the procurement results including the (i) name of each contractor/supplier who submitted a quotation/bid; (ii) quotations/bids as read out 57 at quotation/bid opening; (iii) reason for rejection of quotation/bid; (iv) name of the winning contractor/supplier; (v) contract prices; and (vi) scope of the contract. The detailed disclosure procedures are referred to Section 6 (Para. 6.1 Disclosure) of the CDD Manual. 6. Complaint Handling Procedures. Complaints will be handled in accordance with the procedures of Section 6 (Para. 6.2 Complaint Handling Mechanism) of the CDD Manual. In all cases, the County PMO`s telephone number and the person in charge should be available if public inquiry is needed. II. Procurement of Works, Goods and Services under Component 2 (CDF): 7. Under this component, the Project will provide Community Development Financing (CDF) to AVs with the objective of providing assistance to groups of beneficiary households for the implementation of income generation activities. These CDFs will be managed by the AVs according to the approved proposal, and the procurement activities will be undertaken by beneficiary households (individually or in groups) in accordance with commercial practices. III. Procurement of Works, Goods and Services under Component 3 (Rural Migrants Support), Component 4 (Sustainable Land Management and Adaptation), and Component 5 (Project Management, Monitoring and Evaluation). 8. Procurement of Works. Construction of civil works will be required for the Rural Migrants Support, the Sustainable Land Management and Adaptation (SLMA), and the Project Management and M&E components. Under the Rural Migrants Support component, works to be procured will include construction/rehabilitation of migrant dormitories and migrant worker service centers. Under the SLMA component, civil works will include land management, water management and other small scale types of pilot infrastructure that meet the selection criteria set out in the SLMA Manual. Under the Project Management and M&E component, civil works will include upgrading of office infrastructure. NCB procurement will be done using the Model Bidding Documents (MBD) for NCB agreed with the Bank. (i) National Competitive Bidding (NCB). Although not anticipated, any contracts for works estimated to cost US$100,000 equivalent or more will be procured and awarded under NCB procedures acceptable to the Bank. Works contracts with estimated values of more than US$100,000 may be advertised only in a provincial newspaper. The procedures to be followed for National Competitive Bidding will be those set forth in the Law on Tendering and Bidding of the People's Republic of China promulgated by Order No. 21 of the President of the People's Republic of China on August 30, 1999, with the following clarifications required for compliance with the Guidelines: (a) All invitations to prequalify or to bid will be advertised in a newspaper of national circulation in the Borrower`s country, except works contracts that are estimated to cost more than US$100,000 equivalent but less than US$2million equivalent each or goods contracts that are estimated to cost less than $300,000 equivalent each, which may be advertised in a provincial daily newspaper. Such advertisement will be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and 58 submit their responses. In any event, a minimum of thirty (30) days will be given to bidders between the date of advertisement in such newspaper and the deadline for submission of bids, and the advertisement and bidding documents will specify the deadline for such submission. (b) Qualification requirements of bidders and the method of evaluating the qualification of each bidder willl be specified in detail in the bidding documents. (c) All bidders that meet the qualification criteria set out in the pre-qualification document will be allowed to bid and there will be no limit on the number of pre-qualified bidders. (d) All bidders will be required to provide security in an amount sufficient to protect the employer in case of breach of contract by the contractor, and the bidding documents will specify the required form and amount of such security. In place of a bid security, the bidding documents may require that a bidder submit with its bid a signed declaration that, if the bidder withdraws its bid during the bid validity period or, if awarded the contract, the bidder fails to sign the contract or submit any required performance security before the deadline required in the bidding documents, the bidder will be suspended for a period of two years from being awarded any contract with the Borrower, Shaanxi, Henan and Chongqing, including any of their departments, agencies or administrative units. (e) Bidders will be allowed to submit bids by mail or by hand. The time for opening of all bids will be the same as the deadline for receipt of such bids. (f) All bids will be opened in public; all bidders will be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening, but bidders will not be required to be present at the bid opening. (g) All bid evaluation criteria will be disclosed in the bidding documents and quantified in monetary terms or expressed in the form of pass/fail requirements. (h) No bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by project Provinces. (i) Each contract will be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (A) to be substantially responsive to the bidding documents and (B) to offer the lowest evaluated cost. The winning bidder will not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. (j) Each contract financed with the proceeds of the Loan will provide that the suppliers and contractors will permit the Bank, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by the Bank. (k) Government owned enterprises in the Borrower`s country may be permitted to bid or submit a proposal for goods if they can establish that they (A) are 59 legally and financially autonomous, (B) operate under commercial law, and (C) are not a dependent agency of the agency conducting the procurement. (l) All bids should not be rejected solely because the number of bids is less than three (3), and rejection of all bids or rebidding will not take place without the Bank`s prior written concurrence. (m) The results of bid evaluation and contract award will be published in the national press or provincial press (as provided in above (a) or official gazette or free and open access website and will identify (A) the name of each bidder who submitted a bid; (B) bid prices as read out at bid opening; (C) the name and evaluated price of each evaluated bid; (D) the name of bidders who`s bids were rejected and the reasons for their rejection; and (E) the name and offered prices of the winning bidder as well as the duration and summary scope of the awarded contract. (n) Shaanxi, Henan and Chongqing will have in place provisions for bidders to protest. (ii) Shopping. Small works, such as for construction/rehabilitation of migrant worker dormitories and migrant worker service centers, SLMA water and land management and other infrastructure pilots, and project office upgrading, estimated to cost less than US$100,000 equivalent per contract will be awarded through shopping procedures as specified in paragraph 3.5 of the Procurement Guidelines. These works will be suitable for lump sum and fixed-price contracts awarded on the basis of quotations obtained from at least three local contractors. The contract will be paid on an output basis. 9. Procurement of Goods. Vehicles, motorcycles, office and training equipment, seeds, tools, irrigation equipment, water wells, and other goods and equipment will be procured under components 3, 4 and 5. The procurement will be done using Bank`s SBD for all ICB, and the Chinese Model Bidding Documents (MBD) for NCB as agreed with the Bank. (a) International Competitive Bidding (ICB). Contract for goods estimated to cost US$500,000 equivalent or more will be procured under ICB procedures specified in the Procurement Guidelines. (b) National Competitive Bidding (NCB). NCB procedures will be used for procurement of goods costing less than US$500,000 equivalent per contract. Contracts that are estimated to cost less than US$300,000 equivalent each may be advertised only in a provincial newspaper. (c) Shopping. Other small value goods will be procured through shopping procedures with contracts under US$100,000 equivalent per contract. (d) Direct Contracting. Equipment with proprietary nature, satellite imagery and new species of seeds obtained only from one source or which meet other circumstances as specified in Para. 3.6 of the Procurement Guidelines will be procured on the basis of direct contracting. 10. Selection of Consultants. Consultant services will be required under the Rural Migrants Support, SLMA and Project Management components. These consulting services will include 60 project management and M&E, institution and capacity building, technical advisory services, village assessments, land use and resource mapping, technical design work for SLM pilot activities, land use, vulnerability and carbon stock monitoring, training and analytical studies on rural migrants and on sustainable land management, climate change adaptation, and poverty. Most services will be provided by consulting firms and some will be provided by individual consultants. (i) Selection of Consulting Firms: Consulting contracts expected to cost more than US$200,000 equivalent per contract will use the Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS) in conformity with paras. 2.1 through 3.4 of the Guidelines. The values of most consulting services are estimated to be less than US$200,000 equivalent per contract. For these consulting services with values less than US$200,000 equivalent per contract, the Selection Based on Consultants Qualifications (CQ) will be used. Chinese universities and design and research institutes can be shortlisted if they comply with para. 1.11 of the Guidelines. In such cases, QBS or CQ will be used instead of QCBS. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Under the circumstances described in paragraph 3.10 of the Consultants guidelines, consultants may be selected and awarded on a sole-source basis, subject to the Bank`s prior approval. (ii) Selection of Individual Consultants: Individual consultants will be selected and contracts awarded in accordance with the provisions of paragraphs 5.2 through 5.3 of the consultants guidelines. Under the circumstances described in paragraph 5.4 of the Consultants guidelines, individual consultants may be selected and awarded on a sole- source basis, subject to the Bank`s prior approval. 11. Incremental Operating Costs. Financing of Incremental Operating Costs (IOC) is required under this Project for components 2, 3, 4 and 5. The operating costs are largely related to transportation, field allowances, hotel and accommodation to be incurred during project supervision, office supplies, monitoring and management, and travel and field expenses allowances for project facilitators. The project implementing agency will follow its own procedures which have been found to be satisfactory. Salaries of government staff (other than short term consultants and contractual staff) will not be covered by the Project. 12. Training, Workshops and Study Tours: Training, workshop and study tours will be required under the Project for components 2, 3, 4 and 5. Detailed programs will be developed by the provincial PMOs during project implementation and included in the Procurement Plan, as well as in the Project Annual Work Plan for Bank`s review. Actual expenditures incurred in accordance with the approved detailed programs will be used as the basis for reimbursement. C. Assessment of the Agency's Capacity to Implement Procurement 13. The Procurement Capacity Assessment was undertaken by the Bank`s procurement specialists. The procurement activities will be carried out by the PMOs established at the central, provincial, prefectural, county, township and community levels. The assessment reviewed the implementing agencies` organizational structure and functions, past experience, 61 staff skills, quality and adequacy of support and control systems, and the legal and regulatory framework. The procurement capacity at the central, provincial and county levels is strong, but procurement capacity at the community level, where the CDD Component will be implemented, is still weak. The original overall project risk for procurement is high. 14. To address the weak capacity at the community level and minimize the risks for the CDD component, the following mitigation action plan (based, in part, on the lessons learned from the previous CDD Pilot Project in China) has been agreed: Item Assessed Major Weaknesses Mitigating Measures Taken (original situation) A. Institutional Arrangement and Capacity of Communities 1.1 -- Decision making 1. Terms of references (TOR) for decision Administrative committee and project making committee and project supervision village level: supervision committee committee (two committees) at administrative at administrative level level have been prepared and included in the were not established. CDD Manual. 2. Procedures for establishing the two committees have been set up and documented in the CDD Manual. No disbursement will be made to the AVs until these committees have been established. 1.2 Natural --Village project 1. Terms of references (TOR) for decision village level: implementation team making committee and project supervision and project supervision committee have been prepared and included in team were not the CDD Manual. established. 2. Procedures for establishing the two committees have been set up and documented in the CDD Manual. No disbursement will be made to the natural villages until these teams have been established. 1.3 Project staff at --Project staff were not 1. Procedures for selection of project staff have community level appointed. been established and clearly defined in the and training --Lack of training CDD Manual. Project staff should be on board program for project before start up of the CAPP activities. staff. 2. Comprehensive training program for project staff has been included in training and workshops plans. 3. Training for communities has already started. 1.4 Technical --Technical support 1. Terms of references (TOR) of community support arrangement was not facilitators have been defined in the CDD finalized. Manual. 2. Recruitment of community facilitators has already started and some facilitators have been selected. It is agreed that all facilitators will be 62 selected and trained at start up of the project. 3. If necessary, professional design agencies will be hired by communities to prepare engineering design and procurement of CAPP activities. 4. If necessary, professional contract supervision agencies will be hired by communities to supervise the contract and provide technical support during project implementation. 5. Framework of technical support provided by county and township line technical departments to communities has been agreed and documented in the CDD Manual. 6. To supplement technical support from county line technical departments, it is agreed that technical experts will be hired as necessary by project counties to help communities review technical design of CAPP activities and provide technical guidance and advice to communities during procurement and contract implementation process. B. Procurement Procedures 2. 1 Procurement -Procurement 1. Outline of the procurement procedures for Procedures in procedures need to be CDD has been discussed and agreed at pre- CDD Manual further discussed and appraisal. finalized. 