Completion Report

Project Number: 38301-013 Loan Number: 2474 July 2018

People’s Republic of China: Dryland Sustainable

Agriculture Project This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency unit – yuan (CNY)

At Appraisal At Project Completion (1 November 2008) (31 May 2018)

CNY1.00 = $0.1462 $0.1563 $1.00 = CNY6.84 CNY6.40

ABBREVIATIONS

ADB – Asian Development Bank CPMO – central project management office DMF – design and monitoring framework EMP – environmental management plan ha – hectare IEE – initial environmental examination MTR – midterm review mu – Chinese unit of measurement (1 mu = 666.67 square

meters) PCR – project completion report PMO – project management office PPMO – provincial project management office PPMS – project performance management system PRC – People’s Republic of China SCFTA – Spanish Cooperation Fund for Technical Assistance

NOTES

(i) The fiscal year (FY) of the Government of the People’s Republic of China and its

agencies ends on 31 December. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 31 December 2018.

(ii) In this report, "$" refers to United States dollars unless otherwise stated

Vice-President Stephen Groff, Operations 2 Director General Amy S.P. Leung, East Asia Department (EARD) Director Qingfeng Zhang, Environment, Natural Resources, and Agriculture

Division, EARD Team leader Jan Hinrichs, Natural Resources Economist, EARD Team members Mark R. Bezuijen, Senior Environment Specialist, EARD

Daisy B. Gavina, Senior Operations Assistant, EARD Ryan Bert C. Peralta, Project Analyst, EARD Nogendra Sapkota, Senior Social Development Specialist, EARD

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

CONTENTS Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

A. Project Design and Formulation 1 B. Project Outputs 3 C. Project Costs and Financing 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Consultant Recruitment and Procurement 7 H. Gender Equity 8 I. Safeguards 8 J. Monitoring and Reporting 9

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness 10 C. Efficiency 11 D. Sustainability 11 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 12 G. Performance of the Asian Development Bank 12 H. Overall Assessment 12

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 13

APPENDIXES

1. Design and Monitoring Framework 15

2. Project Cost at Appraisal and Actual 20

3. Project Cost by Financier 21

4. Disbursement of ADB Loan Proceeds 23

5. Contract Awards of ADB Loan Proceeds 25

6. Social Dimensions and Safeguards 26

A. Introduction 26 B. Land Use and Resettlement 27 C. Ethnic Minority Consideration 27 D. Gender Equality Promotion 28 E. Poverty Reduction 28 F. Consultation and Participation 28 G. Conclusions and Lessons Learned 29

7. Environmental Safeguards 31

A. Categorization and Due Diligence 31

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B. Institutional Setup, Support, and Capacity Development 31 C. Environment Safeguard Measures 31 D. Monitoring 32 E. Timing and Quality of Environment Monitoring Reports 32 F. Grievance Redress Mechanism 32 G. Costs of Environment Management Plan Implementation 33 H. Environmental Benefits 33 I. Lessons learned 34

8. Status of Compliance with Loan Covenants 35

9. Financial and Economic Analysis 42

10. Financial Ratio Analysis of Participating Agro-Enterprises 49

A. Introduction 49 B. Profitability 49 C. Financial Ratios 49

11. Summary of Physical Achievements 56

BASIC DATA A. Loan Identification 1. Country 2. Loan Number and financing source

Grant Number and financing source 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number 8. Financing modality

People’s Republic of China 2474 / Ordinary Capital Resources 0128 / Spanish Cooperation Fund Dryland Sustainable Agriculture Project People’s Republic of China Ministry of Agriculture $83,000,000 1690 Project loan

B. Loan and Grant Data 1. Appraisal – Date started – Date completed 2. Loan negotiations – Date started – Date completed 3. Date of Board approval 4. Date of loan agreement 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions 6. Project completion date

– Appraisal – Actual

7. Loan closing date – In loan agreement – Actual – Number of extensions 8. Financial closing date

– Actual

9. Terms of loan – Interest rate – Maturity – Grace period 10. Terms of relending – Interest rate

22 February 2008 8 March 2008 20 October 2008 21 October 2008 25 November 2008 3 February 2009 4 May 2009 19 May 2009 None 30 June 2014 30 June 2016 31 December 2014 31 December 2016 Two 22 September 2017 The sum of London interbank offered rate (LIBOR) and 0.60% 25 years 5 years From the Ministry of Finance to provinces and from provinces to counties: the sum of LIBOR and 0.60%; From counties to private agro-enterprises: the

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– Maturity – Grace period 11. Cofinancing (Spanish Cooperation Fund—0128) - Approval - Date of financing agreement - Date of effectiveness - Closing date in financing agreement - Actual date of closing - Number of extensions

sum of LIBOR, 0.60%, and additional interest rate spread of up to 0.2% From the Ministry of Finance to the provinces and from the provinces to counties: 25 years maturity From counties to private agro-enterprises: 15 years maturity 5 years grace period 25 November 2008 03 February 2009 19 May 2009 31 December 2014 06 June 2011 (cancelled) None

12. Disbursements

a. Dates Initial Disbursement

20 May 2010 Final Disbursement 22 September 2017

Time Interval 88 months

Effective Date 19 May 2009

Actual Closing Date 31 December 2016

Time Interval 91 months

b. Amount ($ million)

Category

Original

Allocationa (1)

Increased during

Implementation (2)

Cancelled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Works—Gansu 9.79 4.29 0.40 13.68 13.68 0.00 Works—Henan 16.97 (5.82) 3.01 8.14 8.14 0.00 Works—Shandong 16.33 4.41 1.04 19.70 19.70 0.00 Goods—Gansu 15.22 (4.30) 0.10 10.82 10.82 0.00 Goods—Henan 19.02 5.83 5.05 19.80 19.80 0.00 Goods—Shandong 5.67 (4.41) 0.34 0.92 0.92 0.00 Total 83.00 0.00 9.94b 73.06 73.06 0.00

a Includes contingencies. b Cancelled at financial closing. Note: Figures may not sum due to rounding.

C. Project Data

1. Project cost ($ million) Cost Appraisal Estimate Actual

Foreign exchange cost 0.00 0.00 Local currency cost 204.69 238.25 Total 204.69 238.25

2. Financing plan ($ million) Cost Appraisal Estimate Actual

Implementation cost Borrower financeda 107.82 162.59 ADB financed 83.00 73.06 Other external financingb 0.35 0.00

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Cost Appraisal Estimate Actual

Total implementation cost 191.17 235.65

Financing charges during implementation Borrower financedc 13.52 2.60 ADB financed 0.00 0.00 Other external financing 0.00 0.00

Total interest during construction cost 13.52 2.60

ADB = Asian Development Bank. a National and local governments, agro-enterprises, and farmers. b Spanish Cooperation Fund for technical assistance. c All financing charges were financed by agro-enterprises.

3. Cost breakdown by project component ($ million)

Component Appraisal Estimate Actual

A. Investment Costs Agroenterprise and Farm Partnership Improvements 171.22 235.54

Project Support and Management 9.08 0.11

B. Contingencies 10.87 0.00

C. Financial Charges During Implementation 13.52 2.60

Total 204.69 238.25

Note: Amounts may not add up exactly due to rounding.

4. Project schedule Item Appraisal Estimate Actual

Component 1 – Agro-enterprise and Farm Partnership Improvements

- Commence physical implementation of partnerships February 2009 September 2009 - Prepare partnership and approval process December 2013 December 2015 - Complete financing agreements for first approved partnerships December 2008 May 2010 and complete commitment of all loan fundsa December 2013 n/a - Private agro-enterprises provide support services to farmers December 2013 December 2016

Component 2 – Project Support and Management - Commence physical implementation of public-sector-provided

support services February 2009 September 2009

- Provide strengthening of provincial and county PMOs December 2009 December 2009 - Prepare support services and approval process December 2013 December 2016 - Complete financing agreements for first approved activities July 2009 May 2010

and complete commitment of all loan fundsa December 2013 n/a - PMOs operational December 2014 September 2017

n/a = not applicable, PMO = project management office. a Not all loan funds were committed.

5. Project performance report ratings Implementation Period

Ratings

Development Objectives Implementation Progress

From 19 May 2009 to 31 December 2009 Satisfactory Satisfactory From 1 January 2010 to 31 December 2010 Satisfactory Satisfactory From 1 January 2011 to 31 March 2011 Satisfactory Satisfactory

Single Project Rating

From 1 April 2011 to 31 December 2014 On track From 1 January 2015 to 30 June 2015 Potential problem From 1 July 2015 to 22 September 2017 On track

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members

Loan Inception 20–24 July 2009 2 10 a, e Loan Review 1 10–14 May 2010 2 10 a, e Loan Review 2 16–21 June 2011 3 18 b, c, e Loan Review 3 3–7 March 2012 1 5 c Midterm Review 10–24 September 2012 2 30 c, e Loan Review 4 21–25 October 2013 2 10 c, e Loan Review 5 25–30 October 2014 2 12 c, e Loan Review 6 27–29 October 2015 2 6 d, e Loan Review 7 17–19 October 2016 1 3 d Consultation 6 December 2017 2 2 d, f Project Completion Review 21–24 May 2018 2 8 d, e

a = Principal Economist, b = Lead Natural Resources Economist, c = Environmental Economist, d = Natural Resources Economist, e = Project Analyst, f = Senior Operations Assistant.

I. PROJECT DESCRIPTION

1. At the time of project preparation in 2005, the People’s Republic of China (PRC) had some of the worst land degradation in the world, with more than 40% of its land area (3 million–4 million square kilometers) adversely affected. About 70% of the country’s farmland, or 350 million hectares (ha), was considered dryland, while about 40% of the country’s total land area was dryland. The PRC’s dryland areas are characterized by: (i) low water resources and high dependency on rainfall, (ii) soil infertility and low yields, and (iii) degraded lands and environment. Poverty is generally higher in rural areas, particularly in rain-fed and drier areas, and much of the PRC’s poor and vulnerable population live in dryland areas. In the years leading up to 2005, the PRC had experienced a sharp rise in demand for agricultural products, especially higher-value horticultural and livestock products, as a result of increasing incomes and urbanization. This coincided with increases in world commodity and agricultural prices. This provided an opportunity for farmers and agro-enterprises to expand production and sales for both the domestic market and for export. However, they would need to increase production—a challenge for farmers in dryland areas—and improve marketing-related infrastructure to do this. Contracts, alliances, and other links between farmers and agro-enterprise also required strengthening. One way to strengthen these links was through contract farming connecting small-scale farmers with agro-processing firms. Contract farming had grown rapidly in the 10 years leading up to project appraisal, initially in the economically advanced coastal provinces but subsequently in underdeveloped areas of central and western PRC. The government supported contract farming through various programs and incentives such as credit support and tax reductions for agribusinesses involved in contract farming.

2. The Dryland Sustainable Agriculture Project was proposed to address constraints in producing, processing, and providing support services and investment finance to tackle natural resource degradation and promote the long-term sustainability and profitability of higher-value agricultural production and processing.1 The expected impact of the project was reduced rural poverty in Gansu, Henan, and Shandong provinces through the sustainable use of land and water resources. The expected outcome was increased agricultural productivity through the adoption of sustainable farming practices in the project area. The principal expected output of the project was the promotion of financially and environmentally sustainable agriculture in dryland areas through partnerships between private agro-enterprises and smallholder farmers.

II. DESIGN AND IMPLEMENTATION

A. Project Design and Formulation

3. Government policy to develop the agriculture sector at the time of project design was defined in the New Socialist Countryside Policy2 and the Eleventh Five-Year Plan, 2006–2010.3 The Eleventh Five-Year Plan shifted the emphasis of economic and social development policies from growth to sustainability, based on broader and more inclusive rural development and social programs in the context of an increasingly market-oriented economy. The objective of the plan was to achieve greater balance among (i) urban and rural areas, (ii) geographic regions, (iii) economic sectors, (iv) economic and social development, and (v) economic growth and protection of the environment. Within agriculture, specific objectives included: (i) improving farm and off-farm

1 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Grant to the People's Republic of China for the Dryland Sustainable Agriculture Project. Manila. 2 Communist Party of China Central Committee. 2006. New Socialist Countryside Policy. Document No. 1. Beijing. 3 Government of the People’s Republic of China, National Development and Reform Commission. 2006. The Outline

of the Eleventh Five-Year Plan. Beijing.

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income opportunities for the rural population, (ii) increasing grain production, (iii) developing agribusiness and farmer organizations, and (iv) adopting standards and building capacity to address environmental issues. In January 2006, the government published its strategy calling for increased efforts to address the problems of about 900 million rural people by increasing the importance of grain production, product safety, infrastructure, support services (including research and extension), social welfare, and governance. The strategy emphasized that “dragon-head”4 agro-enterprises should work in partnership with farmers to share benefits. Growth of agro-enterprise activity was seen as a means to expand market outlets for farmers and provide off-farm employment opportunities for the rural population. The latter was expected to reduce population pressure on the land, resulting in more sustainable farm structures and practices. Expanding market opportunities for higher-value products would require supply-side strengthening, efficiency gains, improved prices for farmers, and improved farmer access to support services and financial resources.

4. The strategic objectives of the Asian Development Bank (ADB) for the PRC at the time of project formulation were identified in the country partnership strategy for the PRC, 2008–2010.5 ADB’s operations were consistent with the government’s Eleventh Five-Year Plan and focused on rural development, environment, energy conservation, urban development, and regional cooperation. Specifically, ADB sought to achieve balanced development among regions, and between rural and urban areas.

5. The project was formulated under project preparatory technical assistance.6 The technical assistance was approved on 18 August 2005, with a closing date of 31 March 2006—later revised to 30 September 2008. The design of the project at appraisal largely reflected the design proposed in the final technical assistance report. The project area comprised parts of 27 counties across three provinces: Gansu (seven counties), Henan (12 counties), and Shandong (eight counties). Project activities focused on developing partnerships between farmers and agro-enterprises;7 financing agro-enterprise investment in processing; and enhancing agricultural support services such as farm input and technology supply, extension and information centers, wholesale markets, and product quality testing. While the overall scope of the project was consistent with government and ADB objectives to address agricultural development, poverty, and environmental concerns in the project area, the project design was overly ambitious in its geographic coverage and the targeted number of farmer–agro-enterprise relationships to be developed. In addition, the targeted support services were too numerous and too diverse. These factors posed a risk to effective project implementation and the achievement of project outputs and outcome. A more focused and coherent approach that targeted fewer provinces would have been preferable.

6. The project’s expected impact, as defined in the design and monitoring framework (DMF; Appendix 1) was reduced rural poverty in the project areas. However, many external factors influence poverty reduction, so this impact was not appropriate. At the outcome level, several performance targets and indicators were not applicable to assessing increased agricultural

4 The dragon-head model is a variant of the vertically integrated contract farming model in which the largest and

strongest agribusiness enterprises are given support to accelerate development of sustainable commercial partnerships between the enterprise and farmers.

5 ADB. 2008. Country Partnership Strategy: People’s Republic of China, 2008−2010. Manila. 6 ADB. 2005. Technical Assistance to the People’s Republic of China for Preparing the Dryland Farming in the Northern

Region Project. Manila. The name of the project was changed in 2007 at the request of the government to more accurately describe the project scope.

7 A partnership is a grouping of entities formed mainly to enhance administrative convenience. It has no legal status. It may contain farmers, agro-enterprises, input suppliers, service providers, local government agencies, etc. The individual members of the partnership may or may not have commercial connections with each other and may or may not operate independently of each other.

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productivity (off-farm employment, increased household income), and/or were difficult to quantify (farmland degradation). There were no targets pertaining to farm productivity (e.g., increased crop yields). The indicator for increased value-added production was expressed in terms of weight (tons) instead of monetary value—this was a mistake for a project that promoted farmers’ diversification into higher-value products, many of which (herbs, spices, medicinal plants, etc.) might weigh significantly less than traditional crops. At the output level, the DMF contained indicators that were overly ambitious or difficult to measure. Measuring the number of support service centers established per se rather than measuring the type and number of clients using the centers’ services was a mistake. Issues discussed during the midterm review (MTR) mission in September 2012 resulted in revisions to the DMF (para. 8), including the removal of sub-outputs from the design summary, and revision of targets and/or revision of the time frames for achieving them. The project completion review (PCR) assessed performance against the revised targets.

7. During project implementation, the grant from the Spanish Cooperation Fund for Technical Assistance (SCFTA) was cancelled (para. 16). Eleven out of 55 agro-enterprises decided to cease participation in the project and were replaced with nine newly selected agro-enterprises after the MTR (para. 9). In October 2015, ADB approved the withdrawal of an additional three agro-enterprises from the project, and funds earmarked for them were reallocated to four existing agro-enterprises (para.10). Market-driven changes to the number of participating agro-enterprises kept the project design relevant, and training facilities established under the project continued to teach farmers sustainable farming practices despite the cancellation of the SCFTA grant.

B. Project Outputs

8. The MTR raised the following issues with project implementation: (i) partnerships were not consistently defined across provinces and flexibility in allocating funds within partnerships was limited; (ii) agro-enterprises withdrew from the project; (iii) agro-enterprises’ investment plans changed because of domestic cost increases, changing market conditions, and/or currency appreciation;8 and (iv) project cost overestimates at appraisal. Following the MTR, ADB revised the DMF outcome and output targets, but the impact targets remained unchanged. At the DMF outcome level: (i) the targeted increase in off-farm employment was revised from 34,000 by 2013 to 32,000 by 2015; (ii) the year by which the targeted increase in household income was to be achieved was revised from 2013 to 2015; (iii) the target to reduce soil degradation annually by 10% was removed; (iv) the target to improve soil quality by 10%−15% was removed; and (v) the year by which the targeted increase of 500,000 tons of value-added products from agro-enterprises was to be achieved was changed from 2013 to 2015, and the individual quantity targets by province were removed. The DMF output targets are discussed below.

1. Agro-enterprise and Farm Partnership Improvements9

9. The project proposed establishing 29 partnerships between agro-enterprises and farmers to strengthen processing and increase production in the three project provinces, with the goal of meeting growing demand for high-value agricultural products both domestically and for export. Partnerships were based on contract-farming, with dragon-head agro-enterprises playing the lead role—a tried and tested model in the PRC. Twenty-nine partnerships involving 55 agro-enterprises (from a list of 150) were selected by provincial governments based on financial, economic, environmental, and social performance. It was estimated that these partnerships would

8 The exchange rate between the United States dollar and the Chinese yuan had fallen by 8%, from CNY6.84 at

appraisal to CNY6.30 at MTR, resulting in fewer funds for investment in yuan terms. 9 The sub-outputs “Enhanced agricultural production” and “Private support services to farmers” were removed during

the MTR.

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improve the production capacity of 120,000 ha of land and would directly benefit 600,000 farm households in addition to the estimated 850,000 households already involved in contract farming with agro-enterprises. Benefits to farm households were expected to accrue from a shift in production from low-yielding, low-value food crops to higher-value, more marketable horticultural and commercial crops. Agro-enterprises would directly support farmers to diversify and increase productivity by providing extension services, improved farm technologies (e.g. conservation agriculture and water-saving technologies), and improved access to inputs (seeds, machinery, etc.) and market outlets through the partnerships. Agro-enterprises were to establish and/or strengthen: (i) three agricultural extension and technology transfer centers in Henan, (ii) two organic fertilizer mixing plants in Henan and Shandong, (iii) one machinery manufacturing plant and 30 machinery service stations in Henan, (iv) one seed production center in Shandong, (v) three agricultural produce information centers in Henan and Shandong, (vi) one agricultural product testing center in Henan, (vii) four expanded fruit and vegetable markets in Gansu and Henan; and (viii) four farmer associations in Henan and Shandong. These private sector services were intended to complement public sector support services provided under output 2.

10. Several changes in the list of agro-enterprises selected for participation at appraisal were made during the early stages of project implementation as a result of issues identified during the MTR (para. 8). Following the MTR, the government proposed (in August 2013) to revise the original list of 55 agro-enterprises to 53. This was after 11 agro-enterprises decided to cease participation in the project and nine others were selected to replace them. Corresponding changes were made in project costs and loan allocation (paras. 17–18). The target number of partnerships in the DMF was also reduced from 29 to 25. In October 2015, ADB approved the withdrawal of three more agro-enterprises from the project and reallocated the funds for these projects to four existing agro-enterprises. No change was made to the DMF in this respect.

11. At project closing in 2016, 27 partnerships across 26 counties had been established involving 49 agro-enterprises (28 agro-enterprises in seven counties in Gansu, 12 agro-enterprises in 12 counties in Henan, and nine agro-enterprises in seven counties in Shandong). One agro-enterprise in Gansu did not borrow, and funds allocated to it were returned as part of the loan cancellation (para. 19). Between project closing and the time of the PCR, two partnerships in Henan were dissolved, and one agro-enterprise in Shandong ceased operations. During preparation of the project completion report, a survey of all project-financed agro-enterprises was undertaken to determine their profitability and financial status over the preceding 5 years (2013−2017). Forty-four agro-enterprises responded to the survey. Of these, all but one returned a profit in each year from 2013 to 2017. A machinery-manufacturing agro-enterprise in Henan Province had been experiencing declining demand and net profit since 2015, and it returned a loss in 2017. With respect to financial soundness, the majority of agro-enterprises met all covenanted financial ratio criteria throughout 2013−2017 (Appendix 10).

12. An estimated 672,850 farmers were engaged in agro-enterprise partnerships at project completion. During the MTR, it was agreed that the original target of 600,000 households engaged in partnerships with agro-enterprises was overly ambitious and that the figure should be specified to 600,000 farmers. The actual number engaged exceeds the revised target of 600,000 farmers by 12%.

13. Achievements in respect to support services established or expanded under output 1 met DMF targets, with the following exceptions: (i) only one organic fertilizer mixing plant was established (in Shandong in 2011), rather than the target of one in Henan and one in Shandong by 2013; and (ii) out of four planned fruit and vegetable markets, only two were constructed but not funded by the project.

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2. Project Support and Management10

14. Under the project, the extension staff of provincial and county agriculture bureaus, assisted by lead farmers from project-supported production bases, were to provide farmers with advisory services. It was proposed to train 66,200 households (including up to 80,000 project and non-project farmers) annually by the end of the project. It was also proposed that existing provincial government risk mitigation measures (compensation, training, and related services) would be available to project-supported farmers.

15. The project proposed strengthening the capacity of implementing agencies, including the project performance management system (PPMS), through provincial governments’ financing of upgraded offices, training facilities, training materials, and training equipment. This was to be complemented by the $350,000 SCFTA grant to improve sustainable farming practices, increase farm productivity, reduce land degradation, adopt sustainable land management practices, assess the impact of climate change on land degradation (particularly in Gansu Province), and improve water conservation.

16. Targets and indicators related to the establishment and/or enhancement of public sector support were removed from the DMF following the MTR. The target to train 80,000 farmers annually from 2011 and 2013 and the target to train 500 farmers in sustainable farming practices were also removed. The SCFTA grant for this purpose was cancelled by the Government of Spain on 6 June 2011.11 At project completion, 68,000 participants had been trained, compared with a target of 66,200 to be trained during 2011−2014.12 The cancellation of the grant, therefore, did not have a significant impact on project performance.

C. Project Costs and Financing

17. The cost of the project was estimated at $204.69 million at appraisal. On 8 November 2013, following the MTR, project costs were revised, and financing was reallocated. The key changes in base cost estimates were an increase in agro-enterprise and farm partnership improvement (output 1) from $171.22 million to $202.49 million, and an increase in project support and management (output 2) from $9.08 million to $9.18 million. This resulted in an increase in estimated total project costs from $204.69 million to $241.49 million. Actual project costs amounted to $238.25 million. Details of project costs by output are in Appendix 2.

18. At appraisal, it was estimated that ADB would finance $83.00 million, the SCFTA $0.35 million, the national government $0.90 million, provincial and county governments $9.01 million, agro-enterprises $97.83 million, and farmers $13.60 million. Revisions made during the MTR were: (i) a reduction in national, provincial, and county government financing from $9.91 million to $8.19 million; (ii) an increase in financing by agro-enterprises from $97.83 million to $138.68 million; and (iii) a reduction in financing by farmers from $13.60 million to $11.62 million.13 ADB financed $73.06 million of actual project costs (88.0% of the proposed loan amount). National, provincial, and county governments financed $2.99 million (36.5% of the

10 The sub-outputs “Public sector support to farmers,” “Demonstration of sustainable farming practices,” and “Project

management” were removed during the MTR. 11 Implementation arrangements for the SCFTA grant were changed; the national government then used its own funds

to carry out some of the technical training for staff and farmers. 12 A participant is defined as a person attending a training session. Participants are not necessarily separate

individuals—i.e., some participants may have attended more than one training session. 13 ADB financing remained unchanged.

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revised MTR estimate); agro-enterprises financed $161.62 million (116.5% of the revised MTR estimate), including financial charges during implementation of $2.60 million; and farmers financed $0.58 million (5.0% of the revised MTR amount).14 Details of project costs by expenditure category and financier are in Appendix 3.

D. Disbursements

19. Under the ADB loan, total disbursements amounted to $73.06 million, or 88.0% of the loan amount (para. 18). 15 At financial closing on 22 September 2017, $9.94 million remained undisbursed and was cancelled. The main reason for the cancellation was the dynamic market situation, which caused some participating enterprises either to proceed without ADB funds or to change how they planned to invest the ADB funds. The first disbursement took place on 20 May 2010 and final disbursement occurred on 22 September 2017. A breakdown of projected and actual annual and cumulative disbursements under the loan is in Appendix 4. Actual cumulative disbursements exceeded projected cumulative disbursements during the first 3 years of project implementation, but then fell behind projected levels from 2012 onwards.

E. Project Schedule

20. The project was designed to be implemented over 5 years from June 2009 to June 2014. The ADB loan was approved on 25 November 2008. The financing agreement date was 3 February 2009. The loan effectiveness date was 19 May 2009. At MTR, it was agreed to extend the date for physical completion from 30 June 2014 to 30 June 2015 and extend the loan closing date from 31 December 2014 to 31 December 2015.16 On 18 November 2015 the Ministry of Finance requested that ADB further extend loan closing date to 31 December 2016. ADB approved the extension on 23 December 2015. The loan closed on 31 December 2016, as per the revised schedule, and the financial closing date was 22 September 2017. The pace of project implementation was adversely affected by a variety of factors (para. 8). These resulted in a shuffling of participating agro-enterprises and/or changes to agro-enterprises’ investment plans, which in turn led to delays resulting from the need to identify and perform due diligence on replacement enterprises. Changes in implementation arrangements during 2014−2016 (para. 23) also resulted in delays in implementation and disbursements.

F. Implementation Arrangements

21. The Ministry of Agriculture was designated as the project executing agency. Within the ministry, the Foreign Economic Cooperation Center was the central project management office (CPMO). Provincial governments were designated as provincial executing agencies and county, district, and municipal governments as implementing agencies. Provincial project management offices (PPMOs) existed at the time of appraisal. An important role of the national and provincial governments was to ensure that participating farmers received the intended project benefits in

14 It was not clear at appraisal what form the contribution of farmers would take. According to the project agreement

(Schedule, para. 19), they were obliged to undertake land improvement works and repay the cost of inputs to participating enterprises. Discussions with provincial project management offices suggest that the low level of farmer financing resulted from a combination of (i) the contribution of farmers being overestimated at appraisal, given that many small-scale farmers would be unable to finance works and inputs; (ii) inputs for production undertaken by farmers on behalf of agro-enterprises being financed by agro-enterprises; and (iii) a failure to record the contribution of farmers to land preparation and inputs.

15 The lower-than-projected disbursement resulted from fewer agro-enterprises participating in the project (para. 10) and changing market conditions causing agro-enterprises to alter investment plans (para. 8).

16 The formal request from the government for changes to project implementation, including a revised loan closing date, was not made until 3 September 2013, almost 1 year after the MTR.

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terms of productivity and income increases through favorable contracts with agro-enterprises. The PPMOs were to be assisted by provincial, municipal, and county agencies (finance bureaus, agriculture bureaus, and environmental protection bureaus). Agro-enterprises were to be responsible for coordination and implementation of activities related to contract farming (production base establishment and/or expansion, processing, and marketing). Several contracting arrangements were already in place at appraisal, which was expected to expedite implementation. County, district, and municipal governments were to provide loans to agro-enterprises ranging from $0.7 million to $8.6 million.

22. The implementation capacity of the institutions and agro-enterprises involved was assessed by ADB to be adequate given their existing staffing levels, incremental staffing plans, and previous experience with externally financed projects and providing financial support to agro-enterprises. All provincial and county agencies and agro-enterprises involved in the project had received annual training on technological improvements, project management, and financial management.