2. The detailed procedures have been reviewed at the appraisal. Comments and suggestions raised by the three provinces have been incorporated in the final draft CDD Manual. 2.2 Procurement --Procurement 1. Detailed procurement procedures, i.e., local procedures procedures for CDD shopping, local competitive bidding, component should be community force account, etc have been defined. clearly defined in the CDD Manual. 2. Sample documents for local shopping and local competitive bidding have been prepared and attached in the CDD Manual 2.3 Promotion of -- No mandatory 1. Local advertising of procurement notices transparency requirement for using media as local newspaper or radio at advertising of project county is mandatory required for all procurement competitive bidding. opportunities. 2. Minimum time for quotation/bid preparation is specified in the CDD Manual. 3. Quotations/bids will be opened publicly in communities. 63 4. Evaluation of quotations/bids will be done in accordance with the procedures and requirements as specified in the requests for quotation/bidding documents. 2.4 Disclosure of --Public disclosure 1. Communities will post contract award procurement mechanism for award of recommendation in villages for 5 working days result contracts needs to be before the announcement of contract award. established. 2. Communities will disclose procurement result including (i) name of each contractor; (ii) quotations/bids read out at quotation/bid opening; (iii) reason for rejection of quotation/bid; (iv) name of winning contractor and contract price. Details disclosure procedures are set out in the CDD Manual. 2.5 Handling of --Formal complaint 1. Detailed procedures for handling complaints Complaints handling procedures are worked out and included in the CDD should be defined. Manual. 2. Complaint hot lines have been established within each of the 25 project counties and districts. C. Record Keeping 3.1 Procurement --Procurement filing 1. Detailed procurement documentation filing system needs to be requirements are included in the CDD Manual. established. 2. Original procurement documentation will be filed in communities, but copies of the documentations will be also filed in county PMOs. 3.2 Procurement --Supervision 1. PMOs at provincial and county level will do supervision procedures should be procurement supervision on regular basis. Six not established. months supervision reports should be prepared and available for the Bank`s review. 2. Bank will carry out ex post review at least once every six months during the first year of project implementation and at least once annually thereafter. D. Procurement Plan 15. For the CDD Component, it is unlikely that the project community will be able to prepare an annual Procurement Plan in advance. Instead, a detailed Community Annual Project Plan (CAPP) will be prepared by communities following the procedures detailed in Section 5 of the CDD Manual. The consolidated Procurement Plan, including all CAPPs in the respective township or county, will be maintained at both township Work Stations and county PMOs and will be disclosed to the public. For all other project components, the CPCO and provincial 64 PMOs (PPMOs) have developed a draft Procurement Plan for project implementation, which provides the basis for the procurement methods, subject to review and concurrence by the Bank. The Procurement Plan will also be available in the Project`s database and in the Bank`s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. E. World Bank Prior Review 16. All contracts in excess of US$300,000 for goods, contracts in excess of US$1 million for civil works, all direct contracting contracts, all contracts for consultant services in excess of US$100,000 for firms and US$50,000 for individual consultants, and all contracts awarded under single source selection will be subject to prior review by the Bank. All other contracts including all contracts under the CDD component will be subject to ex-post review by the Bank. The post review sampling ratio will be one out of twenty contracts. Detailed thresholds for procurement methods and prior review are summarized in Table 1. Table 1 Thresholds for Procurement Methods and Prior Review Contract Value Prior Review Expenditure Procurement Threshold Threshold (US$ Category Method (US$ thousands) thousands) 1. Civil Works 100 NCB >1,000 <100 Shopping NA 2. Goods 500 ICB >300 <500 NCB >300 <100 Shopping NA Direct Contracting All direct contracting contracts 3. Consultant 200 QCBS/QBS >100 Services <200 CQS >100 Individual >50 for individual Consultants consultants, all single source Single source contracts regardless selection of value 65 Annex 8: Economic and Financial Analysis CHINA: Sustainable Development in Poor Rural Areas Project 1. Introduction. Significant economic, social, and environmental benefits are observed for this series of poverty reduction projects (that is, SWPRP, QBPRP and PRCDP) implemented in similar areas from mid 1990s to the present. The State Statistical Bureau`s (SSB) independent monitoring reports show that project villages in SWPRP and QBPRP achieved remarkable benefits, as reflected by declining of poverty, increased per capita income, reduced grain deficits, more development opportunities for the beneficiaries, better access to market, and improved natural environment. SSB`s reports also demonstrate that project villages, in many aspects, outperformed the non-project villages which generally enjoyed better initial conditions than that of the project villages. The participatory monitoring and evaluations conducted in PRCDP confirm that the increasing degree of beneficiaries` participation in the project cycle brings out noteworthy social benefits, including a stronger sense of project ownership, more equal status between different social groups, and enriched social capital. In short, a well designed and implemented poverty reduction project is expected to generate the following benefits: Improved food security and increased per capita income from enhanced agricultural productivity and more stable off-farm job opportunities; Higher standards of living and greater well-being due to improved access to markets, safe drinking water, transportation, electric power, and other basic public services; Strengthened ability to smooth risks due to improved access to applied technology and capacity building activities; Stabilization and reversal of environmental destruction through sustainable land management and natural resource conservation; A stronger capacity of community self-governance and greater sense of community cohesion and empowerment through CDD/CDF approaches; and, Improved status of some specific social groups, such as women as well as the most remote natural villages, through activities aimed to achieving better gender equality and providing more development opportunities. 2. Obviously, some of these benefits are more easily quantified than others. For example, methodologies are well developed for quantifying the benefits from improved agricultural productivity and basic infrastructure construction. It would be difficult, however, to quantify some social and environmental benefits, such as improved social cohesion, greater gender equality, a better natural environment, and benefits from other beneficiaries` empowerment activities. 3. Methodology and major assumptions. A traditional methodology has been used to conduct the economic analysis. The future stream of costs and benefits have been estimated for various project activities, and then the net present value (NPV) and an economic rate of return (ERR) have been derived based on the net benefits. The data for calculating the ERR were collected by the provincial PMOs in August 2008 from sample project counties. 4. Project net benefits have been quantified for the CDD, CDF and RMS components. These three major components comprise 60%, 22% and 7% respectively of total project cost, and 66 together comprise more than 90% of total project investment. The project-wide ERR has been calculated as the average of the individual ERRs weighted by their shares of project investment. The benefits of the project management and M&E component are difficult to quantify and hence an ERR has not been calculated for this component. 5. Several conventional and conservative assumptions have been made in the economic analysis. First, per capita income in the project and non-project areas has been assumed to increase at 5% annually in the first ten years, and then remain unchanged thereafter. Second, the estimated benefits (revenues) are extrapolated over a 20-year period. Third, the capital discount factor is 0.1. Detailed calculations, including methodologies, specific assumptions, crop budgets, and activity models are provided in the project files. 6. Results. The overall economic rate of return of the project is estimated to be around 31% (see table below). It should be noted that, due to the conservative assumptions made and for reasons summarized below, the estimated ERR is likely to underestimate the real benefits of the project and hence the ERR should be regarded as the lower bound of the real ERR. However, even from the lower bound perspective, the economic viability of the project is well justified. Rates of return to the whole project and different components Activity Project as a whole CDD CDF RMS ERR 31% 32% 53% 22% 7. CDD component. This component will finance rural infrastructure construction selected by community members through the CDD approach. Experience from the past projects` implementation unambiguously shows that infrastructure activities are most welcomed by beneficiaries. The project`s Social Assessment report also confirms this point. The Poverty Monitoring Reports (SSB, 2001-2005) show that the small-scale irrigation subcomponent can contribute a 1.4% increase to per capita income. Based on this parameter and other three moderate assumptions, the rate of return to the small irrigation subcomponent is estimated around 32%. This ERR can be treated as the lower bound of the real ERR for the CDD component. For example, when asked to rank the subcomponents of infrastructure component, farmers usually give the first two or three priorities to the road construction, drinking water, and electrification. Therefore, we can reasonably believe that ERRs for road, irrigation, and electrification should be relatively higher than that of small irrigation in order to match farmers` preference rank. Interestingly, other researchers (e.g., Rozelle and Huang, 2003) also found similar results and came to the same conclusion, which strengthens confidence in these findings. 8. CDF Component. This component includes, among other activities, two major groups of activities: livestock raising, and cash-crop and tree planting. For livestock raising, ERRs were calculated for the activities of raising goats, pigs, rabbits, and silkworm. For the cash-crop and tree planting, ERRs were calculated for activities of planting vegetables, walnuts, chestnuts, and Sichuan pepper. Consistent with the overall high price-level of agricultural products at present (and the likelihood of prices remaining high for the foreseeable future), the ERRs for individual activities range from 36% (pig-raising) to more than 50% (vegetables), and the overall ERR for the whole component is about 53%. 67 9. RMS component. This component, which accounts for 7% of total project cost, will focus on improving the provision of a variety of services (including housing, financial assistance, education, vocational training, and rights protection) to rural migrants in selected areas of Chongqing. Findings from research show that ERRs for education (including vocational training) can be very high. For example, Ravallion and Chen (1997) showed that the per capita income of those poor who received basic education is about 20% higher than those who did not. IFPRI (2001) estimated that a RMB1 investment in education or vocational training would generate RMB5 in return. Based on these parameters and the per capita gross income data from all three provinces in 2007 (from SSB), the rate of return to education and vocational training is estimated to be around 22%. There are no data to enable us to calculate the ERRs of microenterprises run by migrant workers. However, migrant labor support components in SWPRP and QBPRP had ERRs of greater than 50%. On that basis, it is assumed that the ERRs for microenterprises should not be lower than 22%, otherwise, the government would use the funds for vocational training in view of the opportunity cost. Therefore, it is assumed that the overall ERR for the rural migrants support component is about 22%. 10. No effort was made to estimate the financial rate of return (FRR). After three decades of very successful market-oriented economic reform, the price distortions due to the government interventions have been largely eliminated. Rich and strong evidence shows that an integrated domestic market has now been established and it is increasingly integrated with the international market. On this basis, it is believed that there is no need to separately calculate a project FRR in order to capture the impact of price distortions. 68 Annex 9: Safeguard Policy Issues CHINA: Sustainable Development in Poor Rural Areas Project Environmental safeguards 1. There are five components in the project including: CDD for community infrastructure and public services, CDF for household income generation and capacity building, rural migrants support, and sustainable land management and adaptation. The project is classified as Category B due to the type, location, sensitivity, and scale of the project and the nature and magnitude of its potential environmental impacts. The project will bring about positive impacts and benefits on the environment and the targeted communities in the project areas, and have minimal adverse impacts. 2. Background. FCPMC prepared the Environmental and Social Management Framework (ESMF) following the relevant policies, laws and regulations of the Chinese Central Government and local governments. The ESMF also complies with the safeguard policies of the World Bank, avoids or minimizes the potential negative environmental and social impacts of the project activities, and ensures improvement of the livelihoods of project farmers and the sustainable economic and social development of poverty areas. 3. The ESMF complies with the safeguard policies of the World Bank and is applicable to all project components. The objective of the ESMF is to ensure that all poverty reduction activities undertaken through the project will satisfy the following requirements: (a) Enhancing positive and sustainable environment and social outcomes; (b) Incorporating environmental protection and social aspects of the project components into the decision-making process; (c) Minimizing environmental degradation caused by each project component or the accumulated effects; (d) Assisting resettlers to improve their livelihoods and prevent declines in their livelihoods. 4. In accordance with the Bank`s principal experience and understanding of poverty reduction work in China, the ESMF analyzed the possible environmental and social impacts of the components to be financed, proposed corresponding mitigation measures, explicitly defined activities to be and not to be supported, as well as avoidance of locations unsuitable for activity implementation in order to reduce negative environmental and social impacts. Meanwhile, the ESMF made provisions for a mechanism to satisfy the Bank`s safeguard requirements including the necessary organizational structure, evaluation system, monitoring system and capacity building. 