23. The PCR team identified no significant issues related to implementation arrangements, notwithstanding the shuffling of participating agro-enterprises. The MTR mission noted that the project was being implemented in a satisfactory manner, in line with arrangements agreed upon at appraisal, and that cooperation between the CPMO and PPMOs and between PPMOs and provincial government agencies was satisfactory. A subsequent ADB review mission in November 2014 identified delays resulting from (i) the need to revise lending agreements between the Shandong Provincial Department of Finance and county or city bureaus of finance; (ii) in Henan, the withdrawal of three enterprises and the acquisition of one agro-enterprise by another; and (iii) changes in some agro-enterprises’ activities. In 2015, the loan agreement was amended to take account of the reallocation of funds from enterprises withdrawing from the project. ADB approved the reallocation in June 2015 but the Ministry of Finance did not sign the amended agreement until November 2015 to accommodate a further reallocation request from Gansu Province. In 2016, changes were made in domestic implementation procedures after the State Council passed a requirement that agro-enterprises provide a counter guarantee for ADB loan funds to provincial departments of finance. This, and changing market conditions, led some enterprises to withdraw and/or seek alternative sources of finance.

G. Consultant Recruitment and Procurement

24. At appraisal, it was proposed to contract 5 person-months of international and 25 person-months of national experts to: (i) prepare and deliver training (about 50 short courses) to farmers and agriculture technicians in the project area on sustainable agriculture and participatory soil and water management; (ii) support local institutions in Gansu, Henan, and Shandong provinces in collaboration with the training; and (iii) prepare training materials. Consulting services were due to be financed by the SCFTA grant of $350,000, which was subsequently cancelled (para. 16). Cost estimates by financier (Appendix 3) indicate that local governments, agro-enterprises, and farmers financed consulting services. Discussions with the project management offices (PMOs) suggest that “consulting services” included a variety of expenditures (training, office equipment, fees to service providers, etc.) for which no obvious expenditure category was defined at appraisal. PMOs did not record the type and scale of consulting services and training per se.

25. The project involved 217 contracts, of which 89 were for civil works construction and 128 were for the supply of goods and equipment. Of these, 215 were procured by national competitive bidding and two by shopping. All contracts were procured by the PPMOs in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). The summary of physical

8

achievements is in Appendix 11. No changes in the mode of procurement occurred during implementation, and no major issues related to procurement (e.g., packaging of contracts, preparation of bidding documents, evaluation of bids, and contract variations) were reported during implementation.

H. Gender Equity

26. The project gender action plan was implemented satisfactorily. The project addressed gender issues and measures implemented included (i) applying gender equity considerations in selection of project agro-enterprises, (ii) raising of gender awareness, and (iii) gender-awareness technical training, employment, etc. A summary of the gender action plan and achievements is in Appendix 6.

I. Safeguards

27. The project was classified as Category B for environment (Appendix 7). The approach taken for environmental due diligence comprised preparation of: (i) six initial environmental examinations (IEEs) and environmental management plans (EMPs) for six core subprojects; (ii) rapid assessments for 49 noncore subprojects, including screening criteria to identify potential risks; and (iii) a consolidated EMP for the noncore subprojects. The IEE, summary IEEs, and EMPs remained the core reference documents for environmental safeguards throughout project implementation. The PPMOs coordinated overall environmental management for the project. PMOs within counties and cities supervised and coordinated environmental management for each subproject.

28. The EMPs were generally well implemented. Mitigation measures proposed in the subproject EMPs were undertaken effectively. No major adverse environmental effects were caused by project-related construction. During subproject operation, agro-enterprises widely used cleaner energy sources such as gas and electricity instead of coal, as originally proposed, leading to less air pollution. Wastewater treatment facilities were in place and effluent met national wastewater discharge standards. Solid waste from livestock and poultry farms were used as organic fertilizer, and medical waste (from on-site treatment of livestock) was treated by certified agencies. The potential environmental impacts associated with waste emissions and discharge from the livestock and poultry farms were effectively mitigated. The project has created significant environmental benefits in project-area cities and counties. Through interventions in agriculture, the consumption of irrigation water and the use of chemical fertilizers and pesticides have been greatly reduced.

29. The project was considered to have no involuntary resettlement impact. It did not require land acquisition and resettlement and no resettlement plan or resettlement framework was developed. The expansion of agricultural production and processing took place on land that belonged to project beneficiaries. During implementation, 26 agro-enterprises rented 180,264 mu, or 12,018 ha, of land from farmers to be used as production bases. This process was undertaken with the full participation of the farmers concerned, who were fully informed of the proposed land use and were fully engaged in discussions of rental terms. Individual farmers signed the rental agreements or provided letters of authorization for village committees to sign the agreements on their behalf.

30. The project had a limited impact on indigenous peoples. Only 1% of the population in the project area was classified as ethnic minority (Hui), all of whom were concentrated in Zhangjiachuan County in Gansu, where they make up around 70% of the population. Any impacts

9

were expected to be positive. No indigenous peoples’ action plan or framework was developed. All three agro-enterprises operating in Zhangjiachuan County made efforts to provide contract farming, training, and/or employment opportunities for the Hui people.

J. Monitoring and Reporting

31. No problems were encountered in meeting the conditions of loan effectiveness, all of which were achieved before the date specified in the financing agreement.

32. The government complied with the majority of loan covenants. However, the submission of some audited project financial statements was delayed (project agreement section 2.09 [a ii]). Critically, the key requirement for participating agro-enterprises to provide financial statements to PPMOs and ADB (project agreement schedule paras. 15 to 17) was not fully complied with. The PPMOs stated that they had discussed the difficulty of obtaining agro-enterprises’ financial statements with the Foreign Economic Cooperation Center, and that the center had agreed to discuss the issue with ADB. However, ADB did not agree to a change. The PPMOs stated that they were unaware that ADB had not approved the change, and consequently some PPMOs failed to obtain agro-enterprises’ financial statements and submit them to ADB. This did not materially affect project implementation or performance. However, with access to the financial statements the PPMOs may have been able to take preemptive action to support agro-enterprises that were suffering from changing market conditions or were failing to meet their financial ratios. With respect to environmental monitoring (project agreement schedule para. 8), Gansu Province was not able to complete submissions of annual environmental monitoring reports mainly because of the low capacity of the provincial and local PMOs (Appendix 7 Para. 5). A summary of compliance with loan covenants is in Appendix 8.

33. Project design required that the PPMS be established by the Ministry of Agriculture and PPMOs within 6 months of the start of the project. A portion of the SCFTA grant was earmarked to provide support for strengthening the PPMS. The cancellation of the SCFTA grant meant that no such support was provided. The PPMS was intended to incorporate indicators proposed in the DMF to monitor, at minimum: (i) expansion of agro-enterprises’ physical assets (e.g., production bases and processing capacity; (ii) changes in crop and livestock varieties and yields; (iii) types and application rates of fertilizers and agrochemicals; (iv) farm income increases; (v) reduction in poverty incidence, and gender and social development; and (vi) reduction in degraded land. The ADB failed to include several of these indicators (e.g. production-base expansion, crop varieties and yields, and fertilizer application) in the DMF. In general, the PPMS provided timely information on project progress. During the MTR, ADB requested PPMOs to monitor agro-enterprises’ compliance with loan covenants related to the financial ratios specified at appraisal. They were also required to (i) collect data on agro-enterprise investment cash flows to facilitate financial and economic analysis, and (ii) collect detailed data to monitor the project’s impact and outcomes. No such reporting appears to have been done.

III. EVALUATION OF PERFORMANCE

A. Relevance

34. At appraisal, the project was highly relevant to government and ADB goals and strategies in the agriculture sector. It targeted farmers who use traditional agricultural methods to cultivate low-yielding, low-value crops, linking them to markets for higher-value crops through agro-enterprises. The project also gave farmers incentives to diversify, enhance product quality and safety, and adopt improved and environmentally sustainable production techniques. The project

10

remained highly relevant at the time of the PCR. The government’s Thirteenth Five-Year Plan, 2016−2020 continues to promote diversification, private sector involvement, and innovation in agriculture while encouraging links between farmers and agro-enterprises. Issues exist concerning the appropriateness of some targets and indicators included in the DMF at appraisal (para. 6). No indicators were defined for the expansion of production bases or for increased farm productivity (paras. 6 and 33), which were key project objectives at appraisal. These indicators were addressed and rationalized during the MTR. The project is rated relevant.

B. Effectiveness

35. The project achieved the revised outcome targets and indicators (Appendix 1). The off-farm employment target was set at 32,000 additional people employed. At project completion, more than 68,000 people were either directly employed in project-supported agro-enterprises or indirectly employed in other service industries as a result of project-supported investments. The average household income from farming in the project area increased from CNY8,221 in 2009 to CNY20,316 in 2015—an increase of CNY12,095, which substantially exceeded the target increase of CNY1,000. Project-supported agro-enterprises increased their output of value-added products to 629,000 tons in 2016, substantially overachieving the target of 500,00 tons.

36. Although no indicators were defined for production-base expansion or increased farm productivity, the PPMOs reported that by project close, 65,172 ha of production base had been constructed and/or rehabilitated. This equated to 54% of the area expected at appraisal.17 The most likely reasons behind the increases in farm productivity are farmers’ diversification into higher-value crops and the expansion of support services, processing facilities, and access to investment finance under the project. By enhancing contract farming arrangements with agro-enterprises financed under the project, the project strengthened farmers’ access to agricultural extension advice, new technologies and inputs, and market outlets. This facilitated the adoption of (i) improved seeds, varieties, and breeds; (ii) conservation agriculture techniques such as returning crop residues to the soil; (iii) water-saving technologies such as drip irrigation, sprayers, etc., (iv) organic fertilizer and reduced use of chemical fertilizers, pesticides, and herbicides, and (v) advanced post-harvest and processing technologies. Farmers diversified from traditional rain-fed, low-yielding wheat and corn to cultivation of cash crops, herbs, fruit, and vegetables.

37. The CPMO estimates that 8,524 people have been directly employed by project-supported agro-enterprises and at least 60,000 have been indirectly employed in other value-chain entities upstream and downstream of project-supported agro-enterprises. This compares with the target of off-farm employment of 32,000. The project is effective in terms of promoting gender equality. By the end of 2016, 63.8% of the long-term jobs generated by the project were held by women, 43.5% of the staff in the project management offices were female, and 60% of training participants provided by the enterprises were female. The average household income increase significantly exceeded the outcome target increase of CNY1,000. The CPMO estimated that the increase in production of value-added products as a result of the project reached 629,000 tons in 2015, compared with the target of 500,000 tons. At the provincial level, production of value-added crops exceeded the target by 24% in Gansu and by 95% in Shandong but reached only 92% of the target in Henan. Based on data received from 44 agro-enterprises (Appendix 9), the increase in

17 Much of the reduction in area resulted from the withdrawal of agro-enterprises that had planned to develop large

areas of production base. The MTR reported that two Shandong-based agro-enterprises that withdrew had planned to develop 20,000 ha of production base. The MTR also revised the area of production base expected be developed to about 48,700 ha, although this was not officially recorded because the DMF lacked a production-base indicator.

11

revenue from agro-processing was about $490 million per year. Overall, the project is rated effective in achieving the outcome.

C. Efficiency

38. Changing market conditions and the replacement of agro-enterprises selected for participation caused implementation delays. The economic analysis of the project indicates that the indicative incremental economic internal rate of return was 22.7%.18 This compares with an economic internal rate of return of 36.4% estimated at appraisal. Sensitivity analysis indicates that the project is susceptible to minor adverse changes in output and operating cost streams. Details of the analysis are in Appendix 9. The project is rated efficient.

D. Sustainability

39. The sustainability of the project is largely dependent upon the financial sustainability of the agro-enterprises that participated in the project and continue to operate.18 An analysis of the cash flow of 25 agro-enterprises (Appendix 9) indicates that the financial internal rate of return ranged from 2.1% to more than 100%. Only one agro-enterprise had a financial internal rate of return lower than the estimated weighted average cost of capital of 3.1%. Sensitivity analysis indicates that the financial internal rate of return of most agro-enterprises is robust with respect to adverse movements in investment costs and operating costs. Around half are susceptible to a reduction of 10% or less in revenues. An assessment of agro-enterprises’ compliance with required financial ratios indicates that most of the 44 agro-enterprises analyzed met the required ratios throughout 2013−2017 (Appendix 10). It is not possible to assess the sustainability of agricultural support services established under the project (para. 13), as no data were available on their operation at the time of the PCR. The project is rated likely sustainable.

E. Development Impact

40. The original DMF included two impact indicators: (i) average per capita net income of beneficiary farmers increased by 5% per year from 2015 onward, and (ii) the number of poor people in the project area reduced from 538,000 in 2006 to 404,000 by 2020 (with additional targets by province). The CPMO estimates that average per capita income of beneficiary farmers rose from CNY3,357 in 2009 to CNY9,371 in 2015. This equates to an average annual growth rate of 18.7%, significantly above the target of 5% from 2015 onward.19 With respect to poverty, the project was classified as general intervention. It is too early to assess the poverty impact by 2020, but at the time of the PCR, the CPMO estimated that 304,100 people had been lifted out of poverty in the project area. It is not possible to estimate what proportion of this number was directly attributable to the project.

41. The project secured access to markets for farmers in the project area, with associated benefits of stable prices and incomes. More than 320,000 farm households benefited from the project.20 Benefits included contract farming and adoption of water-saving irrigation techniques, conservation agriculture, organic fertilizer, organic pesticides and other advanced technologies. Of the beneficiary households, 200,468 were engaged in contract farming. Higher income coupled with enhanced technical skills and increased production capacity have helped vulnerable and poor

18 The analysis was based on financial cash-flow data provided by agro-enterprises in response to a survey undertaken

for the PCR. Of the 49 agro-enterprises participating in the project, 25 returned data that were considered suitable for use in the analysis.

19 No data were available at the time of the PCR to estimate the increase in average per capita income beyond 2016. 20 Based on a survey of agro-enterprises undertaken during the PCR mission.

12

households escape from and remain out of poverty. Agro-enterprises’ investments in processing facilities, cold storage, warehousing, and related post-harvest infrastructure enhanced value chain links between farmers and consumers and added greater value to farmer’s output products. A summary of physical works and activities completed in each province is in Appendix 11.

42. Gender impacts. Gender-awareness training provided to project management staff and leaders of township and village committees helped increase the participation of women, including ethnic minority women, in project activities, related consultations, and decision-making. Women equally and actively participated in project activities and related training and employment opportunities.