5. The ESMF includes the following contents: description of the policy framework of the national and local governments and of the World Bank relevant to the project; lessons learned from previous poverty reduction projects; criteria for screening projects activities including the types, possible scale and impact of activities of each component to be financed; identification of environmental and social impacts of each component; mitigation plans and institutional arrangements for monitoring and supervision; mechanism satisfying the Bank`s safeguard requirements including mechanisms for the Environment Assessment, Environmental Management Plan, and Land acquisition and resettlement plan; implementation arrangements 69 including capacity evaluation of the implementing agencies and proposed capacity building measures; monitoring and reporting system including regular supervision and adjustment mechanism during implementation process; and budget arrangements and training for PMO staff. 6. Potential environmental impacts and risks and mitigation measures. The implementation of this project will be conducive to coordinated and rapid economic development in poverty areas, improving rural infrastructure facilities and public service conditions and enhancing the capacity to resist natural disasters. Therefore, the project bears important significance to the sustainable development of the society. 7. At the same time, the project components will potentially cause a variety of short-term construction and long-term operational impacts. A series of mitigation measures have been planned accordingly to reduce the impacts to acceptable levels during the construction and operation phases: Construction phase: Project components will likely have a variety of short-term impacts during construction, such as noise, dust, solid wastes, wastewater, soil erosion, resettlement and temporary land occupancy issues etc. These concerns are relatively minor due to the site and size of the components, and measures to reduce them to acceptable levels have been discussed and detailed in the ESMF. Operations phase: The main environmental issues are the management for the wastewater, noise, solid wastes and odor. Appropriate mitigation measures have been established and detailed in the ESMF. 8. Environmental requirements will be incorporated in the project designs and construction contracts. The construction contracts will also include an appropriate clause regarding the procedures to be followed in the chance event of finding culturally significant artifacts or sites. 9. Capacity building. To ensure that the above measures and plans are implemented efficiently and effectively, the ESMF will be mainstreamed in the project training. County PMOs will offer relevant training to the township and village project implementation staff and guide the administrative villages in developing environmental management plans and collective land adjustment plans. 10. Funding arrangements. Under the project management, monitoring and evaluation system, a certain amount of funding will be arranged to cover the costs of the project`s environmental and social safeguard system and for the implementation of the environmental and social safeguard plans. This will include funds for formulating various plans, training, and monitoring activities. 11. Monitoring. The monitoring of environmental and social impacts will be divided into internal and external monitoring. The former is part of the project implementation plan to be implemented by local PMOs, including the environmental and social impacts during the entire process of project implementation and during the post-evaluation stage as well as the assessment of the adopted mitigation measures. Necessary adjustments to the original plans will be made in 70 accordance with the level of environment and social impact of the project. Internal monitoring reports will be submitted to the World Bank on a regular basis. 12. During the implementation, the project will commission external independent monitoring work to an independent and impartial third party in order to understand the project`s impact, the beneficiaries` sense of satisfaction with the project activities, and to propose measures for improvement. External monitoring will usually be undertaken once every year and the external monitoring reports will be submitted to the CPCO, PPMOs and the World Bank on a regular basis. 13. Public consultations. In accordance with the stipulations of safeguards policy of the World Bank, a participatory survey of public opinion was conducted based on the requirements of the ESMF. The survey included the follow approaches: - Questionnaire survey. In line with the project implementation activities in the project counties, a public survey questionnaire was developed. The questionnaire included major possible activities to be implemented, the potential environmental and social impacts and mitigation measures to be adopted, and public opinions was solicited in these aspects. The questionnaire was distributed to those directly related to the project, and each county distributed no less than 100 copies of the questionnaires. Views and opinions solicited were consolidated. - Expert consultation. Experts in environmental protection, ecological conservation, relic protection, and sociology from the project provinces, municipalities and counties were invited to participate in the technical consultations and workshops on the potential environmental and social issues that might come up with the implementation of the project. - Soliciting the opinions of NGOs. Opinions of provincial, municipal and county NGOs were solicited, including environmental protection organizations and other social groups, through convening discussion sessions, telephone interviews and correspondence. Social safeguards 14. Resettlement. It is expected that limited and scattered land acquisition will be required for a variety of small infrastructure activities proposed in the CDD and SLMA components. However, no physical relocation of people is anticipated. Nevertheless, an overall project resettlement policy framework has been developed to guide future planning efforts in case any resettlement or other land acquisition is needed. The principles established in OP/BP 4.12 of World Bank were adopted in the preparation of this policy framework. The specific principles and objectives are as follows: (i) As far as possible, efforts will be made to avoid or minimize land acquisition. If land requisition is unavoidable, negative impact on project-affected people (PAP), particularly less advantaged people, will be reduced to the greatest extent possible in project implementation; (ii) If land acquisition and resettlement are necessary, all PAP will be compensated and their livelihoods will be restored to improve their living standards at least to the level prior to 71 the project activities; (iii) All PAPs are eligible for compensation for losses of their land and assets and for restoration of their incomes. Asset loss lacking legal rights will not prevent PAP from enjoying such right to compensation, restoration and arrangement; (iv) The provided measures for arrangement and restoration include: (a) provide compensation for land requisition and allowances for resettlement of villages and farming households affected by projects; (b) full compensation for crops, trees and other similar agricultural products according to market price; and (c) other assets and appropriate measures to compensate for the loss PAP suffer in their livelihood and production; (v) Land for land replacement is a preferred choice. Under the following circumstances, cash compensation can be the option: (a) no land is available in neighboring project areas; (b) PAP are willing to accept cash compensation for land; and (c) cash compensation is combined with appropriate measures for restoration and proceeds from the project to ensure their incomes are restored at least to the level prior to the projects; (vi) Fulfillment of land replacement and/or cash compensation for PAP prior to the date of starting project; (vii) Full efforts will be made to ensure that PAP can acquire equivalent resources on a sustainable basis and mitigate the impact of land requisition or limitations of emigrants exert on ownership or management of public resources; (viii) If necessary, financial support and goods will be provided for arrangement and restoration of emigrants; (ix) The resettlement plan will include appropriate institutional arrangements to ensure timely designing, planning and implementation of arrangements and restoration measures; (x) In the process of implementation of measures for arrangement of emigrants, internal and external monitoring will be conducted appropriately, timely and effectively; 15. Full efforts will be made to ensure that residents in project-affected areas will benefit from the facilities or services produced by the project activities themselves. 16. In most cases, the land for small infrastructure works at the community level will be obtained through collective land adjustment. Detailed procedures and processes of collective land adjustment has been developed by following the requirements of Bank policy on Involuntary Resettlement OP 4.12 and relevant government policies, and are included in the RPF as well as in ESMF. 17. Indigenous peoples. Among the project`s 25 counties and districts, Qianjiang District and Youyang County in Chongqing Municipality are designated minority autonomous areas which comprise concentrated populations of ethnic minority peoples including the Tujia and Miao people. Minority groups make up about 73% and 84% of the total population in Qianjiang and Youyang respectively. The Bank`s OP 4.10 states that in cases where "Indigenous Peoples are the sole or the overwhelming majority of direct project beneficiaries, so the elements of an IPP should be included in the overall project design." Therefore, the safeguards review process concluded that OP 4.10 is triggered but that no separate Indigenous Peoples Development Plan (IPDP) is needed since the majority of beneficiaries are minorities. Other than in Qianjiang District and Youyang County, there are no other communities or concentrated groups of ethnic minority people in the project area of all three project provinces. Shaanxi and Henan have very 72 small numbers of ethnic minority people in the project area. Ethnic minority people comprise only 0.3% of the project beneficiary population in Shaanxi and Henan, and there are no communities or other concentrated groupings of ethnic minority people in any of the project villages in these two provinces. 18. Incorporation of IPP elements: The IPP elements have been fully incorporated into the project design and preparation. First, the project will apply a community driven approach and the community will have control over the project resources and they themselves will have decision making power. The detailed procedures and steps of CDD approach are specified in the CDD manual. The project`s CDD and CDF components will be implemented on the basis of the CDD approach, and the SLMA component will also be subject to the villager`s voluntary participation. Second, the social assessment (SA) was conducted and free, prior and informed consultation with affected minority communities were carried out. Through consultation with minority groups and communities, broad community support of minorities to the project has been ascertained. Third, Qianjiang and Youyang are Tujia and Miao autonomous minority district and county respectively. With the implementation of China`s Autonomous Law for Minority Regions and various preferential policies, minority groups not only share the same power and rights over land and other natural resources, but also (a) received different kinds of specific support from government from all levels, as well as (b) applied their cultural advantage to practicing indigenous approaches to natural resource management and community governance. Fourth, in recent years, the Tujia and Miao minority cultures have received much attention from both the local governments and the communities. These two groups are trying to discover and preserve their own culture by developing cultural tourism such as the Tujia hand-waving dance (bai shou wu) and traditional Tujia housing and the Miao embroidery. Information disclosure 19. Information disclosure. The information pertaining to the EIA of the three provinces of this project was released through public media such as local newspaper and websites. The information of Resettlement Policy Framework was released at the LGPR website. The ESMF was disclosed locally in each province. The disclosure dates are shown in the table below: RPF ESMF EA Chongqing ------------- June 23, 2008 April 28, 2008 Henan ------------- June 25, 2008 May 29, 2008 Shaanxi ------------- June 26, 2008 March 28, 2008 Central May 15, 2008 June 19 2008 -------------- 73 Annex 10: Project Preparation and Supervision CHINA: Sustainable Development in Poor Rural Areas Project Planned Actual PCN review June 19, 2007 June 19, 2007 Initial PID to PIC June 26, 2007 June 25, 2007 Initial ISDS to PIC September 22, 2007 September 23, 2008 Appraisal October 20, 2008 October 20, 2008 Negotiations September 15, 2009 April 15, 2010 Board/RVP approval June 10, 2010 June 10, 2010 Planned date of effectiveness September 13, 2010 Planned date of mid-term review April 15, 2013 Planned closing date December 31, 2015 Key institutions responsible for preparation of the project: FCPMC, Chongqing PADO, Henan PADO, Shaanxi PADO Bank staff and consultants who worked on the project included: Name Title Unit Alan Piazza Task Team Leader SDV Guo Li Co-Task Team Leader AFTAR Ulrich Schmitt Co-Task Team Leader EASCS Chaogang Wang Senior Social Development Specialist SDV Guzman Garcia-Rivero Operations Adviser EASER Jinan Shi Senior Procurement Specialist EAPPR Yuan Wang Procurement Analyst EAPPR Xiaowei Guo Senior Procurement Specialist EAPPR Yi Dong Senior FM Specialist EAPFM Haiyan Wang Finance Officer CTRDM Yiren Feng Environment Specialist EASCS Chu Junxue Senior Finance Officer CTRFC Robert O`Leary Senior Finance Officer CTRFC Mei Wang Senior Counsel LEGES Syed I. Ahmed Senior Counsel LEGES Marta Molares-Halberg Lead Counsel LEGES Bruce Trangmar Agriculturalist Consultant Johanna Pennarz Gender Equity Specialist Consultant Bai Nansheng M&E Specialist Consultant Scott Rozelle M&E Specialist Consultant Zhang Jiabao Agriculturalist Consultant He Yupeng Small Town Development Specialist Consultant Bai Xue ICT Specialist Consultant Richard Chisholm Senior Agriculturalist EASTS Robert Chase (peer reviewer) Lead Economist AFTSP Nathan Belete (peer reviewer) Senior Rural Development Economist SASDA Minhnguyet Khorami Program Assistant EASER 74 Lourdes Anducta Program Assistant EASER Zijing Niu Program Assistant EACCF Chunxiang Zhang Senior Program Assistant EACCF 75 Annex 11: Documents in the Project File CHINA: Sustainable Development in Poor Rural Areas Project By the Borrower: 1. FCPMC (2008): CDD Manual - SDPRAP (FCPMC, August 2008). 2. FCPMC (2009): CDF Manual - SDPRAP (FCPMC, January 2009). 3. Chongqing (2008): Draft Project Feasibility Study Report ­ Poverty 5 (in Chinese) (Chongqing PADO Poverty 5 Project Office, April 2008). 4. Chongqing Poor Areas Cadre Training Center (2007): Project Proposal ­ SDPRAP Chongqing Rural Migrants Support Component (in Chinese) (Chongqing Poor Areas Cadre Training Center, December 2007). 