43. Ethnic minority impact. The ethnic minority Hui people equally and actively participated in the project. About 8,000 Hui farm household were directly engaged in partnerships with the three project-supported agro-enterprises in the Hui’s home country in Gansu Province, Zhangjiachuan. This exceeded the 6,000 households expected at appraisal. Average household income from farming increased by CNY11,832, from CNY4,219 to CNY16,051, during 2009–2015. This compares with an average increase of CNY9,343 for Gansu Province as a whole.

44. The project’s development impact is rated satisfactory.

F. Performance of the Borrower and the Executing Agency

45. The government, as the borrower, provided overall supervision of the project through the Ministry of Agriculture and the central and provincial PMOs. Few implementation issues arose (para. 23). However, the lack of an effective PPMS and the failure of the PPMOs to provide agro-enterprises’ financial statements (para. 32) and some of the environment monitoring reports (Appendix 7, para. 5) undermined project monitoring. This, in turn, adversely affected the analysis of project benefits during the MTR and the PCR. The performance of the borrower and executing agency is rated satisfactory.

G. Performance of the Asian Development Bank

46. ADB supervised the project extensively, with an inception mission in July 2009, seven review missions from May 2010 to October 2016, and a consultation mission in December 2017. The MTR took place in September 2012 and the project completion review mission took place in May 2018. ADB changed the project officer and project analyst several times between appraisal and completion, resulting in a lack of continuity in project direction. PPMOs expressed concerns that the processing of project documents, communications, etc. appeared to be inefficient and resulted in delays, and that several layers of approval were required on both the ADB side and the government side. The shortcomings in the preparation of DMF targets suggest that greater diligence could have been applied to finalizing the project design. Listing individual partnerships and agro-enterprises in the loan agreement reduced flexibility and caused delays when agro-enterprises needed to be replaced and funds reallocated. Overall, ADB’s performance is rated satisfactory.

H. Overall Assessment

47. Based on the assessment of the project as relevant, effective, efficient, and likely sustainable, overall the project is rated successful. It is rated relevant because the project is fully aligned with the

13

government’s priority of diversifying the agriculture sector.21 The rating of effective is based on the achievement of the project’s intended outcome and substantial achievement of the output targets. It is rated efficient in light of the efficiency of the investment and the implementation process. It is rated likely sustainable based on the assessed financial sustainability of project-supported agro-enterprises and their ability to sustain project achievements.

Overall Ratings Criteria Rating

Relevance Relevant Effectiveness Effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of Asian Development Bank Satisfactory

Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons

48. The major lessons from the project are: (i) Contract farming linking farmers with dragon-head agro-enterprises and

associated market outlets has significant potential to raise the income of farm households and lift households out of poverty.22

(ii) Mechanisms need to be put in place to expedite changes in implementation that may arise from selected project participants withdrawing from the project because of changing market conditions. For this project, more efficient due diligence of replacement agro-enterprises and faster approval of the resulting changes to financing agreements could have minimized implementation and disbursement delays.

(iii) An ineffective PPMS resulting in project outputs and outcomes not being properly reported risks undermining the success of a project. A monitoring and evaluation system should be used by PPMOs to guide project implementation and identify potential risks to attain project objectives rather than simply record the attainment of numerical output targets.

(iv) Greater emphasis by PPMOs on obtaining financial data of participating agro-enterprises would facilitate performance monitoring and, when accompanied by related advisory support, would possibly pre-empt agro-enterprise withdrawal from the project.

B. Recommendations

49. General recommendations are: (i) Many projects, particularly those in agriculture and natural resources, are faced

with implementation delays in their first year. ADB project designers should take

21 Government of the People’s Republic of China, National Development and Reform Commission. 2015. The

Thirteenth Five-Year Plan for Economic and Social Development of the People’s Republic of China, 2016−2020. Beijing; ADB. 2008. Country Partnership Strategy: People’s Republic of China, 2008–2010. Manila.

22 ADB produced a knowledge product on contract farming on the basis of the Dryland Sustainable Agriculture Project: ADB. 2015. Contract Farming for Better Farmer–Enterprise Partnerships: ADB’s Experience in the People’s Republic of China. Manila.

14

the probability of implementation delays into consideration when phasing and budgeting project activities.

(ii) ADB project designers should ensure sufficient flexibility to accommodate changing market conditions for projects that are implemented through agro-enterprises. Project designers should avoid earmarking specific loan amounts to individual agro-enterprises. This will obviate the need to process time-consuming loan agreement and costs changes in the event one or more agro-enterprises withdraw from the project.

(iii) ADB project designers should identify realistic, specific and attributable indicators for the DMF; broad impact indicators such as “poverty reduction” should be excluded. Outputs listed in the DMF should closely reflect the outputs defined in the report and recommendation of the President. Output indicators should be clearly defined to avoid misinterpretation, and as far as possible should be quantified so that indicators can be easily monitored, and achievements assessed.

(iv) Greater emphasis should be placed by PPMOs on regularly collecting financial statements and monitoring the financial performance of sub-borrowers during project implementation, especially when collecting financial statements is covenanted. Such monitoring may be used to ensure ongoing sub-borrower compliance with covenanted financial ratios. Consulting services may be engaged by ADB on an intermittent basis to monitor the financial performance of participating private sector entities and preempt issues that may lead to their failure or withdrawal from a project. Project management staff do not generally have the time or capacity to handle financial monitoring.

(v) For gender action plans, it is recommended that (a) ADB starts monitoring implementation as early as possible to support project managers in effectively using gender consultants; and (b) project managers assign gender focal points to build capacity of implementing agencies and take charge of gender action plan implementation.

50. Future monitoring. It is recommended that the Henan provincial government and/or local governments continue to monitor the established agricultural product quality and technology transfer centers over the long term. Monitoring should ensure that they are properly maintained and remain operational to deliver high-quality testing and training. 51. Covenants. It is recommended that the covenants in the loan and project agreements for operation of project facilities be maintained in their existing form during operation.23 52. Further action or follow-up. To ensure project sustainability, it is recommended that the Henan, Shandong, and Gansu provincial governments and/or local governments (i) assess the project’s effect on employment in project-supported agro-enterprises and determine its impact on socioeconomic development and poverty reduction, and (ii) continue to promote sustainable farming practices that address land degradation and water conservation. 53. Timing of the project performance evaluation report. It is recommended that a performance evaluation review be conducted in 2022 or later. This will allow proper evaluation of the project’s impact on economic development and poverty reduction based on accumulated statistics.

23 Project agreement, Schedule, Para 6.

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators and Targets Project Achievementsc

At Appraisala Revised At Appraisala Revisedb

Impact Reduced rural poverty in Gansu, Henan, and Shandong Provinces from sustainable use of land and water resources

Impact (No change)

Average per capita net income of beneficiary farmers increased by 5% per year from 2015 onward Number of poor people in the project area reduced from 538,000 in 2006 to 404,000 by 2020; and in provincial project areas from 132,000 to 110,000 in Gansu, from 354,000 to 284,000 in Henan, and from 52,000 to 10,000 in Shandong

(No change) (No change)

Average annual per capita net income of beneficiary farmers during 2009 to 2015 increased by 18.7% from CNY3,357 in 2009 to CNY9,371 in 2015 Number of poor people in the project area reduced by 304,100 between 2006 and 2017, including 81,635 in Gansu, 176,665 in Henan and 45,800 in Shandong

Outcome Increased agricultural productivity through adoption of sustainable farming practices in the project area

Outcome (No change)

Off-farm employment increased by about 34,000 by 2013 Average household income from farming increased by CNY1,000 by 2013 Farmland degradation reduced by 10% per year over the project period Soil quality (increased organic matter and fertility) improves by 10%–15% by 2013 Incremental value-added products from agro-enterprises not less than 500,000

Off-farm employment increased by about 32,000 by 2015 Average household income from farming increased by CNY1,000 by 2015 (Deleted) (Deleted) Incremental value-added products from

By 2015, 8,524 people directly employed in project-supported agro-enterprises, of which 59% are women. Around 40,000 households rented land to project-financed agro-enterprises By 2015, at least 60,000 people indirectly employed off-farm as a result of project-supported investments Average household income from farming increased by CNY12,095 from CNY8,221 in 2009 to CNY20,316 in 2015 Value-added production 629,000 tons in 2016, of which:

16 Appendix 1

Design Summary Performance Indicators and Targets Project Achievementsc

At Appraisala Revised At Appraisala Revisedb

tons per year by 2013 (50,000 tons in Gansu, 300,000 tons in Henan, and 150,000 tons in Shandong)

agro-enterprises not less than 500,000 tons per year by 2015

Gansu: 62,000 Henan: 274,600 Shandong: 292,400

Outputs 1. Agro-enterprise and farm partnership improvements a. Enhanced agricultural production b. Private support services to farmers

Outputs 1. Improved agro-enterprise and farmer partnership and support services to farmers (Deleted) (Deleted)

At least 29 partnerships operating profitably in financially sound positions by 2013 (including about seven in Gansu, 12 in Henan, and 10 in Shandong), and confirmed to use environmentally sustainable farming and industrial technologies At least 600,000 farm households (about 128,000 in Gansu, 218,000 in Henan, and 254,000 in Shandong) and processing workers benefiting directly from the partnerships by 2013 At least three new extension and technology transfer centers established in Henan, and supporting appropriate farming systems by 2011

At least 25 partnerships operating profitably in financially sound positions by 2013 (including about seven in Gansu, nine in Henan, and nine in Shandong), and confirmed to use environmentally sustainable farming and industrial technologies At least 600,000 farmers (about 128,000 in Gansu, 218,000 in Henan, and 254,000 in Shandong) and processing workers benefiting directly from the partnerships by 2015 At least three new extension and technology transfer centers established in

By 2013, 27 partnerships were operating profitably and in sound financial positions. At project closing in 2016, 27 partnerships across 26 counties involving 49 agro-enterprises were operating. By province: Gansu: seven counties, 28 agro-enterprises; Henan: 12 counties, 12 agro-enterprises; Shandong: seven counties, nine agro-enterprises. Of 44 agro-enterprises surveyed for the PCR, 43 returned a profit in each year from 2013 to 2017. One involved in machinery manufacture showed a loss in 2017 as a result of declining demand. Most of the 44 agro-enterprises met covenanted financial ratio criteria, Details are in Appendix 10. By 2015, 672,800 farmers (179,700 households) engaged in agro-enterprise partnerships, of which: Gansu: 172,100 farmers (44,000 households) Henan: 200,700 farmers (61,000 households) Shandong: 300,000 farmers (74,700 households) Three centers established in 2011 in Fudamei, Zhecheng and Zhengzhou in Henan Province

Appendix 1 17

Design Summary Performance Indicators and Targets Project Achievementsc

At Appraisala Revised At Appraisala Revisedb

At least two organic fertilizer blending facilities established or expanded in Henan and Shandong, operating in a financially and environmentally sustainable manner by 2010 At least one expanded farm machinery plant and 30 service stations established in Henan by 2011 At least one seed production center established and in operation in Shandong by 2011 At least three agricultural information centers operating in Henan and Shandong by 2011 At least one new agricultural product quality testing center established and operating in Henan by 2012 At least four expanded wholesale fruit and vegetable markets established and operating in Gansu and Henan by 2011

Henan, and supporting appropriate farming systems by 2013 At least two organic fertilizer blending facilities established or expanded in Henan and Shandong, operating in a financially and environmentally sustainable manner by 2013 At least one expanded farm machinery plant and 30 service stations established in Henan by 2013 At least one seed production center established and in operation in Shandong by 2013 At least three agricultural information centers operating in Henan and Shandong by 2013 At least one new agricultural product quality testing center established and operating in Henan by 2013 At least four expanded wholesale fruit and vegetable markets

One organic fertilizer mixing plant established in Shandong in 2011 One farm machinery plant and 30 service stations established in Henan in 2011 One seed production center established and in operation in Shandong by 2013 Two agricultural information centers operating by 2011, one in Henan and one in Shandong One agricultural product quality testing center established and operating in Henan in 2012 Two markets not funded by the project established at Gangu (Gansu Province) and Zhechang (Henan Province) serving project-

18 Appendix 1

Design Summary Performance Indicators and Targets Project Achievementsc

At Appraisala Revised At Appraisala Revisedb

At least four farmer associations expanded in Henan and Shandong by 2012

established and operating in Gansu and Henan by 2013 At least four farmer associations expanded in Henan and Shandong by 2013

area households and agro-enterprises By 2013, two farmer associations expanded in Anyang (Henan Province), one established in Zhecheng (Henan Province), and one established in Gaomi (Shandong Province)

2. Project Support and Management a. Public sector support to farmers b. Demonstration of sustainable farming practices c. Project management

2. Enhanced public support to farmers and project management

Training to cover about 66,200 farm households, with up to 80,000 farmers trained annually during 2011–2013 National, provincial, and county governments provide risk mitigation support to farmers in the event of natural disasters About 500 farmers trained in sustainable farming practices that address land degradation and water conservation using Spanish Cooperation Fund for Technical Assistance PMOs established and operating in each province and county Project performance and monitoring system operating effectively Activities prepared, reviewed, and approved consistent with criteria

Training to cover about 66,200 farm households during 2011–2014 (Deleted) (Deleted) (No change) (No change) (No change)

68,000 participantsd trained between 2011 and 2014, of which: Gansu: 13,703 Henan: 21,087 Shandong: 33,210 PMOs were already established and operating at the time of appraisal Project performance and monitoring system operational but not fully effective in respect of provision of project performance data. Refer to main text for discussion Activities implemented generally in accordance with criteria. Refer to main text for discussion.

MTR = midterm review, PMO = project management office.

Appendix 1 19

a As indicated in: ADB. 2008. Report and Recommendation of the President to the Board of Directors for the Proposed Loan and Administration of Grant People's Republic of China for Dryland Sustainable Agriculture Project. Manila.

b Based on revisions following midterm review (refer to main text paras. 6 and 8). c. As of project closing September 2017, unless otherwise stated. d A participant is defined as a person attending a training session. Participants are not necessarily separate individuals. Some people may have attended more than

one training session. e Farmer’s per capita income data was not available from PMO or Government statistics.