5. Henan PADO (2007): Project Proposal ­ SDPRAP (in Chinese) (Henan PADO, December 2007). 6. Shaanxi PADO FCPMC (2008): Project Feasibility Study Report ­ Poverty 5 (in Chinese) (Shaanxi PADO FCPMC, September 2008). 7. Zheng Baohua (2007): Social Assessment for the SDPRAP (Zheng Baohua, September 2007). 8. Chinese Academy of Social Sciences (2008): CDD Program Mid-Term Survey and Review (FCPMC, June, 2008). 9. FCPMC (2008): Environmental and Social Management Framework (ESMF) (FCPMC, May 2008). 10. FCPMC (2009): SLMA Component Report (FCPMC, November 3, 2009). By the Bank: 2. Ravallion, Martin and Chen Shaohua (2008): The Developing World is Poorer Than We Thought, But No Less Successful in the Fight against Poverty (Policy Research Working Paper 4703, The World Bank, August 2008). 3. Ravallion, Martin and Chen Shaohua (2008): China is Poorer Than We Thought, But No Less Successful in the Fight against Poverty (Policy Research Working Paper 4261, The World Bank, May 2008). 4. Uma Lele (1997): QAG Review of East Asia Rural Poverty Reduction Projects (Office Memorandum, The World Bank, November 5, 1997). 76 5. Datt, Gaurav and Shubham Chaudhuri (2009): From Poor Areas to Poor People: China`s Evolving Poverty Reduction Agenda (The World Bank, March 2009). 6. The World Bank (2001): China: Overcoming Rural Poverty (The World Bank, March 2001). 77 Annex 12: Statement of Loans and Credits CHINA: Sustainable Development in Poor Rural Areas Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev`d P093963 2008 CN-Guiyang Transport 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 P086515 2007 CN-3rd National Railway 200.00 0.00 0.00 0.00 0.00 200.00 18.67 0.00 P088964 2007 CN-Guangxi Integrated Forestry Dev 100.00 0.00 0.00 0.00 0.00 68.09 -29.41 0.00 P081776 2007 CN-GUANGDONG/PRD2 96.00 0.00 0.00 0.00 0.00 96.00 5.67 0.00 P091020 2007 CN-Fujian Highway Sector Investment 320.00 0.00 0.00 0.00 0.00 320.00 43.50 0.00 P092618 2007 CN-LIAONING MED CITIES INFRAS 2 173.00 0.00 0.00 0.00 0.00 173.00 0.00 0.00 P083322 2007 CN-SICHUAN URBAN DEV 180.00 0.00 0.00 0.00 0.00 170.70 28.54 0.00 P077752 2007 CN-SHANDONG ENVMT 2 147.00 0.00 0.00 0.00 0.00 118.81 -22.36 0.00 P095315 2007 CN-W. Region Rural Water & Sanitation 25.00 0.00 0.00 0.00 0.00 25.00 0.00 0.00 P096285 2007 CN-MSE Finance 100.00 0.00 0.00 0.00 0.00 100.00 100.00 0.00 P075613 2007 CN-Shaanxi Ankang Road Development 300.00 0.00 0.00 0.00 0.00 290.00 7.39 0.00 P084742 2006 CN-IAIL III 200.00 0.00 0.00 0.00 0.00 93.01 -7.75 0.00 P081348 2006 CN-HENAN TOWNS WATER 150.00 0.00 0.00 0.00 0.00 139.63 14.63 0.00 P081255 2006 CN-Changjiang/Pearl River Watershed 100.00 0.00 0.00 0.00 0.00 94.76 16.42 0.00 Reha P075732 2006 CN-SHANGHAI URBAN APL2 180.00 0.00 0.00 0.00 0.00 144.90 18.23 0.00 P085124 2006 CN-Ecnomic Reform Implementation 20.00 0.00 0.00 0.00 0.00 18.44 4.61 0.00 P085333 2006 CN-5th Inland Waterways 100.00 0.00 0.00 0.00 0.00 62.16 22.33 0.00 P086629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 0.00 91.76 16.93 1.67 P093906 2006 CN-3rd Jiangxi Hwy 200.00 0.00 0.00 0.00 0.00 140.31 -19.69 0.00 P096158 2006 CN-Renewable Energy II (CRESP II) 86.33 0.00 0.00 0.00 0.00 71.95 30.50 0.00 P099992 2006 CN-Liaoning Medium Cities 218.00 0.00 0.00 0.00 0.00 169.77 -23.65 0.00 Infrastructure P070519 2006 CN-Fuzhou Nantai Island Peri-Urban Dev 100.00 0.00 0.00 0.00 0.00 98.25 22.00 0.00 P057933 2005 CN-TAI BASIN URBAN ENVMT 61.00 0.00 0.00 0.00 0.00 29.77 17.16 0.00 P086505 2005 CN-NINGBO WATER & ENVMT 130.00 0.00 0.00 0.00 0.00 80.73 -9.77 0.00 P067828 2005 CN-Renewable Energy Scale-up Program 87.00 0.00 0.00 0.00 10.00 2.40 8.90 0.00 P068752 2005 CN-Inner Mongolia Highway & Trade 100.00 0.00 0.00 0.00 0.00 28.66 -21.76 0.00 Corrid P069862 2005 CN - Agricultural Technology Transfer 100.00 0.00 0.00 0.00 0.00 70.38 29.82 0.00 P081346 2005 CN-LIUZHOU ENVIRONMENT MGMT 100.00 0.00 0.00 0.00 0.00 55.04 -5.41 0.00 P081161 2005 CN-CHONGQING SMALL CITIES 180.00 0.00 0.00 0.00 0.00 140.06 35.39 0.00 P071094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 72.21 44.01 0.00 Development P075730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 155.62 56.46 0.00 P065035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 16.93 7.01 0.00 Development P073002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 0.00 31.32 28.83 0.00 P065463 2004 CN-Jiangxi Integrated Agric. Modern. 100.00 0.00 0.00 0.00 0.00 51.18 28.65 0.00 P066955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 85.34 40.08 0.00 P077137 2004 CN-4th Inland Waterways 91.00 0.00 0.00 0.00 0.46 47.17 26.46 25.96 P075728 2004 CN-GUANGDONG/PRD UR ENVMT 128.00 0.00 0.00 0.00 0.64 74.46 28.70 0.00 P069852 2004 CN-Wuhan Urban Transport 200.00 0.00 0.00 0.00 1.00 62.13 60.79 0.00 78 P081749 2004 CN-Hubei Shiman Highway 200.00 0.00 0.00 0.00 1.00 9.19 -8.14 0.00 P058847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 12.25 12.25 0.00 P040599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 0.00 121.69 78.87 -0.40 P076714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 0.00 11.16 -9.67 0.00 P070191 2003 CN-SHANGHAI URB ENVMT APL1 200.00 0.00 0.00 0.00 0.00 76.34 45.66 0.00 P068058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 0.00 44.11 33.54 0.00 P071147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 41.63 29.49 0.00 P068049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 0.00 9.88 8.52 0.00 P064729 2002 CN-Sustainable Forestry Development 93.90 0.00 0.00 0.00 0.00 8.14 1.84 0.00 P070459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 7.84 3.84 0.00 P056596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 0.00 30.86 30.86 0.00 P051859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 12.17 11.97 0.00 P047345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 10.36 10.36 -2.08 CONTROL P064730 2000 CN-Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 58.99 58.99 42.65 P042109 2000 CN-BEIJING ENVIRONMENT II 349.00 0.00 0.00 25.00 26.51 146.62 173.13 10.02 P049436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 29.50 43.85 73.35 -5.46 P045910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 27.83 27.83 7.87 P036953 1999 CN-Health IX 10.00 50.00 0.00 0.00 0.40 5.71 3.98 3.98 P042299 1999 CN-Tec Coop Credit IV 10.00 35.00 0.00 0.00 5.84 9.59 12.82 0.00 P051856 1999 CN-Accounting Reform & Development 27.40 5.60 0.00 0.00 0.00 5.23 5.02 4.74 P003507 1996 Ertan II Hydroelectric Project 400.00 0.00 0.00 0.00 0.15 33.33 5.78 0.00 Total: 8,203.40 90.60 0.00 25.00 75.50 4,516.71 1,232.17 88.95 CHINA STATEMENT OF IFC`s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2006 ASIMCO 0.00 0.00 4.12 0.00 0.00 0.00 3.61 0.00 2005 BCCB 0.00 59.21 0.00 0.00 0.00 59.03 0.00 0.00 2003 BCIB 0.00 0.00 12.04 0.00 0.00 0.00 0.00 0.00 2006 BUFH 8.14 0.00 0.00 0.00 8.14 0.00 0.00 0.00 2005 Babei 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Babei Necktie 11.00 0.00 0.00 6.00 8.94 0.00 0.00 4.88 1999 Bank of Shanghai 0.00 21.76 0.00 0.00 0.00 21.76 0.00 0.00 2000 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2005 BioChina 0.00 3.70 0.00 0.00 0.00 3.13 0.00 0.00 2002 CDH China Fund 0.00 2.02 0.00 0.00 0.00 0.00 0.00 0.00 2005 CDH China II 0.00 17.99 0.00 0.00 0.00 11.38 0.00 0.00 2006 CDH Venture 0.00 20.00 0.00 0.00 0.00 0.51 0.00 0.00 79 2005 CT Holdings 0.00 0.00 40.00 0.00 0.00 0.00 0.00 0.00 2004 CUNA Mutual 0.00 10.53 0.00 0.00 0.00 0.00 0.00 0.00 2006 Capital Today 0.00 25.00 0.00 0.00 0.00 0.32 0.00 0.00 2005 Changyu Group 0.00 18.07 0.00 0.00 0.00 18.07 0.00 0.00 1998 Chengdu Huarong 3.36 3.20 0.00 3.13 3.36 3.20 0.00 3.13 2004 China Green Ener 20.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2004 China Re Life 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2006 Chinasoft 0.00 0.00 15.00 0.00 0.00 0.00 10.00 0.00 2004 Colony China 0.00 15.31 0.00 0.00 0.00 9.29 0.00 0.00 2004 Colony China GP 0.00 0.84 0.00 0.00 0.00 0.49 0.00 0.00 2006 Conch 81.50 40.93 0.00 0.00 81.50 0.00 0.00 0.00 2006 Dagang NewSpring 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 0.24 0.00 8.00 6.67 0.24 0.00 5.33 2006 Deqingyuan 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1994 Dynamic Fund 0.00 2.21 0.00 0.00 0.00 2.01 0.00 0.00 2007 Epure 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 17.64 0.00 6.00 13.47 13.64 0.00 6.00 12.53 2006 Fenglin HJ MDF 0.23 0.00 0.00 3.27 0.00 0.00 0.00 0.00 2005 Five Star 0.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 2006 GDIH 50.85 0.00 0.00 0.00 50.85 0.00 0.00 0.00 2003 Great Infotech 0.00 1.73 0.00 0.00 0.00 1.03 0.00 0.00 2006 Hangzhou RCB 0.00 10.85 0.00 0.00 0.00 0.00 0.00 0.00 2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 HiSoft Tech 0.00 4.34 0.00 0.00 0.00 1.74 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2004 Jiangxi Chenming 40.00 12.90 0.00 18.76 40.00 12.90 0.00 18.76 2006 Launch Tech 0.00 8.35 0.00 0.00 0.00 8.33 0.00 0.00 2001 Maanshan Carbon 5.25 2.00 0.00 0.00 5.25 2.00 0.00 0.00 2005 Maanshan Carbon 11.00 1.00 0.00 0.00 5.00 1.00 0.00 0.00 2005 Minsheng 15.75 0.00 0.00 0.00 7.00 0.00 0.00 0.00 2006 Minsheng & IB 25.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2005 Minsheng Bank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00 2001 NCCB 0.00 8.94 0.00 0.00 0.00 8.82 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 2004 Nanjing Kumho 31.38 2.23 0.00 0.00 31.38 2.23 0.00 0.00 2006 Neophotonics 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2001 New China Life 0.00 5.83 0.00 0.00 0.00 5.83 0.00 0.00 2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 Newbridge Inv. 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00 2005 North Andre 8.00 6.74 0.00 0.00 0.00 4.25 0.00 0.00 2003 PSAM 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00 RAK China 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2006 Renaissance Sec 0.00 0.00 20.04 0.00 0.00 0.00 0.00 0.00 2006 Rongde 0.00 35.00 0.00 0.00 0.00 31.38 0.00 0.00 SAC HK Holding 0.00 1.60 0.00 0.00 0.00 1.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2006 SBCVC 0.00 20.00 0.00 0.00 0.00 2.00 0.00 0.00 80 2000 SEAF SSIF 0.00 3.74 0.00 0.00 0.00 3.37 0.00 0.00 SH Keji IT 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SHCT 38.18 0.00 0.00 28.64 29.04 0.00 0.00 21.78 2004 SIBFI 0.14 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1998 Shanghai Krupp 19.25 0.00 0.00 36.75 19.25 0.00 0.00 36.75 2006 Shanshui Group 50.00 5.50 2.20 0.00 50.00 5.50 0.00 0.00 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 SinoSpring 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 Stora Enso 20.83 0.00 0.00 4.17 11.00 0.00 0.00 0.00 2005 Stora Enso 29.17 0.00 0.00 20.83 0.00 0.00 0.00 0.00 2006 Stora Enso 50.00 0.00 0.00 175.00 0.00 0.00 0.00 0.00 2006 TBK 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2006 VeriSilicon 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 Wanjie High-Tech 9.89 0.00 0.00 0.00 9.89 0.00 0.00 0.00 2004 Wumart 0.00 1.62 0.00 0.00 0.00 1.62 0.00 0.00 2003 XACB 0.00 17.95 0.00 0.00 0.00 0.64 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00 2006 Zhejiang Glass 50.00 24.96 0.00 18.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 10.43 0.00 0.00 4.87 10.43 0.00 0.00 4.87 2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00 2006 Zhongda_Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 733.58 577.30 181.40 340.89 470.95 371.06 29.61 108.03 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 SML 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2007 Xinao CTC 0.04 0.01 0.00 0.14 2004 China Green 0.00 0.00 0.01 0.00 2006 Launch Tech 0.01 0.00 0.00 0.00 2005 MS Shipping 0.00 0.01 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 Total pending commitment: 0.05 0.03 0.03 0.14 81 Annex 13: Country at a Glance CHINA: Sustainable Development in Poor Rural Areas East Lo we r- P O V E R T Y a nd S O C IA L A s ia & m iddle - D e v e lo pm e nt dia m o nd* C hina P a c if ic inc o m e 2006 P o pulatio n, mid-year (millio ns) ,31 .8 1 1 1,900 2,276 Life expectancy GNI per capita (A tlas metho d, US$ ) 2,000 1,863 2,037 GNI (A tlas metho d, US$ billio ns) 2,623.6 3,539 4,635 A v e ra ge a nnua l gro wt h, 2 0 0 0 - 0 6 P o pulatio n (%) 0.6 0.9 0.9 GNI Gro ss Labo r fo rce (%) 1.0 1.3 1.4 per primary M o s t re c e nt e s t im a t e ( la t e s t ye a r a v a ila ble , 2 0 0 0 - 0 6 ) capita enro llment P o verty (% o f po pulatio n belo w natio nal po verty line) .. .. .. Urban po pulatio n (% o f to tal po pulatio n) 41 42 47 Life expectancy at birth (years) 72 71 71 Infant mo rtality (per 1,000 live births) 23 26 31 Child malnutritio n (% o f children under 5) 8 15 13 A ccess to impro ved water so urce A ccess to an impro ved water so urce (% o f po pulatio n) 77 79 81 Literacy (% o f po pulatio n age 1 5+) 91 91 89 Gro ss primary enro llment (% o f scho o l-age po pulatio n) 13 1 14 1 13 1 China M ale 1 13 1 15 1 17 Lo wer-middle-inco me gro up Female 1 12 1 13 1 14 KE Y E C O N O M IC R A T IO S a nd LO N G - T E R M T R E N D S 19 8 6 19 9 6 2005 2006 E c o no m ic ra t io s * GDP (US$ billio ns) 295.7 856.1 2,243.9 2,644.7 Gro ss capital fo rmatio n/GDP 38.6 40.4 43.9 44.6 Trade Expo rts o f go o ds and services/GDP 1 1 .8 20.1 37.3 40.1 Gro ss do mestic savings/GDP 35.8 42.5 49.4 52.5 Gro ss natio nal savings/GDP 35.9 41.3 51.0 54.1 Current acco unt balance/GDP -2.8 0.8 7.2 9.4 Do mestic Capital Interest payments/GDP 0.2 0.5 0.1 .. savings fo rmatio n To tal debt/GDP 8.0 15.0 12.6 .. To tal debt service/expo rts 8.2 8.7 3.0 .. P resent value o f debt/GDP .. .. 12.3 .. P resent value o f debt/expo rts .. .. 30.6 .. Indebtedness 19 8 6 - 9 6 19 9 6 - 0 6 2005 2006 2 0 0 6 - 10 (average annual gro wth) GDP 10.1 9.0 10.4 10.7 10.6 China GDP per capita 8.6 8.2 9.7 10.1 9.9 Lo wer-middle-inco me gro up Expo rts o f go o ds and services 10.0 21.8 24.3 23.3 17.4 S T R UC T UR E o f t he E C O N O M Y G ro wt h o f c a pit a l a nd G D P ( %) 20 19 8 6 19 9 6 2005 2006 G ro wt h o f c a pit a l a nd G D P ( %) (% o f GDP ) 15 20 10 A griculture 27.1 19.5 12.5 1 1 .7 15 5 Industry 44.0 47.5 47.5 48.4 10 0 M anufacturing 35.2 33.5 33.5 .. 5 01 02 03 04 05 06 Services 28.9 33.0 39.9 39.9 0 Ho useho ld final co nsumptio n expenditure 49.3 43.5 36.1 33.2 01 02 03 04 05 06 General go v't final co nsumptio n expenditure 14.9 14.0 14.5 14.3 GCF GDP Impo rts o f go o ds and services 14.7 18.0 31.7 32.2 19 8 6 - 9 6 19 9 6 - 0 6 2005 2006 G ro wt h o f e xpo rt s a nd im po rt s ( %) (average annual gro wth) 40 A griculture 4.3 3.5 5.2 5.0 Industry 13.5 10.1 1 .7 1 12.5 30 M anufacturing 12.8 10.2 12.1 .. 20 Services 9.4 9.8 10.5 10.3 10 Ho useho ld final co nsumptio n expenditure 10.9 7.8 5.8 6.3 0 General go v't final co nsumptio n expenditure 10.4 9.5 1 1 .6 10.9 01 02 03 04 05 06 Gro ss capital fo rmatio n 1 1 .9 10.2 1 .6 1 13.2 Exports Imports Impo rts o f go o ds and services 1 1 .9 18.5 1 1 .4 14.3 No te: 2006 data are preliminary estimates. This table was pro duced fro m the Develo pment Eco no mics LDB database. * The diamo nds sho w fo ur key indicato rs in the co untry (in bo ld) co mpared with its inco me-gro up average. If data are missing, the diamo nd will be inco mplete. 82 China P R IC E S a nd G O V E R N M E N T F IN A N C E 19 8 6 19 9 6 2005 2006 Inf la t io n ( %) D o m e s t ic pric e s 8 (% change) Co nsumer prices .. 