20 Appendix 2

PROJECT COST AT APPRAISAL AND ACTUAL ($ million)

Appraisal Estimate Actual

Item Foreign

Exchange Local

Currency Total Cost Foreign

Exchange Local

Currency Total Cost

A. Investment Costs 1. Agro-enterprise and farm partnership

Improvements 0.00 171.22 171.22 0.00 235.54 235.54 2. Project support and management 0.00 9.08 9.08 0.00 0.11 0.11

B. Contingencies 0.00 10.87 10.87 0.00 0.00 0.00 C. Financing Charges During Implementation 0.00 13.52 13.52 0.00 2.60 2.60 Total 0.00 204.69 204.69 0.00 238.25 238.25

Source: Asian Development Bank estimates.

Appendix 3 21

PROJECT COST BY FINANCIER

Table A3.1: Project Cost at Appraisal by Financier ($ million)

ADB Spanish Funda

National Governmentb

Local Governmentsc Agro-enterprises Farmers Total

Amount ($ million)

% of Cost

Category

Amount ($

million)

% of Cost

Category

Amount ($

million)

% of Cost Categ

ory

Amount ($

million)

% of Cost

Category

Amount ($

million)

% of Cost

Category

Amount ($

million)

% of Cost Categ

ory $

million

A. Investment Costsd 1. Works 43.09 54.88 0.00 0.00 0.00 0.00 1.08 1.38 26.32 33.52 8.03 10.23 78.52 2. Goods 39.91 48.45 0.00 0.00 0.95 1.15 7.73 9.38 28.22 34.26 5.57 6.76 82.38 3. Start-up costs 0.00 0.00 0.00 0.00 0.05 0.17 0.00 0.00 29.72 99.83 0.00 0.00 29.77 4. Consulting services 0.00 0.00 0.35 70.00 0.15 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.50

Total Base Costs and Contingencies

83.00 43.42 0.35 0.18 1.15 0.06 8.81 4.61 84.26 44.08 13.60 7.11 191.17

B. Financial Charges during Implementation

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 13.52 100.00 0.00 0.00 13.52

Total Project Costs (A+B) 83.00 40.55 0.35 0.17 1.15 0.56 8.81 4.30 97.78 47.77 13.60 6.64 204.69 % Total Project Cost 41% 0.00 1% 4% 48% 7% 100%

ADB = Asian Development Bank. a Spanish Cooperation Fund for Technical Assistance. b Figures for national government are from the project administration manual (Table A7.4), which provides the breakdown by expenditure category. The total differs from

that provided in the summary financing plan in both the report and recommendation of the President and the project administration manual, which indicate a total of $0.90 million.

c Provincial and county governments. As with national government, the total of detailed cost by expenditure category differs from that in the summary financing plan, which has a total of $9.01 million.

d Includes contingencies. Available cost estimates by financier at appraisal do not separate out contingencies. Note: Figures may not sum due to rounding. Source: ADB.

22 Appendix 3

Table A3.2: Project Cost at Completion by Financiera

($ million) ADB

National and Local Government Agro-enterprises Farmers Total

Amount

% of Cost Category Amount

% of Cost Category Amount

% of Cost Category Amount

% of Cost Category

A. Investment Costsb 1. Works 41.52 31.34 0.27 0.20 90.16 68.04 0.55 0.42 132.50 2. Goods 31.54 34.98 0.21 0.23 58.43 64.79 0.00 0.00 90.18 3. Start-up costs 0.00 0.12 4.91 2.41 94.48 0.02 0.61 2.55 4. Consulting services 0.00 2.39 22.92 8.02 76.93 0.01 0.15 10.42

Total Base Costs and Contingencies

73.06 31.00 2.99 1.27 159.02 67.48 0.58 0.25 235.65

B. Financial Charges during Implementationc

0.00 0.00 0.00 0.00 2.60 100.00 0.00 0.00 2.60

Total Project Costs (A+B) 73.06 30.67 2.99 1.26 161.62 67.83 0.58 0.25 238.25 % Total Project Cost 31% 1% 68% 0.00 100%

ADB = Asian Development Bank. a The Spanish Cooperation Fund for technical assistance grant was cancelled and is not included in the table. b Includes contingencies. c Includes interest and commitment charge. Source: ADB.

Appendix 4 23

DISBURSEMENT OF ADB LOAN PROCEEDS

Table A4.1: Annual and Cumulative Disbursement of ADB Loan Proceedsa ($ million)

Annual Disbursement Cumulative Disbursement

Yeara Amount ($ million) % of Total

Amount ($ million) % of Total

2010 12.05 16.5 12.05 16.5 2011 23.46 32.1 35.51 48.6 2012 9.51 13.0 45.02 61.6 2013 8.11 11.1 53.13 72.7 2014 5.10 7.0 58.22 79.7 2015 10.50 14.4 68.72 94.1 2016 4.71 6.4 73.43 100.5 2017 (0.37) (0.5) 73.06 100.0 Total 73.06 100.0 ADB = Asian Development Bank. a Includes disbursements to advance accounts. Source: ADB.

Table A4.2: Projected Annual and Cumulative Disbursement of ADB Loan Proceeds

($ million) Annual Disbursement Cumulative Disbursement

Year Amount ($ million) % of Total

Amount ($ million) % of Total

2010 12.05 14.5 12.05 14.5 2011 7.00 8.4 19.05 23.0 2012 11.00 13.3 30.05 36.2 2013 26.00 31.3 56.05 67.5 2014 26.95 32.5 83.00 100.0 2015 0.00 - 83.00 100.0 Total 83.00 100.0 ADB = Asian Development Bank. Source: ADB.

24 Appendix 4

Figure A4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds ($ million)

Source: Asian Development Bank.

10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

2010 2011 2012 2013 2014 2015 2016 2017

$ m

illio

n

Projected Annual Disbursement

Actual Annual Disbursement

Projected CumulativeDisbursement

Actual Cumulative Disbursement

Appendix 5 25

CONTRACT AWARDS OF ADB LOAN PROCEEDS

Table A5.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Year Amount ($ million) % of Total

Amount ($ million) % of Total

2010 30.45 41.7 30.45 41.7 2011 14.84 20.3 45.28 62.0 2012 12.32 16.9 57.61 78.8 2013 0.00 - 57.61 78.8 2014 0.00 - 57.61 78.8 2015 10.98 15.0 68.59 93.9 2016 4.48 6.1 73.06 100.0 2017 0.00 - 73.06 100.0 Total 73.06 100.0 ADB = Asian Development Bank. Source: ADB.

Table A5.2: Projected Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Year Amount ($ million) % of Total

Amount ($ million) % of Total

2010 37.60 45.3 37.60 45.3 2011 12.00 14.5 49.60 59.8 2012 12.00 14.5 61.60 74.2 2013 11.40 13.7 73.00 88.0 2014 10.00 12.0 83.00 100.0 Total 83.00 100.0 ADB = Asian Development Bank. Source: Asian Development Bank.

Figure A5.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Source: Asian Development Bank.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

2010 2011 2012 2013 2014 2015 2016 2017

$ m

illio

n

Projected Annual ContractAwards

Actual Annual Contract Awards

Projected Cumulative ContractAwards

Actual Cumulative ContractAwards

26 Appendix 6

SOCIAL DIMENSIONS AND SAFEGUARDS

A. Introduction

1. The project was approved (November 2008) and became effective (May 2009) before Asian Development Bank’s Safeguard Policy Statement became effective in June 2009. The project did not have land acquisition and resettlement and had no negative social impact. Farmers, especially the poor in the project area, benefited from the project in various ways.

2. By enhancing and expanding contract farming arrangements with agro-enterprises financed under the project, the project strengthened farmers’ access to agricultural extension advice, new technologies and inputs, and market outlets. This facilitated the adoption of (i) improved seeds, varieties, and breeds, (ii) conservation agriculture techniques such as returning crop residues to the soil, (iii) water-saving technologies such as drip irrigation, sprayers, etc., (iv) organic fertilizer which reduced application of chemical fertilizers, pesticides, and herbicides, and (v) advanced post-harvest and processing technologies. Increases in farm productivity are likely to have been achieved as a result of the project’s approach to addressing constraints in production, the provision of support services, processing, and access to investment finance.

3. Benefitting from the partnerships, the farming patterns diversified from traditional rain-fed, low-yielding wheat and corn production to cultivation of cash crops, herbs, fruit, vegetables, etc.

4. Farmers’ income increases are not only from the improved farming systems and increased productivities, also from renting farmland to the project enterprises and engagement in the project created employment opportunities.

5. In total, 329,479 farmer households with 1,248,030 people benefited from the project in various ways, such as secured market through contract farming, application of water saving technologies, training, employment, and renting land, as shown in the Table A6.1. Of which, 53.7% are women, and 28.7% were poor people.

Table A6.1: Project Beneficiaries (2010–2016)

Beneficiary Area

Beneficiary Households

(No.)

Beneficiaries

Total (person)

Women (%) (person)

The Poor (%)

A. Contract farmers 200,468 773,806 50.9 (393,989)

28.4

B. Raw material suppliers of non-contract farmers 72,829 270,108 56.5 (152,731)

21.3

C. Farmers received services from the project enterprises

Fine seeds, breeding 50,981 198,693 44.4 (88,161)

27.1

Conservation agriculture technologies 1,200 4,100 51.0 (2,091)

15.7

Water-saving technologies 55,705 218,763 50.9 (111,249)

25.0

Organic fertilizer 61,347 238,934 52.6 (125,616)

26.6

D. Farmers trained by the project enterprises 73,506 92,665 60.0 (55,566)

28.3

Appendix 6 27

E. Household renting land to the project enterprises 51,534 198,921 60.2 (119,845)

39.8

F. Employment opportunities created by the project operation

Long-term farmer workers 4,648 5,194 63.8 (3,315)

30.4

Short-term farmer workers 5,473 5,513 65.9 (3,635)

29.8

G. Farmers worked for the project construction 6,307 6,348 36.1 (2,292)

29.2

Total 329,479 1,248,030 53.7 (669,879)

28.7

Sources: Surveys and interviews with agro-enterprises by national evaluators during April-May 2018.

B. Land Use and Resettlement

6. The project had no involuntary resettlement impact. It did not require land acquisition and resettlement. The expansion of agricultural production and processing took place on existing land or land belonging to project beneficiaries. During 2010−2016 of the project implementation, 26 project agro-enterprises rented 180,264 mu (equivalent to 12,018 hectares (ha)) of farmland from 51,534 farmer households to be used as production bases. This process was undertaken with full participation of the farmers concerned, who were fully informed of rental terms, including fees and modes of payment. Land use agreements were voluntary and signed by individual farmers or by village committees on behalf of individual farmers who provided letters of authorization and certified by the local governments.

7. Annual rent rates of the land vary from CNY500 to CNY1,000 per mu according to the land quality, land location, and year of rent, which were higher than net income of cultivating traditional crops, such as wheat and corn. The rents were paid in cash or through banks and on yearly basis or every 2−3 years. The enterprises made their employment opportunities first available to farmers who rented land to the enterprises, that is, farmers rented land to the enterprise could get double benefits: land rental rate and wages of working for the enterprises. Long-term workers were paid monthly at about CNY3,000−CNY6,000, and short-term workers were paid daily or every half day by cash at about CNY60−CNY300.

C. Ethnic Minority Consideration

8. Only 1% of the population in the project area was classified as ethnic minority (Hui). They were all concentrated in one project county, Zhangjiachuan County, in Gansu, where Hui people make up around 70% of the total population. The project was considered to have no negative impact on the Hui people. No indigenous peoples’ action plan or framework was developed.1 During the project implementation, all the three project agro-enterprises operating in the county have made great efforts in expanding contract farming with the Hui people and providing training and employment opportunities to the Hui people. During 2010−2016 of the project implementation, additional 8,000 Hui farmer households have made contracts with the enterprises, 1,800 Hui farmers participated in the project-provided trainings, and 125 Hui farmers (97.6% of the total) engaged in project operations. Average farmer household income from farming increased by

1 The project was approved under a previous Asian Development Bank Indigenous Peoples Policy (1998) that did not

require a separate plan or framework for non-category A projects.

28 Appendix 6

CNY11,832 from CNY4,219 in 2009 to CNY16,051 in 2015, which was higher than the Gansu average of CNY9,343.

D. Gender Equality Promotion

9. The project gender action plan was implemented satisfactorily. The project addressed gender issues and implemented relevant measures, including (i) application of gender equity considerations in selection of the project agro-enterprises, (ii) gender-awareness raising, and (iii) gender-aware technical training, employment, etc. By 2016, of the total 5,194 long-term jobs generated by the project, 63.8% were taken by women; 60% of 92,665 participants of trainings provided by the enterprises are women; and 43.5% of the total 46 staff members in the project management offices (PMO) are women. The figures are all higher than the targets.

E. Poverty Reduction

10. Benefitting from the farmer-enterprises partnerships, traditional wheat-corn cropping system has largely switched to high value-added cash cropping system, such as greenhouse vegetables, asparagus, mushroom, grapes, gingers, Chinese yams, detoxification sweet potato, peanuts, herbs, hemp, and so on. Farm productivities increased, and favorable prices were secured by farmer-enterprise partnerships. For example, Furen Company in Henan Province additionally contracted 13,100 mu (equivalent to 873 ha) of wheat-corn farmland for producing Chinese herbs which were further processed as Chinese medicine. The Furen Company provided technical support to the contract farmers and bought back the herbs at a price that is higher than market price by 3%. Net income per ha of Rabdosia rubescens (a Chinese herb) was CNY43,500 in 2016, much higher than net income of CNY8,250 per ha of wheat plus corn in the same area the same year. Contract farming covered 1.22 million mu (81,459 ha) of farm land in 2016,2 which was cultivated by 200,468 households. Of these, 28.7% were poverty households. The central PMO estimates that the increase in production of value-added products, as a result of the project, reached 629,000 tons by 2015, higher than the target of 500,000 tons.

11. By 2016, of the 5,194 farmers directly employed by the project-supported enterprise, 30.4% were poor. Of the 60,000 farmers indirectly employed in other value-chain entities upstream and downstream of project-supported agro-enterprises, at least 30% were poor.

12. It was from sample survey of 413 households in 2016, that average per capita income in the project area increased by CNY6,014 from CNY3,357 in 2009 to CNY9,371 in 2015. It was estimated by the project PMO based on sample households survey that about 340,000 poverty population in the project were lifted out of poverty by 2015.

F. Consultation and Participation

13. The project engaged a large number of rural households in various ways, especially in contracting farming. All households involved were consulted during project preparation and implementation. The success of the project highly depended on the effective participation of households. No constraint was placed on the poor, women, ethnic minority people and the other vulnerable farmers to access and participate in the project activities.

2 This differs from farmland rented from rural households by agro-enterprises. The right of use of contracted (rather

than rented) farmland remains with farmer households.