8.3 1.8 1.5 6 Implicit GDP deflato r 4.6 6.4 4.2 3.6 4 2 G o v e rnm e nt f ina nc e (% o f GDP , includes current grants) 0 Current revenue 0.0 10.5 17.2 18.4 -2 01 02 03 04 05 06 Current budget balance -17.7 0.2 2.4 3.0 GDP deflator CPI Overall surplus/deficit -24.8 -1.4 -1.3 -0.7 TRADE 19 8 6 19 9 6 2005 2006 E xpo rt a nd im po rt le v e ls ( US $ m ill.) (US$ millio ns) To tal expo rts (fo b) 30,942 51 1 ,048 761 ,999 969,073 1,250,000 Fo o d 4,448 10,231 22,481 25,722 1,000,000 M ineral fuels, lubricants, and related materials 3,683 5,931 17,621 17,776 M anufactures 19,670 29,1 1 23 71 2,960 6,1 91 47 750,000 To tal impo rts (cif) 42,904 138,833 660,1 8 1 ,61 791 4 500,000 Fo o d 1,625 5,672 9,388 9,997 250,000 Fuel and energy 504 6,877 63,957 89,002 Capital go o ds 16,781 54,763 290,628 357,1 07 0 00 01 02 03 04 05 06 Expo rt price index (2000=100) 59 122 104 107 Impo rt price index (2000=100) 76 108 18 1 124 Exports Imports Terms o f trade (2000=1 00) 77 1 13 88 87 B A LA N C E o f P A Y M E N T S 19 8 6 19 9 6 2005 2006 C urre nt a c c o unt ba la nc e t o G D P ( %) (US$ millio ns) Expo rts o f go o ds and services 34,952 1 ,678 71 836,888 1 ,681 ,061 10 Impo rts o f go o ds and services 43,453 54,1 1 27 712,090 852,769 Reso urce balance -8,501 17,551 124,798 208,912 Net inco me -23 -12,437 10,635 1 1 ,755 5 Net current transfers 378 2,129 25,385 29,200 Current acco unt balance -8,146 7,243 160,818 249,867 Financing items (net) 6,419 24,462 46,198 -2,842 0 Changes in net reserves 1,727 -31,705 -207,016 -247,025 00 01 02 03 04 05 06 M emo : Reserves including go ld (US$ millio ns) .. 1 ,71 11 7 831,427 1,046,465 Co nversio n rate (DEC, lo cal/US$ ) 3.5 8.3 8.2 8.0 E X T E R N A L D E B T a nd R E S O UR C E F LO WS 19 8 6 19 9 6 2005 2006 C o m po s it io n o f 2 0 0 5 de bt ( US $ m ill.) (US$ millio ns) To tal debt o utstanding and disbursed 23,719 128,817 ,61 281 2 .. IB RD 965 7,616 1 ,1 1 40 1 5 1 ,41 A: 11,140 IDA 774 7,579 9,741 9,997 B: 9,741 D: 5,532 To tal debt service 2,973 15,756 27,361 .. E: 25,819 IB RD 66 840 ,1 1 39 1,443 IDA 8 73 296 316 G: Co mpo sitio n o f net reso urce flo ws 148,267 Official grants 155 245 332 .. Official credito rs ,1 1 65 4,401 844 .. F: 81,113 P rivate credito rs 3,693 6,454 5,144 .. Fo reign direct investment (net inflo ws) 1,875 40,180 79,127 .. P o rtfo lio equity (net inflo ws) 0 0 20,346 .. Wo rld B ank pro gram Co mmitments ,1 1 20 1,900 1,277 0 A - IBRD E - Bilateral Disbursements 607 2,097 ,1 1 31 1 70 ,1 B - IDA D - Other multilateral F - Private P rincipal repayments 0 364 1,004 ,1 1 44 C - IM F G - Short-term Net flo ws 607 1,734 127 27 Interest payments 75 549 430 615 Net transfers 532 ,1 1 85 -303 -588 No te: This table was pro duced fro m the Develo pment Eco no mics LDB database. 9/28/07 83 Annex 14: Incremental Cost Analysis CHINA: Sustainable Development in Poor Rural Areas Project Context 1. SDPRAP in the context of China's poverty reduction strategies and projects. Beginning in the early 1990s, the Chinese Government invited the World Bank to provide assistance in the implementation of its national poverty reduction program. SDPRAP is the fifth operation in a series of World Bank financed poverty alleviation projects in China. Previous projects in this series successfully demonstrated multi-sector approaches to poverty reduction in areas of extreme rural poverty and promoted participatory approaches to rural development in China`s marginal areas. Specifically, these projects contributed to the establishment of participatory village development planning processes which have become the main approach for planning and implementing the Government`s rural poverty reduction interventions country-wide. 2. The World Bank and other donors have also supported the Government in its evolving poverty reduction agenda and policies through two key studies: The first study China Strategies for Reducing Poverty in the 1990s` supported the launch of China`s 8-7 National Poverty Reduction Program 1994-2000 (World Bank, 1992). The second study China­Overcoming Rural Poverty` (World Bank, 2002) built on experiences and lessons learnt from project implementation and contributed to the current poverty reduction strategy 2001-2010 (LGPR, UNDP, World Bank 2001). An update of the Government`s poverty reduction strategy is currently under preparation. 3. There are two opportunities for SDPRAP to contribute to the formulation and implementation of this new strategy: a governance opportunity through institutionalizing participatory approaches and, in particular, community-driven development (CDD); and an opportunity to reaffirm and support the Government in its approach to environmental rehabilitation in regions affected by chronic poverty. It is the latter opportunity where GEF support would be critical and could be highly effective in supporting the Government in the integration of land management and climate change adaptation issues with poverty reduction efforts. Project Areas for GEF support 4. Priority ecological zones and project areas selected for GEF support. The SDPRAP will be implemented in 25 nationally designated poor counties of Shaanxi, Henan, and Chongqing. The project is located in ecologically fragile environments of these provinces, where assessments carried out during preparation have confirmed that land degradation is a recent or ongoing feature in these areas. Issues of national importance are severe desertification and degradation in Shaanxi, and erosion and subsequent sedimentation problems in Chongqing. Fragile areas of provincial importance comprise the Wuling Mountains in Chongqing, a karst region with typical rock desertification`, the Funiu Mountains in Henan with general erosion problems, and the Eastern Henan Plains, a wheat production area of national importance with drastically declining 84 water tables. The assessments have also revealed that there are increasingly negative impacts from extreme climatic events that are likely to be related to climate change. 5. Agro-ecological characteristics in the project areas. The project area extends over (a) the northernmost areas of the Loess Plateau in Shaanxi with semi-arid steppe and grassland ecosystems, (b) the karst mountains of the Wuling Mountains in Southeast Chongqing and the Yangtze River valley with erosion-prone purple shale in Northeast Chongqing, (c) the sandstone Funiu Mountains in Western Henan, and (d) the flood-prone sandy areas of the Huaihe plain in Southeast Henan. The semi-arid loess plateau and the Southwest karst are fragile agro- ecological regions extending over large areas in China. These two ecosystems have been the focus of poverty reduction efforts since the early 1990s, and in the future, may be among those areas that will be severely impacted by changing climate conditions. The Yangtze project area in Chongqing and the two Henan project areas are also representative of the challenges of rural- urban migration and the associated changes and challenges of land management in these areas. The Loess Plateau in Northern Shaanxi belongs to the Central China Loess Plateau northwest of the Yellow River Basin. It forms a transition zone to the steppes and desert regions of Inner Mongolia. The Loess Plateau covers 360,000 square kilometers over 7 provinces, extends northeast to southwest over more than 1,000 km and is several hundred kilometers wide with altitudes of 1,000-1,900 m above sea level. The depth of the loess layers increases from the northeast, where it merely fills the basin between the rocky hills, to the southwest where it constitutes the hills themselves. Because loessial soils are rich in nitrogen, phosphorus and potassium, and because they retain water effectively, they are productive and have been farmed for thousands of years despite the region`s seasonally dry climate with only 300­650 mm annual rainfall. Removal of the original vegetation combined with agricultural intensification has caused severe erosion of the loess material. Land degradation is contributing to the dust storms for which the region is infamous and to the distinctive color of the Yellow River and the Yellow Sea. Climate change poses increased risks of desertification, salinization and erosion through more distinctive dry and rainy seasons and increasingly erratic precipitation patterns. The Yellow River Basin in Henan includes (a) the Eastern Henan Plain and (b) the surrounding Funiu Mountains southwest of the plain. The Eastern Henan Plain consists of silt that has been transported from the Loess Plateau and has created fertile soils well suited to agriculture. It is one of the world`s most densely populated rural areas. Soil loss, water shortage, flooding, sedimentation and pollution are major problems affecting the sustainable development of the Yellow River Basin. Being naturally a dry area with an average annual rainfall of 600­800 mm, water scarcity, caused by drought, overuse, and declining aquifers, is a major problem. Specifically, three problems dominate groundwater use: depletion and overdraft, water-logging and salinization due to inadequate drainage and unbalanced use, and pollution due to agriculture, industry and, especially in rural areas, unmanaged solid and organic waste. The Funiu Mountains are part of the watershed divide between the Yangtze and the Yellow River. This area is characterized by steep mountainous terrain with rocky and much less fertile soils and low annual precipitation of 800­1,000 mm which all contribute to a very low ratio of arable land per capita and to widespread extreme rural poverty. 85 This is causing pressure on natural resources and has caused degradation through erosion and soil depletion. The middle watersheds of the Yangtze River in Chongqing include: (a) the Three Gorges Reservoir Region and (b) the Wuling Mountains, a karst area in southeastern Chongqing that also belongs to the Yangtze watershed and is adjacent to the lesser Yangtze gorges of western Hubei. The Chongqing Three Gorges Region and the Wuling Mountains are characterized by a unique canyon landscape, which is ecologically fragile and prone to various natural disasters, especially drought, floods, uneven rainfall, and earthquakes. Limited arable land and high population pressure, partly due to resettlement programs, have caused land degradation that is leading to erosion and subsequently to sedimentation in the reservoir. Land degradation is considerably higher in the karst areas of the Wuling Mountains. The typical karst hydrology and increasingly long drought periods cause severe water shortages and water availability problems for local people. Experiences, gaps and barriers in sustainable land management and adaptation 6. International conventions. China has been a party to UNCCD since 1994 and has ratified UNFCCC in 2002. China`s National Action Plan to combat desertification is coordinated by the State Forestry Administration. The national shelterbelt programs that form the bulk of the action plan activities are largely in non-project provinces. However, Shaanxi has been a focus province for the development of joint sustainable land management strategies among government agencies, also under the action plan. China has published a national climate change program in 2007 that includes a section on climate change adaptation covering a diversified range of issues. 7. Land degradation status. Land degradation is largely a historical factor in many of the upland areas which are also representative of the vast majority of nationally designated poor counties. Various programs have addressed land degradation over the past years. Degradation has been arrested in many areas at present and considerable progress has been made in environmental rehabilitation. Macro-plans and programs, subsidies and outmigration have been and continue to be the main drivers of this environmental rehabilitation. The project areas (except for the Eastern Henan Plain) have been targeted under the national Sloping Land Conversion Program launched in 1999. Vegetation cover has markedly increased as result of the implementation of this program but also because of outmigration and reduced pressure on land resources. Land degradation remains on-going on an estimated 20 percent of the project area. The most affected counties appear to be those where the program has covered only a small portion of areas affected with degradation and where off-farm work opportunities are limited. Land degradation in the Eastern Henan Plain, a region recently listed as poor, mostly results from highly intensified agriculture production, mainly grain monoculture. 8. Vulnerability of local communities to climate change. Vulnerability to climate change varies widely across and within communities in the project area where different household strata show different vulnerability levels as well as coping strategies. Vulnerability is determined by natural conditions, poverty, availability of drinking water, dependence of agriculture on precipitation, frequency and magnitude of extreme climate events, and access to rural infrastructure. Extreme climate events add to climate change vulnerability and are a major risk factor in land management. Communities in affected areas may revert back to unsustainable 86 land use practices or be hampered in the introduction of sustainable land use practices. Climate change can be expected to induce markedly different poverty patterns among the rural population in the future. 9. Gaps and barriers in sustainable land management in China's poor areas. The first phase of the Sloping Land Conversion Program has just been completed and, with compensation payments to farmers coming to an end, the Government has identified the non-sustainability of its land rehabilitation outcomes as a major risk. The Government has therefore initiated a land conversion maintenance program in upland areas, including those of the project provinces. This program will addresses issues related to re-vegetation and forestry but also include the development of rural roads, land construction, rural energy, and village/household relocation. The three project provinces are covered under this program and the Poverty Alleviation and Development Offices, which are the SDPRAP implementing units, are an institutional party to this program. The land conversion maintenance program will therefore set a prominent policy context for SDPRAP and SLMA implementation. 10. An additional barrier is the institutional weakness of rural communities. Both, the upland project areas and the Eastern Henan plain, face this issue. Land management decision-making largely bypasses communities. The vast majority of villages in China`s poor areas do not have land use maps or other resource management tools. In the context of limited dialogue between line agencies and rural communities, local farmer knowledge about their land area and soil fertility has also often been underestimated and has not been fully used. Less-than-optimal land management decisions are often made because these tools and that dialogue between government and communities are absent. A broad range of agricultural subsidies also often generates biased land management decisions by local government and by communities. Migration is a compounding factor: an increasing number of rural communities are becoming dysfunctional as migration shifts from seasonal migration, with mostly beneficial poverty reduction outcomes, to permanent and rapid outmigration. 11. Gaps and barriers in climate change adaptation in China's poor areas. Both mitigation and adaptation initiatives have been initiated in the project provinces, although at a very small scale. There are very few existing adaptation activities in poor villages except for some simple weather forecasting and technical measures. The capacity of individual households to identify risks to climate change and coping measures is very low. Reasons for this include limited awareness and a lack of technical and financial capacity, as well as poor local decision-making processes and institutional weaknesses, similar to those related to land management. Flexible decision-making at all levels, including community and household and stakeholder partnerships, are needed for successful adaptation activities (Millennium Environment Assessment 2005). These processes are weak in China`s poor rural areas. Current efforts are mainly directed at the strategic agricultural sector with little consideration for marginal areas where vulnerability may be even higher. Some large adaptation infrastructure projects have been implemented but serious adaptation work in marginal smallholder agriculture has not started. 12. Sustainable land management in the National Poverty Reduction Agenda. Sustainable development has been the overall policy framework of poverty reduction since the launch of China`s Agenda 21 in 1994, encouraging a decrease of pressure on the environment in upland areas. Agricultural demonstration projects have been carried out for that purpose, land and water 87 resource infrastructure has been built and outmigration has been encouraged. In the 2000s, low- input agriculture has been added to this strategy. 13. GEF-funded initiatives. China has received GEF to support its work on: (a) the preservation of biodiversity in protected areas and (b) the control of land degradation. GEF- funded sustainable land management activities have mostly been within the forestry sector under the PRC-GEF Partnership on Land Degradation in Dryland Ecosystems. One GEF-funded initiative in relation to climate change adaptation, Mainstreaming Climate Change Adaptation in Irrigated Agriculture Project in China`s Huang-Huai-Hai basin, has recently started in Eastern Henan. T he implementing agency, the Comprehensive Agricultural Development Commission, is merged with PADO in that province. That project includes part of the Huaihe plain but project counties are different from SDPRAP project counties and with distinctly different issues. Baseline Scenario 14. The baseline scenario under this project consists of three IBRD-financed components5. The baseline scenario will be implemented in 24 poor counties (excluding one county where the rural migrants support component is being implemented) of the three project provinces of Shaanxi, Henan, and Chongqing. The baseline approach aims at piloting more effective and innovative ways of providing poverty reduction assistance to the poorest communities and households in the forms they themselves most desire. Specifically, the project seeks to bring project funding down to the community level and enable communities and households to determine the use of those funds as well as manage them. The baseline comprises the following components and activities: Community-Driven Development (CDD). The CDD component will provide investment support for the construction and improvement of village access roads, drinking water supply, rural sanitation, electrification, communication, school buildings, small-scale agriculture production infrastructure, and basic housing repair. Community Development Grant (CDF). The CDF component will address the current lack of basic income sources in remote villages by providing small block grants to communities to support household-level productive activities such as improved and diversified crop production, animal husbandry, and other income generating activities. Project Management and Monitoring and Evaluation. This component will facilitate project implementation, monitoring and evaluation, and the coordination between the various government agencies at national, provincial and local levels. 15. Baseline Cost. Total IBRD baseline financing (for the above mentioned three rural community-focused components) is expected to amount to US$91.9 million with Government co-financing up to US$52 million. 5 The Rural Migrants Support component has been excluded from this discussion of the baseline scenario. 88 16. Benefits of the baseline scenario. The key benefit sought under the baseline scenario is the empowerment of project communities to independently decide their development prospects. Besides the institutional innovation to be achieved through the CCD/CDF approach, specific tangible benefits on the ground include participation and ownership of village development planning, improved access to social services (water, roads, power) and improved housing conditions. No specific local or global environment benefits are expected under the baseline scenario. The GEF alternative 17. Climate change will increase the vulnerability of China`s poor population and fragile ecosystems, particularly through extreme climatic events. Adapting land and water management to the expected impacts of climate change is critical to increase the coping range of the poor. 18. The GEF alternative will, for the first time in China, provide support to link rural poverty reduction, sustainable land management, and climate change adaptation. The GEF alternative, through the project`s Sustainable Land Management and Adaptation (SLMA) component, seeks to build stronger communities that are able to actively take part in land management and adaptation decisions through a well-defined process and thus attempt to lift a key institutional barrier to sustainable land management. The inclusion of the concept of vulnerability to climate change` into the project approach will help reorient traditionally top-down methods, which may predominate decision making in adaptation, towards decision making by the community. 19. Specifically, the GEF alternative will provide incremental support to pilot and demonstrate participatory vulnerability and resource assessments, land and water management improvements and innovative small rural infrastructure in some of the poorest communities in the three SDPRAP provinces. It will promote locally appropriate measures to improve land management to increase coping ranges, empower people to change their own lives, and encourage greater ownership of intended risk reduction and adaptation actions. Vulnerable communities will participate in the project as actors capable of preventing disasters and adapting to climate change within their own communities. GEF support will also be directed at mainstreaming` implementation lessons from pilot activities into the SDPRAP community- driven (CDD) approach covering the total project area. Improved sustainable land management is not about land use planning or other technical issues, it is about improved interaction between communities and technical government agencies. Village tools, both maps and assessments, have been developed during preparation to facilitate that dialogue. 20. The local sustainable land management and adaptation benefits will generate global environmental benefits in two focal areas: (a) the Land Degradation Focal Area including: (i) sustainable agriculture and rangeland management` and (ii) sustainable forest management in production landscapes`; and (b) the Climate Change Focal Area since it will pilot an operational approach to adaptation in relation to Land Use, Land Use Change and Forestry`. 89 GEF global objective and SLMA component objective and expected outcomes 21. The GEF global objective is to achieve benefits for climate change and sustainable agriculture, pasture and forest management. The specific objective of the Sustainable Land Management and Adaptation component is to demonstrate improved sustainable land management through innovative community pilots addressing vulnerability to climate change in poor rural areas for introduction and mainstreaming into the SDPRAP`s Community-driven Development (CDD) approach. 22. Expected outcomes. At the end of the project, local government and community capacity in sustainable land management and climate change adaptation will have significantly increased in the SDPRAP area, starting with villages undertaking the pilots. In addition, long-term sustainable land management and vulnerability of the poor to climate change will have been integrated in the review process of the national poverty reduction policies. 23. The rationale for the selection of these outcomes is as follows: With these outcomes, the project will address the main barriers in sustainable land management and adaptation. Government-owned pilot and demonstration activities are an effective way of promoting policy change in China, provided they achieve sufficient visibility and receive official recognition. A small number of villages undertaking adaptation pilots is likely to be insufficient for that purpose. Instead, the scale of SDPRAP is appropriate to achieve that visibility in the three project provinces. The first expected outcome is therefore increased government capacity up to province level. Pilot results will be mainstreamed into SDPRAP during the course of project implementation. The climate change adaptation pilots will, together with national-level activities, seek to demonstrate the importance of long-term aspects in sustainable land management and of vulnerability. Several national agencies will take part in the 2010 and subsequent revisions of the national poverty reduction agenda and the second expected outcome is to contribute to that process. Expected Climate Change Benefits of Combined land management and adaptation 24. The innovative combination of two focal areas is expected to reinforce global environmental benefits in several ways. At the ecosystem level, the linkage is most obvious in Shaanxi and in the Eastern Henan Plain. With increased soil cover and the renewable use of biomass, carbon storage will increase and emissions decrease. At community and institutional levels, the combination has two areas of value that apply throughout the project area: (a) it will contribute to adjusting programs in areas which currently receive land conversion subsidies and (b) it will help integrate the needs of vulnerable groups in climate change adaptation plans. In the long term, the integration of sustainable land management and adaptation and the CDD approach will help support a combination of planned adaptation and stronger decision-making within communities. Such a combination is likely to maximize adaptation capacity. 25. Expected Level of Impact. The project will yield modest direct global benefits, estimated to be in the range of 96,000 tons of carbon sequestered (over the project implementation period) in villages that receive direct support under the SLMA component. About 80 administrative villages will undertake pilot adaptation planning and activity implementation through direct GEF support. Capacity for adaptation with global benefits will also be built among communities in 90 the 700 other poor administrative villages and among government agencies involved in rural infrastructure and land use in the 24 project counties. These benefits could amount to a total of 400,000 tons of carbon stored during project implementation across the total project area. 26. The component has the potential to yield substantial indirect benefits: Specifically, it will create a facilitating framework for sustainable land management in poor areas and for pro-poor climate change adaptation at national level. The component will contribute to avoiding excessive focus of adaptation actions on the more productive agricultural regions and coastal regions and raise awareness of the expected negative impacts of climate change on China`s more marginal inland areas. This increased awareness will be built among government agencies in the three project provinces and national partner institutions of the LGPR that will take part in the national consultation. With increased awareness, these institutions might opt for more pro-active climate change mitigation in poor areas. Given the scale of the provinces, any mitigation decision will yield a global climate change benefit. 27. Risk Factors. At the local level, there is solid scientific evidence and experiences from project implementation of the benefits of sustainable land management. Trends in carbon storage at local and regional levels are however, subject to significant uncertainty. Two major trends in the balance of Greenhouse Gas Emission can, however, be assumed to be at work in the project areas: first, due to out-migration out of poor areas, carbon storage may increase in outmigration areas while increasing in in-migration areas; second, more sustainable land use and regeneration of resources (e.g. through grazing ban in semi-arid zones) may increase carbon storage in rural areas. While no detailed assessments have yet been made, both aspects have been taken into account in the design of an environmental and social impact monitoring plan (see annexes). 28. An additional risk factor may be that addressing adaptation needs has not yet been identified as a specific objective for poverty reduction. Although climate change adaptation is somewhat outside the direct institutional mandate of poverty reduction agencies, adaptation has been selected as an entry point to support a shift of attention from short-term pressing poverty and land degradation issues to longer-term sustainable land management. This is fully consistent with the advocacy role of LGPR for China`s poor population. It is expected that the poverty reduction agenda is a powerful vehicle to support new approaches to sustainable land management and adaptation. Managing land more sustainably in poor areas relates not only to solving pressing poverty issues and environment issues but also to attention to the long-term future of poor rural communities. 29. Other Focal Areas. The project area includes a portion of the upper-middle and middle reaches of the Yellow River and of the middle reaches of the Yangtze. Sustainable land management will directly contribute to maintaining the existing trend of decreasing erosion and indirectly raise awareness to sustainable land management challenges in three provinces and among local government in 24 counties. In terms of biodiversity, attention to karst habitats outside of protected areas will be enhanced in Chongqing, and crop biodiversity will be one of the adaptation activities promoted in Shaanxi and Henan. 91 Incremental Cost Matrix Component Category US$ Global and Domestic Benefits million 1. Community-driven Baseline 97.5 Project communities empowered to make development (CDD) autonomous decisions in community development Improved access to basic rural services, including access to drinking water, power, roads, communication and others. 2. Community- Baseline 36.8 Improved capacity for self-governance development grants and self-development at the community (CDF) level. Increased incomes through CDF assistance. 5. Project Management Baseline 9.6 Effective and comprehensive project and Evaluation management and M&E 3. Sustainable Land GEF 4.26 Global environmental benefits through Management and alternative improved land management, carbon Adaptation (SLMA) sequestration, more sustainable agriculture, pasture and forest management. Increased capacity of local governments and communities to implement sustainable land management and adaptation activities. Indicators for sustainable land management, climate change vulnerability, and adaptation formulated for consideration in national poverty monitoring. Totals Baseline 143.9 Increment 4.26 GEF 148.16 Alternative 92 Annex 15: STAP Reviewer Comments and Team Response CHINA: Sustainable Development in Poor Rural Areas Project 1. The guidance received from STAP on the original Project Information Form (PIF), dated February 14, 2008, has been shared among all stakeholders involved in the preparation of the SLMA component and been fully incorporated into preparation of the component. The detailed responses of team to the STAP comments are included below: 2. STAP comment 1: The project needs a clearer statement on how the proposed actions lead to outcomes. The outputs of the proposal are not clear, in that no specific figures or quantitative ranges are provided for the outputs. 