Appendix 6 29

G. Conclusions and Lessons Learned

14. The project made great inclusive social impacts in cropping system shift from wheat-corn domination to diversify crops, increased productivity and thus incomes of poor, ethnic minority people, and other households. Market and secured price are crucial for income generation and for poverty reduction. Farmer and enterprise partnerships played an irreplaceable role. Strengthening consultation and participation of women, poor, and ethnic minority much facilitated the inclusiveness.

30 Appendix 6

Table A6.2: Implementation of Gender Equality Activities and Targets

(As of 31 December 2016)

Objectives Activities and Targets Results

1. Provision of Technology, Advice and Training, Information, Markets, and Employment

Promote gender awareness. Campaigns, instituted by the PMOs, implementing agencies, agro-enterprises, township governments, and village committees to provide women with information on opportunities for access to technology, advice and training, information, markets, and employment opportunities.

Done. The project conducted campaigns to

provide women access to technology, advice and

training, information, markets, and employment

opportunities.

Provide employment opportunities. At least 40% of employment opportunities generated by the project should be provided to women. This will be achieved by participating agro-enterprises

Done. As shown in Table A6.1, over 60% of the

employment opportunities were taken by women.

Train and provide technology for sustainable farming, quality management, and general agribusiness understanding.

Training programs implemented by agro-enterprises and government agriculture support services will target women trainees. The county agriculture bureaus should provide special training and guidance to women farmers involved in the project activities.

Done. As shown in Table A6.1, 60% of the

farmer trained are women.

2. Project Partners Capacity Enhancement

Strengthen advisory services and the capacity of training providers.

Government agencies are to strengthen the gender-awareness of advisory service providers. Training may include the participation of local branches of the All-China Women’s Federation.

Done. Raising gender-awareness was provided

to the advisory service providers, implementation

agencies, relevant government line agencies,

and farmers.

3. Project Management and Implementation Support

Conduct gender-disaggregated baseline survey, monitoring, and evaluation.

Gender-sensitive indicators are to be included in the project performance management system, especially in areas such as access to technology, advice, training, markets, employment and income, and women’s representation in decision-making. The PMOs will monitor the indicators periodically and appropriately.

Done. Gender-sensitive indicators are included

in the project performance management system.

The PMOs monitor the indicators.

Include participation of women in project management and implementation to ensure balanced access to project resources.

Adequate staffing in the PMOs will target a minimum of 20% women. A person with experience in gender and development will be part of each PMO.

Done. As shown in the DMF, over 40% of PMO

staff are women. Each PMO has a person with

experience in gender and development.

DMF = design and monitoring framework, PMO = project management office. Source: ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grant to the People's Republic of China: for the Dryland Sustainable Agriculture Project. Manila.

Appendix 7 31

ENVIRONMENTAL SAFEGUARDS

A. Categorization and Due Diligence

1. The project was classified as Category B for environment and was prepared under Asian Development Bank’s (ADB) former Environmental Assessment Guidelines (2003), which was succeeded in 2009 by ADB’s Safeguard Policy Statement. To accommodate the large number of subprojects, the approach taken for environmental due diligence comprised preparation of (i) six initial environmental examinations (IEE) for six core subprojects (two in Gansu Province, two in Henan Province and two in Shandong Province), (ii) rapid assessments for 49 noncore subprojects, including screening criteria to identify potential risks, and (iii) six environment management plans (EMP) for each of the six subprojects, and a consolidated EMP for the noncore subprojects. The EMPs described the institutional and contractual arrangements, project mitigation measures, monitoring and reporting and a summary IEE of the major findings and EMPs. The IEEs and EMPs were prepared based on domestic environmental assessments, supplemented by technical assessments and stakeholder consultations by safeguard consultants during project preparation. The IEEs, summary IEE, and EMPs remained the core reference documents for environmental safeguards throughout project implementation. In 2015 (1 year before project completion), the summary IEE was updated to reflect the withdrawal of some subprojects and addition of others.

B. Institutional Setup, Support, and Capacity Development

2. Institutional arrangements for environmental safeguards were defined in the EMPs. Staff teams for the provincial project management offices (PMO) and local PMOs were each required to include at least one environment officer and one social officer. Most or all local PMOs (19 of 27 in Gansu Province, 10 of 11 in Henan Province, and all seven in Shandong Province) also engaged construction supervision companies (CSC), whose mandate included environmental supervision. No environmental support was provided through the loan consulting services. Capacity building was conducted by the CSCs and local environment protection bureaus (LEPB) and focused on construction site management, health, and safety. During project implementation, almost all (42 of 44) local PMOs facilitated at least one training session on environmental management, health and safety, and 21 conducted between three and 20 training sessions. Overall, the project institutional arrangements for environment safeguards had moderate success: (i) safeguard officers were assigned to the provincial PMOs and local PMOs as required, although in practice many had limited safeguard qualifications and experience; (ii) most provincial and local PMOs safeguard officers were only assigned on a part-time basis; and (iii) the CSCs generally lacked dedicated environmental engineers. These challenges are common to many donor-funded projects in the People’s Republic of China (PRC).

C. Environment Safeguard Measures

3. Safeguard measures included soil erosion control, water quality protection, air quality protection, and occupational and community health and safety at construction sites. The environmental assessments during project preparation concluded that the environmental impacts of construction activities would be localized and temporary, and this was largely confirmed during project implementation. During project completion report preparation, interviews were conducted to 50 residents (mainly farmers) near the subproject sites, field inspections of completed subprojects were implemented, and environmental completion audit reports and LEPB approval documents were reviewed. It was found that: (i) all residents interviewed were satisfied with the mitigation measures implemented by contractors; (ii) enterprises that had originally proposed to use coal boilers had instead installed gas or electric boilers (cleaner energy sources with less

32 Appendix 7

contribution to air pollution); (iii) wastewater treatment facilities were in place and operational; (iv) solid waste from livestock and poultry farms is being used as organic fertilizer; (v) medical waste (on-site treatment of livestock) is being treated by certified agencies; and (vi) air quality emissions during project implementation and operation meet the relevant PRC emission discharge standards. These findings confirmed the assessments in the summary IEE i.e. that the potential environmental impacts associated with waste emissions and discharge from livestock and poultry farms could be effectively mitigated.

D. Monitoring

4. Monitoring for environment safeguards comprised: (i) compliance monitoring (non-quantitative visual inspection of construction activities to confirm compliance with the EMPs) conducted by the CSCs, supported by dialogue with LEPBs, local PMOs, and contractors; and (ii) ambient monitoring (quantitative monitoring of air, water, and noise parameters) conducted by LEPBs. During project implementation, 22 of 27 LEPBs in Gansu Province, 10 of 11 LEPBs in Henan Province, and four of seven LEPBs in Shandong Province, conducted random inspections of subproject construction sites. A total of 24 of 27 local PMOs in Gansu, and all local PMOs in Henan and Shandong conducted site visits from once a year to twice a month. These arrangements had moderate success: (i) compliance monitoring was integrated in the work contracts and arrangements of the CSCs as required, but in practice the CSCs lacked dedicated environmental engineers and this limited the thoroughness of field inspections; and (ii) ambient monitoring was conducted throughout the project, and provided a baseline of environmental data, but in general, the timing, frequency, and locations of the monitoring reflected pre-existing routines by the LEPBs and were not tailored to measure project impacts.

E. Timing and Quality of Environment Monitoring Reports

5. The submission of project environment monitoring reports provided to ADB was inconsistent during the project implementation and reporting quality was relatively low. The provision of annual environment monitoring reports by the PPMO to ADB was a requirement under the project agreement, but reports were largely submitted on an annual basis. Between January 2011 and December 2015, two provincial PMOs (for Henan and Shandong provinces) submitted environment monitoring reports for January to June 2011, July 2011 to June 2012, July 2012 to June 2013, and January to December 2015; and one provincial PMO (for Gansu Province) submitted reports for 2010, 2011–2012, 2013, and 2016. Reports varied widely in quality and content, from relatively detailed and systematic description of activities, to documents with almost no original data. These issues were due to: (i) low capacity of the provincial and local PMOs to prepare technical environment reports, including limited experience and/or available time of staff assigned to environment safeguards; (ii) limited provincial PMO capacity to consolidate reports from the large number of local PMOs; and (iii) the limited authority (as reported by them) of the provincial PMOs to compel local PMOs to provide reports on time. Time-bound corrective actions were included in the memorandum of understanding of ADB review missions to resolves these issues, but most were not implemented. The issues discussed here reflect a fundamental challenge of donor-funded projects which involve many subprojects: large, multi-location projects are favored (for reasons of efficiency) but required high levels of capacity in management, coordination, communication, and technical skills, which are often limited at the subproject level. These findings reinforce the need for more comprehensive consulting services for projects with many subprojects.

F. Grievance Redress Mechanism

6. A project-specific grievance redress mechanism (GRM) was established by each provincial PMO and as per EMP requirements, included time-bound steps to identify, report, and

Appendix 7 33

resolve grievances related to environmental or social safeguards. The importance of the GRM and for stakeholder consultation during construction was also emphasized during ADB review missions. Prior to construction activities, communities and other local stakeholders were consulted by the local PMOs and contractors to discuss the scope of works and confirm the dates and duration of construction. During project implementation, 19 enterprises conducted public consultations to seek comments on the environmental mitigation measures implemented. Consultations were held through community meetings, interviews, and questionnaires. Participants were found to be satisfied with the mitigation measures taken. No grievances were reported during project implementation.

G. Costs of Environment Management Plan Implementation

7. The costs of EMP implementation were supported by domestic funding rather than the loan (as is common for ADB-funded projects in the PRC) through the provincial PMOs (for overall supervision and GRM), contractors (for mitigation measures), CSCs (for compliance monitoring) and LEPBs (for ambient monitoring). During project completion report preparation, 36 enterprises provided environmental cost information for mitigation measures. The actual expenses for the implementation of the EMP mitigation measures was CNY28.68 million ($4.48 million), considerably higher than the costs estimated during project preparation [CNY11.33 million ($1.77 million)]. This was reported to be mainly due to: (i) the cost of conversion from coal-boilers to gas or electric boilers; and (ii) some enterprises took the opportunity to construct wastewater treatment facilities with higher treatment capacities than required by the specific subprojects, in order to also service existing facilities. For annual ambient monitoring, the cost for 36 enterprises was CNY2.53 million ($0.40 million). For compliance inspection, institutional strengthening, and training, the actual costs could not be estimated, due to lack of official records and changes over time of environmental officials involved in the project.

H. Environmental Benefits

8. Post-project surveys were conducted by the LEPBs to assess the environmental benefits of the project. It was found that: (i) use of chemical fertilizers had reduced by 17%-60 % in 12 of 15 counties; (ii) pesticide use had decreased by 7%--33% in 11 of 12 counties; (iii) soil organic content had increased by 15%; and (iv) irrigation water consumption was reduced by 8%-54% in 13 of 15 counties. These results conformed with the IEE assessments, which anticipated that the overall environmental impacts of the project would be positive, especially for the agriculture-related interventions.

Indicators of Environmental Improvement Resulting from the Dryland Sustainable Agriculture Project

Soil Organic Content (%)

Irrigation Water (m3/mu)

Chemical Fertilizer (kg/mu)

Pesticide (CNY/mu)

Province City/County Without With Without With Without With Without With

Gansu Tianshui 1.17 1.35 65 50 8 6 Henan Anyang 1.91 2.87 200 100 100 40 50 40 Dancheng 13.00 17.00 7 6 60 50 0 0 Linying 2.00 5.00 200 140 100 90 80 40 Luyi 66.00 33.00 160 100 30 20 0 0 Shanxian 0.50 0.60 10 12 50 40 15 10 Ruzhou 2.00 3.00 240 200 150 100 60 50 Changge 0.60 1.00 15 10 30 30 70 65 Zhecheng 2.20 3.00 380 350 120 100 50 45

34 Appendix 7

Soil Organic Content (%)

Irrigation Water (m3/mu)

Chemical Fertilizer (kg/mu)

Pesticide (CNY/mu)

Province City/County Without With Without With Without With Without With Zhengzhou 1.30 2.60 250 190 140 80 120 60 Luoyang 0.50 2.50 13 6 100 50 30 30 Shandong Boxing 0.80 1.00 1,200 1,000 n/a n/a n/a n/a Jinzhongzi 15.80 18.30 710 420 100 100 60 55 Mishui 3.00 20.00 70 30 50 35 450 350 Wudi n/a n/a 50 42 50 35 80 40 Zhucheng 26.00 30.00 40 50 600 650 40 50 CNY = Chinese yuan, kg = kilogram, m3 = cubic meter, mu = Chinese unit of measurement (1 mu = 666.67 square meters), n/a = not available. Sources: Post-project surveys by the local environment protection bureaus to assess the environmental benefits of the project.

I. Lessons Learned

9. For environment safeguards, the major lessons are as follows: (i) Strengthen inter-agency planning during project preparation. Some LEPBs were

apparently not consulted during project preparation, which resulted in low interest or motivation to conduct the environmental monitoring.

(ii) Establish a stronger institutional framework prior to project effectiveness for projects involving multiple administrative offices and locations. The provincial PMOs had inadequate capacity to coordinate the large number of local PMOs, particularly for data collection and reporting. Capacity assessments for large projects involving multiple offices and locations need to be sufficiently detailed to identify the resources needed for institutional support.

(iii) Conduct detailed assessments of safeguard capacity during project preparation and ensure sufficient external technical support is provided, if needed. For the current project, the lack of loan implementation environment consultants to provide external safeguard support to the local PMOs, reduced the opportunity for effective implementation of the EMPs.

(iv) Recruit an independent agency to conduct the environment safeguard monitoring for projects involving many locations. For the current project, local PMOs were expected to develop monitoring arrangements with LEPBs, but local PMO staff lacked sufficient capacity to review and finalize the monitoring programs, and LEPBs had limited equipment and/or time. These issues were once common for donor-funded infrastructure projects in the PRC but have been resolved in recent and ongoing projects through: (i) contracting independent agencies at provincial level to conduct the monitoring; and/or (ii) delegating the monitoring to project consultants.

(v) Further streamline procedures between PRC and ADB requirements. Until recently, fundamental differences between PRC and ADB requirements for environment safeguards resulted in problems of local ownership and implementation of the ADB-required documents. For the current project, the six subproject IEEs were prepared to fulfil ADB, but not domestic, requirements (during the project, there were limited requirements for site-specific impact assessments and monitoring). The provincial and local PMOs usually followed domestic rather than ADB requirements. These issues present less risks for recent and new ADB-funded projects in the PRC, due to ongoing amendments to the PRC's environmental laws and regulations.