3. The initial description of the component included in the PIF has been revised in order to clarify how the proposed actions and activities will lead to outcomes. Specifically, a detailed design framework and a separate monitoring framework for this component have been prepared during the preparation process. The component objective has been refined to demonstrate improved sustainable land management through community pilots addressing vulnerability to climate change in poor rural areas for mainstreaming into the project`s CDD approach. A full component results framework has been formulated that includes the following two achievable outcomes: (a) increased capacity of local governments and communities to implement sustainable land management and adaptation activities; and (b) pilot indicators for sustainable land management, climate change vulnerability, and adaptation are formulated based on field experiences for consideration in national poverty monitoring. The elements of the component results framework have been integrated into the overall results framework of the SDPRAP. 4. STAP comment 2: It would be important to know how the project intends to include land users` knowledge to design and implement improved techniques on land management, and ecosystem based land planning. 5. The STAP statement that assumptions that poor understanding and inadequate practices by local people are the main barrier to sustainable land management should be avoided has been followed. During preparation any oversimplifying statements on land degradation were avoided. In fact, the component was prepared on basis of detailed assessments of agro-ecosystems, village socio-economic and vulnerability assessments in 15 sample villages in the three project provinces with the active participation of local communities in assessing current situation and identifying solutions. The methodologies developed for component implementation fully reflect the participatory nature of this component. Participatory methodologies as well as baselines formulated during the preparation process are documented in the final component preparation report that is available in the project files. 6. STAP comment 3: The proposal also does not specify how the techniques will be gender specific to target better women`s and men`s land management needs. 7. The component proposal (PIF) on land management and adaptation has no particular gender focus or related objective. However, attention to gender issues has been given during the 93 preparation field work where women have been invited and have actively participated in village assessments. More generally, gender issues will be taken into full account during project implementation as part of the project`s CDD approach and are part of the implementation procedures of the CDD and CDF manuals. 8. STAP comment 4: On global environmental benefits, the proposal does not specify what indicators will be used to measure improvements to land management (rehabilitation, protection), or how will changes to soil quality and carbon stocks be measured and tracked. 9. Regarding global benefits and associated scientific barriers, an innovative methodology to estimate trends in local carbon stock based on a carbon stock index and actual carbon stock has been developed and tested in the field during the component preparation. The methodology is described in the component preparation report (and in PAD Annex 16) and will be used for environmental impact monitoring. Baseline values have established for 15 villages and are documented on GIS-based maps. Since the expected global climate change benefits mostly derive from adaptation and sustainable land management, related impact indicators have been developed and integrated into the components environmental monitoring system. 10. STAP comment 5: On risks, the proposal should be strengthened by including the scientific barriers associated with increasing the levels of carbon stocks by stabilizing vegetation cover, as well as measuring accurately changes in carbon levels. 11. The final preparation report discusses the scientific barriers, limitations and complexities of measuring carbon stocks and trends. The developed methodology represents an innovative compromise between the requirement of measuring carbon sequestration as an indicator of the project`s contribution to global environmental benefits and the difficulty in accurately and cost- efficiently measuring carbon sequestration (e.g. Pearson et al 2005). The carbon stock index value to be generated can be used as a descriptor of the carbon state of a defined area (baseline) and, at the same time, as a relative indicator of change in this area (impact). 12. STAP comment 6: The approach to be adopted by SDPRAP could also be a source of risk itself, especially if the GEF portion is tied to the formidable task in the Chinese context of tackling key institutional constraints within the Chinese poverty alleviation system. If this last part fails to be achieved, how will the GEF objectives in these difficult dryland areas be met? 13. The risk that the overall approach of the SDPRP may fail has been rated moderate. There is strong national and local level ownership of the project`s CDD approach ­ an approach that will tackle institutional constraints--and this ownership is based on successful implementation experiences of the government`s own CDD pilot initiatives which have been implemented over the past years. Risks to the GEF objective are considered to be low because (a) the component will focus only on incremental changes to a well-established CDD approach and (b) the component`s pilot activities can also be implemented independently of the main project and have relevant impacts on the ground. 94 Annex 16: Summary of Environmental Monitoring of the SLMA Component CHINA: Sustainable Development in Poor Rural Areas Project Environmental Impact Monitoring I. Carbon Stock Index and Carbon Monitoring: Methodology and Baseline 1. A methodology of carbon stock monitoring has been designed for the SLMA component. It has not yet been applied elsewhere. It is based on the scientific concept of the naturalness index (Machado, 2004) and draws on scientific papers that provide the theoretical background to form an index out of carbon stock classes (Alexandrov, 2007; Boix-Fayos et al., 2008; Birdsey and Lewis, 2002; Byrne, 2003; Lasco et al., 2003, and Zhengxi et al., 2007). The methodology represents an innovative compromise between the requirement of measuring carbon sequestration as an indicator of the project`s contribution to global environmental benefits and the difficulty in accurately and cost-efficiently measuring carbon sequestration (e.g. Pearson et al 2005). The carbon stock index value can be used as a descriptor of the carbon state of a defined area (baseline) and, at the same time, as a relative indicator of change in this area (impact). It can also be used to estimate actual carbon stock and changes to carbon stocks in a given area. The methodology has been applied during the preparation process in 15 SLMA pilot villages with encouraging results. Results of this exercise (baselines and maps) are documented in the files of the provincial PMOs. Based on these results a carbon sequestration target for those villages that will be supported under the SLMA component has been formulated and included in the Results Framework. During project implementation, carbon stock index methodology will be applied in an additional 20 villages as soon as project implementation starts. For the total of 35 villages (15 existing SLMA pilot villages plus 20 SLMA pilot villages to be selected), an update of the carbon stock index will be conducted towards the end of project implementation but not earlier than the third year of project implementation. A total carbon sequestration impact of the SLMA component will be extrapolated from the results of the 35 SLMA villages where the carbon stock monitoring is implemented. Methodology of Carbon Stock Monitoring 2. What is the carbon stock? Carbon stock is the total amount of carbon currently stored per unit area of land in 6 carbon pools: above-ground trees, above-ground non-tree, below-ground roots, forest floor (or litter), dead wood and soil organic matter. It can be expressed in tC/ha or tCO2/ha. For this project the indicator tC/ha will be applied. 3. How to calculate the index value? The index is formed out of 8 different carbon stock classes described in Table 1. Carbon stock classes are linked to types of present vegetation and land use common in the project area. An index value for a village can be calculated by weighing the class with the area and dividing the total sum of all classes by the total area. In addition, carbon values have been assigned to each index class building on IPCC default values (e.g. temperate forests: 217 tons of C / hectare, including soil carbon = 122 t C /hectare and above 95 ground forest biomass = 96 t of C/ hectare) and other sources6 and by adjusting these values to local conditions. Table 1: Carbon Stock Index Classes and its Indicators/Description Index Class / Indicators/Description tons C / hectare 0 = very low and Bare land with signs of current or very recent soil erosion; further decreasing Bare limestone rocks with signs of current or very recent rock desertification; (0-30 t C/ha) Very recently formed gullies in loess; Agricultural cropland with tillage on steep slopes >25°; Plots where vegetation has been almost completely burned, severe forest fire incidents 1 = low Agricultural land with annual crops incl. paddy fields; (31-60 t C/ha) Degraded grazing land (overgrazing, grassland with scattered shrubs, soil/stones visible); Economic forest that is regularly cut (e.g. Mulberry); Forest plots that have been harvested or burnt by forest fire; Tea and grape plantations; Residential areas with scattered trees and bamboo 2 = below moderate Grass and shrubland (managed rangeland) with extensive grazing (soil stones not (61-90 t C/ha) visible); Shrubland with scattered single trees; Fruit tree orchards with trees often pruned; Medicinal tree plantations (e.g. Eucommia); Agroforestry systems with scattered trees; Agricultural plots with single/double tree lines (trees > 10 cm DBH, >200m lines/ha; Residential areas with many trees (garden villages) 3 = moderate Young forest plantations < 8 years but > 2m height; (91-120 t C/ha) Dense shrubland of Hippophae ('shaji') or other woody shrubs with trees <20% coverage; Degraded open forest without under-storey, forest grazing; Fruit tree orchards with old trees without regular pruning (e.g. Castanea 'banli'); Agroforestry systems dominated by trees; Agricultural plots framed by single/double tree lines (trees > 10 cm DBH, over 400 m tree lines per hectare) 4 = above moderate Open forest stands (>20% - 50% coverage) with trees DBH >10cm and under-storey (121-150 t C/ha) (without grazing in the forest); Medium aged tree plantations 8 ­ 15 years, managed in short rotations Young mountain closures (<5 years closed) with full vegetative cover and without grazing or fuelwood collection 5 = considerable Tree plantations > 15 ­ 22 years, managed in long rotations (151-180 t C/ha) Natural forest stands with >50% coverage and average DBH >20cm, managed in long rotations; Mountain closures 5-10 years closed and without grazing and fuelwood collection. 6 = high Well-stocked tree plantations > 22 years, selectively harvested; (181-210 t C/ha) Natural forest stands > 80% coverage, with some trees > 30 cm DBH, selectively harvested 7 = very high Well stocked tree plantations > 30 years, sustainably managed (211-240 t C/ha) Natural forest stands > 80% coverage and some trees reaching 40 cm DBH, sustainably managed or protected Index Class Indicators/Description 6 Monitoring and estimating tropical forest carbon stocks: making REDD a reality. 2007. Holly K Gibbs, Sandra Brown, John O Niles and Jonathan A Foley. Environmental Research Letters. 96 4. How to map the different index classes? The carbon stock index classes are mapped for each pilot village. Mapping is done for the total land area of a village by mapping the actual occurrence of the different classes in the field. For this, the village has to be walked over with a topographic map of 1:10,000 and the boundaries of the different classes have to be indicated and marked in the map. For non accessible areas, aerial photos can be interpreted. It is important to note that the index classes are not necessarily consistent with ownership plots or land use types. The minimum area to be recorded with a separate index class is 3 mu (0.2 ha). An area smaller than 3 mu (0.2 ha) is put together with the adjacent bigger area with the same index class. In cases where the adjacent index class is very different from the smaller area (e.g. class "0" in an area of class "4"), it should be indicated in the map with a point and an area of 0.1 ha assigned to the point. 5. How to calculate the area of the different index classes? Sketch maps produced in the field are digitized and the different carbon stock classes entered into a Geographical Information System (GIS) as polygons. All polygons are directly adjacent to each other (exception for water bodies and residential areas) and the class for each polygon is defined. Mapping software is used to calculate the total area for each class of polygons/carbon index classes. Chongqing and Henan have decided to produce professional GIS-based maps while Shaanxi has decided to produce participatory village-level sketch maps. 6. How to interpret the results? Interpretation of the calculated index value in Year 1 can follow the simple scale developed for the carbon stock classes, which ranges from the value "0" (decreasing carbon stock) to "7" (high carbon stock). Within this range, index values basically indicate following: Index values < 1: Currently low or decreasing carbon stocks Index values between 1 ­ 2.5: Carbon stock is below moderate indicating a situation of serious past land degradation Index values > 2.5: Land management can be assessed as satisfactory and depending on the trends as either sustainable or unsustainable Index values > 4: Relatively high carbon stock and sound land management. 97 Example of a carbon stock index map from Chongqing. 98 Carbon storage in key assessment villages in Chongqing municipality (unit: hectares) Name of village Index Class Xiangqian Taihe Maoba Shangyu 0 = very low / decreasing 1.70 0.81 6.29 2.66 1 = low 135.27 123.27 459.23 333.07 2 = below moderate 43.86 28.90 1,202.07 1,265.94 3 = moderate 193.59 156.90 65.28 458.95 4 = above moderate 69.08 36.60 958.94 489.33 5 = considerable 0.00 0.00 0.00 0.00 6 = high 0.00 0.00 0.00 0.00 7 = very high 0.00 0.00 67.59 0.00 Total area 443.50 346.47 2,759.40 2,549.96 Carbon storage index value 2.43 2.30* 2.67 2.43 Total storage (estimated C 35,480 27,700 220,750 204,000 value per village area) *Example: 2.30 ­ 2.67 Index values could be assigned to approximately 80 ­ 100 t C/ha. 7. The index values and the estimated total carbon stock can be aggregated into county averages for similar agro-ecosystems to monitor changes in carbon stock at the county level. Comparisons over different agro-ecosystems, however, will remain difficult, since for some agro-ecosystems the maximum index value that can be achieved is lower than in others (e.g. in a semi-arid area such as the Loess Plateau, where closed forest do not naturally occur, the maximum carbon stock index would be 4 to 5). 