Appendix 8 35

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in Loan/Project Agreement

Status of Compliance

Executing and Implementing Agencies

Each of GPG, HPG and SPG shall be the EA at the provincial level for supervision and monitoring of project activities. MOA shall provide technical guidance and support to the provincial EAs. Both the national and provincial EAs shall ensure that participating farmers receive the intended benefits in terms of productivity and income increases through favorable contracts and prices with the enterprises, and that poverty is reduced in the Project area.

LA, Sched 5, para. 2

Complied with.

The county/city/district governments shall be the IAs for all Project components and shall supervise implementation activities. The IAs shall be responsible for (i) overseeing the implementation of all Project components, outputs, and activities; (ii) drawing up the annual work programs and budgets in consultation with the EA; (iii) supervising compliance of procurement with the Procurement Guidelines; (iv) maintaining consolidated accounts, including developing a system to track all financial transactions with Participating Enterprises; (v) preparing and submitting to ADB withdrawal applications for funds from the Loan Account; (vi) monitoring physical and financial progress including benefit flows to intended beneficiaries, and submitting reports to provincial EAs; and (vii) ensuring adequate and timely counterpart financing.

LA, Sched 5, para. 3

Complied with.

Provincial EAs and IAs shall be assisted by provincial and county leading groups and the provincial and county PMOs. The provincial leading groups comprise staff of PMOs and finance, agriculture, environmental protection, and poverty reduction bureaus.

LA, Sched 5, para. 4

Complied with.

Counterpart Financing

The Borrower shall cause GPG, HPG and SPG to ensure that (i) all domestic financing necessary for the Project is provided in a timely manner, and (ii) additional counterpart financing is provided in the event of any shortfall of funds or cost overruns to complete the Project.

LA, Sched 5, para. 5 PA, Schedule, para. 1

Complied with.

Change of Ownership

In the event that (i) any change in ownership of the Project facilities; or (ii) any sale, transfer, or assignment of the shares of any IA and Participating Enterprises is anticipated, the Borrower shall consult with ADB at least six (6) months prior to the implementation of such change. The Borrower through GPG, HPG and SPG shall cause the concerned IA to ensure that such change is carried out in a lawful and transparent manner.

LA, Sched 5, para. 6 PA, Schedule, para. 2

Complied with.

Risk Mitigation

GPG, HPG and SPG shall continue implementing PA, Schedule, Complied with.

36 Appendix 8

Covenant Reference in Loan/Project Agreement

Status of Compliance

agricultural risk mitigation measures to assist farmers participating in the Project in the event of natural disasters through provision of compensation, training, and services.

para. 3

Environment and Social Safeguards

GPG, HPG and SPG shall, and shall cause IAs and Participating Enterprises to, ensure that the implementation procedures (including prior ADB approval requirements) agreed upon with ADB are followed, including environmental and social safeguard requirements in the EIAs.

PA, Schedule, para. 4

Complied with.

GPG, HPG, SPG shall, and shall cause IAs and Participating Enterprises to, ensure that civil works contractor specifications include (a) provisions relating to the environment including, obligating contractors to carry out the mitigating and monitoring measures specified in the relevant EIA, and (b) requirement for contractors to estimate costs for all such mitigating and monitoring measures.

PA, Schedule, para. 5

Complied with.

GPG, HPG and SPG shall, and shall cause IAs and Participating Enterprises to, ensure that the activities do not result in involuntary resettlement of people, and any land acquisition that may be required is adequately compensated in line with a resettlement plan prepared in accordance with applicable laws and regulations of the Borrower, and ADB’s Involuntary Resettlement Policy (1995).

PA, Schedule, para. 6

Complied with. The project did not require land acquisition and resettlement. The expansion of agricultural production and processing took place on existing land or land belonging to project beneficiaries.

GPG, HPG, SPG and IAs shall cause the Participating Enterprises and farmers to operate, maintain, and monitor all Project facilities, including water treatment plants and associated pipelines, wastewater treatment plants, wastewater collection systems, and solid waste systems, in strict conformity with: (a) all applicable laws and regulations, including national and local regulations and standards for environmental protection, health, labor, and occupational safety; (b) ADB's Environment Policy (2002); and (c) the environmental mitigating and monitoring measures detailed in the applicable EIAs.

PA, Schedule, para. 7

Complied with.

GPG, HPG and SPG shall cause IAs and Participating Enterprises to ensure that annual environmental reports are submitted to ADB, commencing from the start of project implementation until 1 year after the commencement of operation of the Project facilities. The reports shall include (a) progress made on mitigating measures and monitoring; (b) problems encountered; (c) data collected; (d) a corrective action plan if any violation of the IEE or Borrower's environmental laws, regulations, standards, rules, policies, or guidelines shall have occurred; (e) records of monitoring and mitigating measures; (f) comments on institutional capacity to manage the Project's

PA, Schedule, para. 8

Partially complied with. No environmental reports received for Gansu from 2014 to 2015.

Appendix 8 37

Covenant Reference in Loan/Project Agreement

Status of Compliance

environmental activities within the provincial governments, the IAs, environmental protection bureaus, and the Participating Enterprises; and (g) recommendations to address any institutional capacity challenges.

GPG, HPG and SPG shall cause IAs and Participating Enterprises to ensure that written justification is provided to ADB for any proposed changes to the mitigation measures specified in the EIAs, which are required during the design, construction, operations, and maintenance stages of the Project. Written justification shall be provided within 60 days if any changes to the EIAs have to be implemented for safety or emergency reasons.

PA, Schedule, para. 9

Complied with, no changes were made in the mitigation measures specified in the EIAs.

GPG, HPG and SPG shall cause IAs and Participating Enterprises to ensure that project benefits accrue equitably to men and women by (a) ensuring equitable access to technology, advice and training, information, markets, and employment in both agro-enterprises and farm production; (b) ensuring women's representation in project management, in advisory services, and in farmers groups; (c) strengthening collaboration between project management and relevant organizations; and (d) ensuring implementation of the gender action plan prepared for the Project.

PA, Schedule, para. 10

Complied with.

GPG shall cause the Zhangjiachuan county government to (a) encourage the contracting of Hui households, especially the poor and women; and (b) monitor the progress and report the results to ADB.

PA, Schedule, para. 11

Complied with. During 2010−2016 of the project implementation, additional 8,000 Hui farmer households have made contracts with the enterprises, 1,800 Hui farmers participated in the project-provided trainings, and 125 Hui farmers (97.6% of the total) engaged in project operations.

Warranties and Representations

GPG, HPG and SPG shall ensure that each Participating Enterprise represents and warrants that (i) it is a company legally incorporated under the Borrower's Company Law and retain this status throughout the period during which the onlending loan is outstanding; (ii) it has been authorized as required under the Borrower's Company Law and its charter by the board of directors to borrow the onlending loans for the purpose of implementation of the respective activity; (iii) the information relating to the Participating Enterprise continues to be true and accurate and does not contain any information which is misleading in any material respect nor does it omit any information in any material respect; (iv) the financial statement provided to GPG, HPG and

PA, Schedule, para. 12

Complied with.

38 Appendix 8

Covenant Reference in Loan/Project Agreement

Status of Compliance

SPG within 3 months of the end of each financial year for processing the concerned activity has been prepared in accordance with the accounting principles as required by the Borrower's Accounting Law, and disclosed all liabilities (contingent or otherwise) of the Participating Enterprise and the reserves, if any, for such liabilities and all unrealized or anticipated liabilities and losses arising from commitments entered into by the Participating Enterprise; (v) it is not engaged in nor, to the best of its knowledge, threatened by, any litigation, arbitration or administrative proceedings, the outcome of which could reasonably be expected to have a material adverse effect; and (vi) it has no outstanding lien on any of its assets and the assets provided as security for borrowing the onlending loan.

Financial Performance Ratios

Except as ADB shall otherwise agree, GPG, HPG and SPG shall cause each Participating Enterprise not to incur any debt if after the incurrence of such debt the ratio of debt to equity shall be greater than 1.5.

PA, Schedule, para. 15

Not complied with. No participating enterprise financial statements or information on financial ratios received during the project period on which to assess debt-equity ratio.

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

PA, Schedule, para. 16

Not complied with. No participating enterprise financial statements or information on financial ratios received during the project period on which to assess debt service capacity.

Except as ADB shall otherwise agree, GPG, HPG and SPG shall, through concerned IA, cause each Participating Enterprise to maintain a ratio of current assets to current liabilities of not less than 1.5.

PA, Schedule, para. 17

Not complied with. No participating enterprise financial statements or information on financial ratios received during the project period on which to assess the ratio of current assets to current liabilities.

An agreement shall be entered into between each Participating Enterprise and participating farmers. Under the agreement, a Participating Enterprise shall be responsible for (i) undertaking, in collaboration with participating farmers, the necessary work to establish

PA, Schedule, para 18

Complied with.

Appendix 8 39

Covenant Reference in Loan/Project Agreement

Status of Compliance

production and install farm infrastructure and equipment; (ii) providing seedlings, fertilizers and pesticides, and technology and guidance to participating farmers in production and postharvest activities, with associated fees agreed to by participating farmers and the Participating Enterprise; and (iii) undertaking to purchase outputs produced by participating farmers, at the higher rate of the prevailing market price or the protected price agreed at the beginning of each year.

Participating farmers shall be obliged to (i) carry out land improvement work under the guidance of the Participating Enterprise, (ii) ensure high-quality production stipulated by the Participating Enterprise, (iii) sell outputs produced to the Participating Enterprise in accordance with the agreement, and (iv) repay to the Participating Enterprise the cost of the inputs and goods provided by the Participating Enterprise through the deduction of charges from the payment made by the Participating Enterprise for the participating farmers' outputs.

PA, Schedule, para. 19

Complied with.

Anticorruption

GPG, HPG and SPG shall, and shall cause IAs and the Participating Enterprises to comply with ADB's Anticorruption Policy (1998 as amended to date). Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, GPG, HPG and SPG shall ensure that relevant provisions of ADB's Anticorruption Policy are included in the bidding documents for the Project and all contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine the records and accounts of the EAs, IAs and Participating Enterprises; and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

PA, Schedule, para. 20

Complied with.

Project Performance Monitoring and Evaluation

GPG, HPG and SPG shall develop a project performance management system (PPMS) to establish benchmark indicators to assess Project performance and impact. The PPMS shall be designed to permit adequate flexibility to adopt remedial action regarding Project design, schedules, activities and development impacts. The PPMS shall include the following agreed indicators: (i) physical progress of agroenterprise implementation (production base and processing capacity expansion); (ii) changes in crop and livestock varieties and yields compared with present; (iii) types and application rates of fertilizers and agrochemicals

PA, Schedule, para. 21

Complied with.

40 Appendix 8

Covenant Reference in Loan/Project Agreement

Status of Compliance

compared with present; (iv) increases in farm incomes; (v) reduction in poverty incidence, and gender and social development; and (vi) reduction in degraded land.

Project Agreement – Particular Covenants

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

PA, Section 2.06

Complied with.

GPG, HPG and SPG shall, and shall cause IAs and the Participating Enterprises to, furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the Goods, Works and consulting services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of GPG, HPG and SPG; and (v) any other matters relating to the purposes of the Loan.

PA, Section 2.08 (a)

Complied with.

Without limiting the generality of the foregoing, GPG, HPG and SPG shall furnish to ADB semi-annual reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made, and problems encountered during the six (6) months under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following six (6) months.

PA, Section 2.08 (b)

Complied with.

Promptly after physical completion of the Project, but in any event not later than three (3) months thereafter or such later date as ADB may agree for this purpose, GPG, HPG and SPG shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by GPG, HPG and SPG of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan.

PA, Section 2.08 (c)

Complied with.

GPG, HPG and SPG shall, and shall cause IAs and the Participating Enterprises to, (i) maintain separate accounts for the Project and for its overall operations; (ii) have such accounts and related financial statements (balance sheet, statement of income and

PA, Section 2.09 (a)

Partially complied with (ii) some audited project financial statements were submitted late. (iii) PPMOs did not collect

Appendix 8 41

Covenant Reference in Loan/Project Agreement

Status of Compliance

expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language. GPG, HPG and SPG shall, and shall cause IAs and the Participating Enterprises to, furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

and submit to ADB financial statements of participating enterprises. All audit reports 2012-2016 submitted by all PPMOs. Gansu final audit report covered the period 1 January 2016 to 1 September 2017 Shandong final audit report covered the period 1 January 2015 to 30 April 2016.

GPG, HPG and SPG shall, and shall cause concerned IA and concerned Participating Enterprise to, enable ADB, upon ADB's request, to discuss GPG's, HPG's, SPG's and IAs financial statements and its financial affairs from time to time with the auditors appointed by GPG, HPG, SPG, concerned IA pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of GPG, HPG, SPG, concerned IA and concerned Participating Enterprise unless GPG, HPG, SPG, concerned IA or concerned Participating Enterprise shall otherwise agree.

PA, Section 2.09 (b)

Complied with.

ADB = Asian Development Bank, EA = executing agency, EIA = environmental impact assessment, GPG = Gansu Provincial Government, HPG = Henan Provincial Government, IA = implementing agency, LA = loan agreement, MOA = memorandum of agreement, PA = project agreement, PMO = project management office, SPG = Shandong Provincial Government.

42 Appendix 9

FINANCIAL AND ECONOMIC ANALYSIS

A. Introduction

1. The financial and economic analysis is designed to assess the financial viability of investment projects financed by the project based on data on financial cash flows provided by participating agro-enterprises and the economic viability of the project as a whole. It has not been possible to replicate the analysis undertaken at appraisal of participating agro-enterprises’ financial and economic viability and of the economic viability of the project as a whole since none of the detailed documentation describing the methodology for financial and economic analyses and the data used in the analysis undertaken at appraisal was available to the project completion review (PCR) mission. The economic analysis at appraisal also grouped the cash flows of “types of operation” (farming operation, processing unit, and partnership) in each province so there was no direct comparison of financial and economic viability for individual agro-enterprises. These were then aggregated into a project cash flow. Without access to documentation defining the methodology, it is not clear whether any double-counting of farming operations took place, in that farm outputs are an intermediate input into processing activities. Or, whether the partnership cash flows (which are assumed to have included both farming and processing activity) were also included in the project cash flow. In addition, original project cost estimates indicating the breakdown of unit costs into foreign and local currency, and taxes and duties were not available. In the absence of appraisal data and given the limited scope of the PCR, the approach to the analyses for the PCR has been to (i) review project achievements in respect to agricultural production based on a survey of participating farm households undertaken for the preparation of the government’s PCR, (ii) undertake financial analysis of participating agro-enterprises based on financial cash flows, and (iii) undertake economic analyses of participating agro-enterprises by converting financial cash flows into economic cash flows by the application conversion factors, as appropriate to financial benefit and cost streams.