8. Changes (trends) in the carbon stock are indicated by comparing the index value of the baseline with the value of a repeated survey in Year 3 or later. For each village, the index allows to follow negative, positive or neutral changes (trends) in the carbon stock. The mapping of the carbon stock classes also helps to interpret results and to visualize where changes take place and may serve as a basis for improved land use management decisions. 9. The mapping of the carbon stock classes will help to interpret results and to visualize where changes take place and may serve as a basis for improved land use management decisions. The carbon stock index map can be used in a GIS as a layer over the village resource map for interpretation and in village discussions. The trends in carbon stock changes can be analyzed in view of ongoing policy developments and enforcement of environmental regulations, such as the grazing ban, and the continuation or discontinuation of subsidies. 10. The carbon stock index measurement and analysis in the 15 key assessment villages has shown that a higher carbon stock index (and higher total carbon stock) is positively correlated with remoteness and low population density, but also to higher income, which is related to a higher number of migrant workers. There is scope for further interpretation and analysis of such correlations with socio-economic factors to be made within the framework of Subcomponent 3. Other uses of the carbon stock index can be imagined and pursued. For example, investments or subsidies for certain land management activities could be linked to increasing or at least stable 99 index values. The index value could also be weighted with population size and annual carbon emissions per capita. In this way it could indicate whether a village or larger administrative unit is carbon neutral, a carbon sink or a carbon emitter. II. Vulnerability to Climate Change Assessment 11. Vulnerability in general, and vulnerability to climate change in specific, is quickly becoming an important concept in analyzing poverty and poverty trends, in particular in fragile environments. Reducing vulnerability through adaptation activities is thus recognized as an important strategy for reducing risks and minimizing the impacts of climate change. Climate change is expected to increase the frequency and magnitude of extreme events (e.g. GECHS, 2008). 12. In the project areas, these extreme climate events are likely to include prolonged drought periods, uneven and unpredictable precipitation patterns, changing temperature regimes, impacts on water and evaporation regimes, hailstorms, frost events, and wildfires. These events are likely to result in reduced agriculture productivity and reduced security of poor people`s livelihood assets, reduced access of the poor to their livelihood assets, less effective coping strategies among the poor, and increased vulnerability of poor people. 13. Climate change under these scenarios is likely to changes in poverty and vulnerability of different strata of the local rural population, while adaptation activities responding to climate change will alter the coping capacity of the local population / household strata. 14. This element of the M&E framework is concerned with the poverty­vulnerability­ adaptation nexus. This nexus will be monitored through assessments at the community level using participatory methods and templates that help quantify current coping ranges of different population segments and assess changes in coping capacity of different household strata for selected extreme climatic events. The methodology developed for this project is based on the Technical Papers of the Adaptation Policy Framework (UNDP-GEF, http://www.undp.org/gef/adaptation/index.htm) and a body of work on community-based adaptation which links climate change, disaster risk reduction and development (see DRR, 2006; MEA, 2005a & 2005b; Olmos, 2001; Reid and Huq, 2007; Sperling, 2002). It is described in detail in Annex 4 of the SLMA component preparation report. Some of the assessment data can be used for monitoring purposes. Methodology 15. The vulnerability assessment aims at demonstrating the relation between extreme climate events and their influence on the vulnerability of poor rural households. At the same time, it seeks to demonstrate how the impact of climate change adaptation activities on vulnerability can be monitored. The monitoring data collected during the vulnerability assessment can serve as an input for a more comprehensive analysis of the poverty-vulnerability-adaptation nexus in different household strata of communities and in different regions. It is important to note that approaches that treat communities as homogeneous (i.e., able to adapt or reduce risks as a group) 100 are prone to failure. Therefore, the stratification of communities along identified key criteria is important part of the methodology. 16. The following four monitoring templates will be used for the vulnerability monitoring. Data will be obtained during the field assessments: Ranking of Impact of Extreme Climate Events on Farmers Livelihoods Average Coping Range to Extreme Climate Events without and with adaptation activities Current vulnerability of different household strata to extreme climate events Awareness of villagers and officials concerning the poverty ­ vulnerability ­ adaptation nexus Baseline in 15 key assessment villages ­ Year 2008 17. The vulnerability assessment has been tested in the 15 SLMA pilot villages in the three provinces. The assessments have produced different outcomes in terms of usefulness for establishing a monitoring baseline and the methodology was refined based on this experience. The year 2008 baseline has only partly been completed. Further work is needed in the 15 existing and new SLMA villages to complete the baseline during the initial implementation phase. In Chongqing and Henan, the vulnerability assessments yielded mostly qualitative descriptions. The vulnerability assessment in Shaanxi (carried out in 5 SLMA pilot villages) yielded valuable results for establishing a monitoring baseline that can be used as example for all other SLMA villages. Table 2 Vulnerability Assessment in Surveyed Villages in Shaanxi Province No. of Percent Drought length Asset Value house holds age (% 40-60 days 60-90 days 90 days > 865 39 6.4 not vulnerable unconfirmed vulnerable Net income per 625-865 278 45.7 unconfirmed vulnerable vulnerable capita [CNY] < 625 291 47.9 vulnerable vulnerable vulnerable 3 155 25.5 not vulnerable unconfirmed vulnerable Water cisterns 2 126 20.7 unconfirmed vulnerable vulnerable [No.] 1 327 53.8 vulnerable vulnerable vulnerable > 0.035 45 7.4 not vulnerable unconfirmed vulnerable Terraced land 0.02- 314 51.6 unconfirmed vulnerable vulnerable [ha] 0.035 < 0.02 249 41.0 vulnerable vulnerable vulnerable III. Socio-economic Indicators of Sustainable Land Management 18. The currently applied standard indicators of land management in villages are often misleading and of limited usefulness. More specifically, observations from the field work indicate that current indicators that are based on the registered population (instead of the actual resident population) in a village, e.g. per capita land use and per capita income do not reflect 101 actual pressure on natural resources. In addition, forest cover is often misleading as an indicator because forest cover includes both horticultural crops and forestry stands. This M&E component therefore promotes the introduction of a set of additional simple indicators that better reflect the situation on the ground and impact of poverty reduction programs. To improve this situation and generate more useful data for assessing actual impacts and pressure on natural resources and improve decision making the following indicators are being introduced. These indicators are expected to better reflect the actual status of sustainable land management in a community: Actual (resident) population density Total area of basic farmland (land appropriate for improved agricultural production) Share of the young active population (male/female) Actual woodland area 19. During village assessments during the preparation, baselines were established for these indicators in some of the selected SLMA villages and the collection and establishment of the baseline will be completed in all 35 SLMA pilot villages. Monitoring responsibilities and procedures 20. The M&E plan will be used by FCPMC and all three provincial PMOs as a guideline for the SLMA component`s monitoring procedures. M&E of the SLMA component will primarily be under the overall responsibility of the provincial Project Management Offices (PMOs). The PMOs will organize the monitoring work at county and township level in a way that each level is clear about the specific monitoring tasks. Furthermore, for monitoring work to be done by outside consultants, the PMOs will specify the relevant tasks in the respective TOR and provide the monitoring plan including the templates to the consultant teams. PMOs will also ensure that M&E is done in a consistent and uniform way in all SLMA villages. The three provincial PMOs will exchange information (through workshops) and make sure that the data processing and analysis uses the same templates and is done in a uniform way. 21. Socioeconomic and environmental baselines will be established in all 77 SLMA pilot villages. In addition, in 35 of these villages a carbon stock index will be used to monitor contribution of the project to global environmental benefits. Monitoring of intermediate outcome indicators will be conducted in all 77 SLMA pilot villages. 22. For the implementation of the environmental impact monitoring aspects, in particular in the development of the carbon stock index and the poverty and vulnerability assessments, the PMOs will be supported by qualified national consultants. Communities will also be closely involved and participate in the monitoring of the poverty, vulnerability, and adaptation assessments. Required project inputs to be arranged by the PMOs include: (a) training to various agencies on the M&E methodologies; (b) recruitment of provincial consultants for the monitoring of global environmental benefits and vulnerability assessments, and (c) evaluation workshops. 23. For the monitoring of the sub-component results (intermediate outcome indicators) of the SLMA component, county PMOs will have primary responsibility. Communities will be 102 actively participating in the monitoring of the results of sub-component 1: pilot design and implementation, as well as in monitoring of inputs at community level. 24. A series of provincial level evaluation workshops will be organized during the second half of project implementation. The workshops will have two purposes, namely to: (a) provide an assessment of SLMA implementation experiences that will be fed back into the CDD approach applied project wide in all SDPRA villages, and (b) produce the analytical input and background data for a national policy study and consultation workshop. 25. FCPMC will take responsibility for overall consolidation of M&E data and information and implementation of the national level policy dialogue on poverty ­ vulnerability ­ adaptation nexus. FCPMC may be supported by national and international TA as needed. 103 Annex 17: Maps: IBRD# 36701, # 36702 CHINA: Sustainable Development in Poor Rural Areas Project 104 116° CHINA POVERTY 5 HOHHOT ANSAI PROJECT COUNTIES/DISTRICTS Huang SELECTED CITIES BEIJING PROVINCE CAPITALS 40° NATIONAL CAPITAL 40° BEIJING XIAN (COUNTY) BOUNDARIES PROVINCE BOUNDARIES NEI MONGOL TIANJIN FUGU TIANJIN SHENMU HEBEI 108° YINCHUAN YULIN SHI Yulin JIAXIAN SHIJIAZHUANG HENGSHAN Jiaxian TAIYUAN MIZHI NINGXIA ZIZHOU SUIDE WUBU SHANXI DINGBIAN JINGBIAN Suide Wubu ZICHANG QINGJIAN Qingjian Wuqi WUQI ANSAI YANCHUAN Ansai JINAN ZHIDAN GANQUAN Yan'an YAN'AN SHI YANCHANG Yanchang SHANDONG Anyang YICHUAN FUXIAN Yichuan 36° 36° Hebei Puyang AN LUOCHU ng HUANGLING HUANGLONG HANCHENG Hua Xian Hua Hancheng Xinxiang YIJUN CHENGCHENG BAISHUI Jiaozuo GANSU CHANGWU XUNYI Tongchuan HEYANG TONGCHUAN Longxian BINXIAN YAO LONGXIAN CHUNHUA PUCHENG Nankao Kaifeng NG LINYOU YONGSHOU FUPING JIA NYA SAN Mianchi Minquan Chencang ZHENGZHOU NG DALI Sanmexia QIA JINYU Luoyang Yanshi GY AN WEINAN BAOJI SU Qixian FENGXIANG LIQUAN AN LINTONG SHI Ningling Liangyuan G GAOLING Lingbao Suxian (CHENCANG QIAN HENAN QISHAN HUAYIN Shangqiu FUFENG Baoji XIANYANG SHI TONGGUAN Yichuan Weishi DISTRICT) Xianyang HUA XIAYI BAOJI WUGONG XINGPING SHI XI'AN SHI Xiayi SHI MEIXIAN XI'AN Songxian Ruyang Ruzhou Yu Xian ZHECHENG LUONAN Taikang Zhecheng FENG LANTIAN Lushi RUYANG Xuchang ZHOUZHI HUXIAN CHANG'AN TAIBAI SONGXIAN LIUBA SHAANXI FOPING ZHASHUI SHANGZHOU SHI DANFENG Luanchuan LUSHAN Lushan Pingdingshan Luohe Zhoukou HUAIYANG Huaiyang NINGSHAN Nanzhao CHENGGU LUEYANG Wuyang Shenqiu MIAN YANG ZHEN'AN SHANYANG SHANGNAN NANZHAO SHENQIU HANZHONG Xixia Fancheng SHI Hanzhong SHIQUAN Neixiang Sheqi Runan NINGQIANG Nanyang Wancheng Zhumadian Pingyu ANHUI NANZHENG XIXIANG XUNYANG SHEQI HANYIN Queshan ANKANG BAIHE Tanghe Deng Xian Xinye ZHENBA TONGBAI Xixian ZIYANG Tongbai PINGLI Luoshan 32° LAN'GAO Pingqiao Huangchuan 32° Xinyang Chengkou HEFEI CHENGKOU ZHENPING SICHUAN WUXI Wuxi KAIXIAN HUBEI Kaixian WUSHAN Wushan YUNYANG Fengjie Chang 1. SHAPINGBA Yunyang Jiang 2. JIANGBEI Wanzhou FENGJIE LIANPING 3. YUZHONG Lianping WANZHOU 4. NAN'AN WUHAN 5. DADUKOU 6. JUILONGPO ZHONGXIAN Dianjiang Zhongxian DIANJIANG CHONGQING Tongnan TONGNAN HECHUAN Hechuan Shizhu BEI Tongliang CHANGSHOU SHIZHU BEI Beibei YUBEI Changshou Fengdu Dazu TONGLIANG Yubei FENGDU DAZU Bishan Fuling 1 2 RONGCHANG Shuangqiao 3 4 FULING Qianjiang BI SH AN Rongchang Yongchuan 65 CHONGQING WULONG PENGSHUI UAN Ba Xian Wulong QIANJIANG BANAN NANCHUAN GCH Pengshui Jiangjin CHINA YON Nanchuan Qijiang JIANGJIN SHAANXI QIJIANG Wansheng HENAN WANSHENG YOUYANG Youyang CHONGQING NANCHANGmap Area of Xiushan HU NAN 28° GUIZHOU XIUSHAN CHANGSHA JIANGXI This map was produced by the Map Design Unit of The World Bank. 0 100 200 300 Kilometers JANUARY 2009 The boundaries, colors, denominations and any other information IBRD 36701 shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 0 100 200 Miles 108° 112° IBRD 36702 112° 116° HEBEI SHANDONG This map was produced by the SHANXI 36° CHINA Map Design Unit of The World Bank. The boundaries, colors, POVERTY V 36° denominations and any other ng Hua information shown on this map do not imply, on the part of The World Bank ZHENGZHOU JIANGSU RUYANG COUNTY IN HENAN PROVINCE Group, any judgment on the legal status of any territory, or any Area of Ruyang endorsement or acceptance of such main map boundaries. SHAANXI HENAN ANHUI 32° 32° HUBEI 116° CHINA HENAN 0 5 10 15 Kilometers Ruyang Tengling Hongling Youfang Xingping Masi Dengshan Ganli Yuma Liukeng Xiaobai Liuhu Nieping Gushi Taiping Jincun COUNTY SEAT Chunshu TOWNSHIP/VILLAGE CENTER Shizhai POOR VILLAGE CENTER Shuangsi Dazhuang TOWNSHIP BOUNDARY RAILROAD ARTERIAL HIGHWAY Weiyuan SUB-LINE ROAD Houping RIVER Hezhuang Shizhu RESERVOIR Jiaogou Xiping Mengcun Masi PROJECT VILLAGE PROJECT AREA Pailu Lianghe POOREST VILLAGE IN PROJECT AREA SCALE = 1:300,000 JANUARY 2009