2. A template for financial cash flows was provided to participating agro-enterprises prior to the PCR in order to record their projected benefits and costs for the investment financed under the project. Cash flow data was received from 44 agro-enterprises of the 49 agro-enterprises that participated in the project. Of these 25 (Gansu 15, Henan six, and Shandong four), were sufficiently complete or in a form that allowed analyses to be undertaken,1 representing around half of the total number of agro-enterprises that participated in the project. This precludes a comprehensive analysis of the economic viability of the project as a whole.

B. Agricultural Production

3. At appraisal, agriculture in the three project provinces was characterized by a traditional rain-fed, predominantly wheat and corn cropping system on flatland and terraced hillsides, augmented by fruits, vegetables, and livestock. Small farm size, low and decreasing yields, limited access to technology, and a failure in the formal rural finance market for long-term credit were identified as key constraints to improving agricultural production and poverty reduction. The project aimed to address these constraints through the introduction of improved crop practices, diversification away from low-yielding, low value crops to high value commodities, and linking farmers with agro-enterprises to ensure farmers’ market outlets and agro-enterprises’ supply of

1 Cash flow data returned by 24 enterprises were, amongst others, (i) incomplete in respect of key revenue and cost

data, (ii) lacked or did not use units consistently, (iii) mixed physical and financial values within the same revenue or cost stream. There was no scope under the PCR to discuss such deficiencies with individual enterprises. The sample of 50% of enterprises that did provide usable data was considered adequate for the purposes of the analysis.

Appendix 9 43

raw materials for processing and value addition. The project proposed to improve production capacity of 1.8 million mu [120,000 hectares (ha)] by linking an additional 600,000 farm households with agro-enterprises through contract farming arrangements.2 No information from project appraisal is available to assess the proposed nature and extent of crop diversification or expected increases in crop yields and production as a result of the project. The design and monitoring framework of the project did, however, provide a target of incremental value-added products from agro-enterprises of not less than 500,000 tons per year from 2015 as a result of the project. As with farm level production, there was no indication what types, quantities, and values of individual value-added products would be.

4. Changing market conditions following appraisal and delays in accessing project finance resulted in some of the original 55 agro-enterprises selected for participation in the project to withdraw. Eventually, following replacements and further withdrawals, 49 agro-enterprises participated in the project. This resulted in a reduction in the area to be rehabilitated under the project. At project close in 2016, the area of farm land linked to agro-enterprises was 463,440 mu (30,896 ha). The project management office estimates that incremental production of value-added products reached 629,000 tons in 2016, exceeding the project target by 26%. A breakdown of this by individual product and product volumes and values are not available. In terms of measuring benefits, this is of limited value since quantity is not an effective indicator of incremental benefit where products of higher value and lower weight (such as herbs, spices, and medicinal plants) are concerned. Moreover, the output of some agro-enterprises is not readily measured in tons, such as those producing live animals, packaging, machinery, etc. or providing services. An assessment of pre- and post-investment revenues reported by the 44 agro-enterprises that responded to the project completion report survey indicates an aggregate increase in revenues of around $488 million, based on an exchange rate of $1 = CNY6.40 at the time of the PCR.

5. Rehabilitation of agricultural production bases and diversification of cropping patterns, yield improvements, etc. were undertaken in Henan and Shandong provinces on the basis of either contract farming in which farmers cultivated crops under contract to agro-enterprises or the rental of farmers’ land to agro-enterprises for agro-enterprises to cultivate crops in their own right. Subprojects in Gansu were based on partnerships between producers and agro-enterprises and were largely livestock-based. As such, they did not involve production base rehabilitation, etc. In Henan Province, the focus was on production base rehabilitation and there was only limited diversification from wheat and corn to higher value crops. There were however increases in yield and reductions in production cost. In Shandong Province, more significant diversification took place from wheat and corn production to production of fruit and vegetables, spices, Chinese herbs, etc. Table A9.1 provides a summary of the production base area, gross and net value of production with and without the project. The total incremental value of agricultural production per year is estimated at CNY689.46 million ($107.73 million at the time of the PCR). This equates to CNY48,228 per ha per year. Net incremental value per ha is significantly higher in Shandong where more significant crop diversification took place, CNY30,705 in Shandong compared with CNY17,523 in Henan.

2 ADB. 2008. Report and Recommendation of the President to the Board of Directors for the Proposed Loan and

Administration of Grant People's Republic of China for Dryland Sustainable Agriculture Project. Manila.

44 Appendix 9

Table A9.1: Production Base Development Henan and Shandong Provinces

Item Henan Shandong Total

Production base area (mu) 294,940 168,500 463,440

Production base area (ha) 19,663 11,233 30,896

Gross value of production (CNY million)

With project 1,133.97 718.08 1,852.05

Without project 868.16 314.95 1,183.11

Increase 265.81 403.13 668.94

Net value of production (CNY million)

With project 678.96 548.71 1,227.67

Without project 334.42 203.79 538.21

Increase 344.54 344.92 689.46

Incremental net value per ha (CNY) 17,522.64 30,705.22 48,227.86 CNY= Chinese yuan, ha = hectare.

C. Financial Analysis of Agro-enterprises

6. At appraisal, 28 agro-enterprises or partnerships were subjected to financial analysis to determine eligibility with respect to financial performance ratios. For each enterprise, a financial internal rate of return (FIRR) was estimated for the investment proposed for financing under the project. FIRRs ranged from 13.6% to 25.5%. No information was available to the PCR mission in order to review the analysis and re-estimate FIRRs using the same methodology. For the PCR analysis, therefore, agro-enterprises were requested to submit 15-year financial cash flows including actual revenues and investment and operating costs incurred under the project from the year of investment to the time of the PCR and projected revenues and costs in order to estimate FIRRs. FIRRs for the 25 agro-enterprises analysed at PCR is presented in Table A9.2, together with the corresponding FIRRs estimated at appraisal, where the appraisal FIRR exists for the same enterprise. For Gansu, appraisal FIRRs were based on partnerships rather than individual agro-enterprises and are not therefore comparable with PCR FIRRs.3 Table A9.2 also presents switching values for cash flows analysed at PCR.

FIRR (%) Switching Values Agro-enterprise Appraisal PCR Revenue Investment Operating

Gansua Fengyu 79.4 59.6 595.5 196.1 Hongyi 33.5 10.5 173.4 12.6 Jiaxin 55.7 46.8 305.3 123.6 Jinxing 4.0 0.6 6.4 0.7 Jiulongshan 20.8 16.8 108.3 24.9 Lianmin 14.6 2.2 79.3 2.3 Lidong 47.2 6.7 188.2 7.4 Maofeng 73.2 38.0 443.4 71.1 Menluo 23.3 24.1 458.0 34.0 Qin'an Jingmao 50.2 10.5 455.0 12.1 Qinglu 69.0 8.0 531.5 8.8 Sanli 9.7 3.2 51.6 3.5 Tiangong 2.1 (2.1) (9.6) (2.7) Zhongxing 42.9 40.8 449.9 81.6

3 A partnership is a grouping of a variety of entities largely for administrative convenience. It has no legal status. It may

contain farmers, agro-enterprises, input suppliers, service providers, local government agencies, etc. The individual members of the partnership may or may not have any commercial connection and may operate independently of each other.

Appendix 9 45

FIRR (%) Switching Values Agro-enterprise Appraisal PCR Revenue Investment Operating

Zhongyuan 30.0 10.3 245.4 12.1 Henan

Beixu 18.1 22.8 4.3 276.7 4.6 Haofeng 22.3 56.4 11.7 679.1 13.5 Hongla 14.8 12.2 1.5 93.1 1.6 Longfei 13.6 71.7 16.8 2,151.3 20.4 Tianyu 14.7 6.7 2.5 18.6 2.9 Yuhe 16.5 11.5 5.2 79.5 5.9

Shandong Jinzhongzib 21.8 3.5 154.3 3.7 Longshengc 19.9 n/a 19.5 209.6 27.4 Yulong 19.1 109.6 2.0 388.3 2.0 Zhenghang 22.7 60.8 4.0 681.9 4.2

FIRR = financial internal rate of return, n/a = not applicable, PCR = project completion review. a Analysis for Gansu Province at appraisal was based on partnerships. FIRRs for individual agro-enterprises were not

estimated. b Not included in the analysis at appraisal. c No base case FIRR is estimated as the net cash flow is high relative to investment cost. Sources: PCR mission estimates are based on cash flow data provided by agro-enterprises. Appraisal estimates are from: ADB. 2008. Report and Recommendation of the President to the Board of Directors for the Proposed Loan and Administration of Grant People's Republic of China for Dryland Sustainable Agriculture Project. Manila.

7. All agro-enterprises, with the exception of Tiangong in Gansu Province, have FIRRs above the estimated weighted average cost of capital (WACC), of 3.1%4 sensitivity analysis indicates that FIRRs are, for a number of enterprise investments, susceptible to relatively minor adverse changes in revenue or operating cost streams, which is common in agro-enterprises for which the margin between revenue from processed product and operating costs, made up predominantly of raw material costs, is low. Continued viability will depend on the extent to which any upward trend in raw material costs can be passed on to consumers in the form of higher processed product prices. For one agro-enterprise, the machinery manufacturer Haofeng in Henan Province, both the appraisal and PCR FIRRs indicate a high level of viability based on projected revenue and costs. However, as a result of a downturn in demand, the agro-enterprise has suffered declining profitability and incurred a loss in 2017 (Appendix 10).

D. Economic Analysis

8. The economic analysis is based on the estimation of economic internal rates of return (EIRR) for the investments made by agro-enterprises that provided cash flow data to the PCR mission. The analysis is based on the domestic price numeraire, in which financial prices are assumed to represent economic values of domestic inputs and outputs (nontraded) and traded/tradeable inputs and outputs (valued at world market prices and converted to local currency at the official exchange rate) are converted to economic values by application of the shadow exchange rate factor (SERF).5 The SERF has been estimated at 1.09 (Table A9.3).

4 Insufficient information is available for each enterprise relating to its various sources and shares of financing and

related rates of interest, and the enterprise return on equity to estimate individual WACCs. The actual rate of interest payable by agro-enterprises is based on the 5-year forward London interbank offer rate. At 24 May 2018, this stood at 2.93%. To this, a margin of 0.2% has been added for loan administration by provincial/county finance bureaus. The resulting rate of 3.13% has been used as a proxy for the WACC for all agro-enterprises.

5 The methodology is based on: ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila.

46 Appendix 9

Table A9.3 Estimation of Shadow Exchange Rate Factor Item Value ($)

Total Imports of Goods and Services 2,098,153,668,298 Total Exports of Goods and Services 1,587,419,402,303

Import Duty at 4% 74,274,639,858 Sales (Value Added) Tax on Imports at 17% 272,759,976,879 Subsidy on Imports at 0% 0

Net Value of Taxes on Imports (NVTM) 347,034,616,736

Export Duty 0 Export Rebates 0

Net Value of Taxes on Exports (NVTX) 0

Exports + Imports 3,685,573,070,601 Imports + NVTM 2,445,188,285,034

Exports - NVTX 1,587,419,402,303

Standard Conversion Factor (SCF) 0.9139

Shadow Exchange Rate Factor (SERF) 1.0942 Sources: Total imports and exports: ADB. 2017. Key Indicators for Asia and the Pacific 2017. Manila. Import duty: World Bank (https://data.worldbank.org). Tariff rate, applied, weighted mean, all products (%). 2016. (File: API_CHN_DS2_en_excel_v2_9944843.xls). Sales (value added) tax: http://www.china-briefing.com/news/2016/12/06/import-export-taxes-and-duties-in-china.html. Value added tax is levied at 13% or 17%. The rate of 13% has been used in the analysis resulting in a lower SERF. Export duty: http://www.china-briefing.com/news/2016/12/06/import-export-taxes-and-duties-in-china.html. Export duties are levied on a small number of goods. For the analysis it has been assumed to be 0%. Export rebates: http://www.china-briefing.com/news/2017/08/17/export-tax-rebates-in-china.html. Rebates of value added tax are available on a small range of exports. For the analysis it has been assumed to be 0%.

9. Cash flow data provided by agro-enterprises did not break down revenues between those earned from exports and those from domestic market sales. An assessment has been made of which products are traded/tradeable and their financial prices converted to economic prices. In the absence of international reference prices for most products, the conversion from financial to economic prices had been made by multiplying by the SERF. Given the scope of the PCR and data limitations faced in the analysis the margin of error that this is likely to introduce is not considered to be critical.

10. With respect to agro-enterprise investment costs, investigations during the PCR mission indicate that all plant and equipment procured is domestically produced. Financial costs would therefore reflect the economic cost of agro-enterprise investments. For operating costs, the principal cost associated with processing is that of raw material input and utilities to operate machinery. Raw material markets in which agro-enterprises operate through contract farming arrangements with farmers that require agro-enterprises to pay market prices are considered to be competitive since farmers are free to sell to other agro-enterprises at prevailing market prices. Increasing demand from agro-enterprises for raw materials is likely to mean that they will be required to pay farmers market prices. Financial prices for raw materials therefore reflect their economic prices. The same is true for skilled labor employed on a permanent basis by agro-enterprises, though seasonal, unskilled labor wages may not reflect their true economic cost. In the absence of data to estimate the proportion of costs that relate to unskilled labor, no attempt has been made to apply a shadow wage rate factor. To reflect the fact that financial prices reflect

Appendix 9 47

economic prices a conversion factor of 1.00 had been applied to financial operating costs. Cash flow data provided by agro-enterprises included tax and similar expenses that have been removed in the economic analysis as transfer payments.

11. Based on the above assumptions and the financial cash flows provided to the mission, EIRRs estimated for each of the 25 agro-enterprise investments are shown in Table A9.4. Three agro-enterprises do not meet the cut-off level for economic viability of 12%. Sensitivity analysis has been undertaken to estimate switching values for output and investment and operating costs streams. The resulting switching values for benefits and operating costs are in Table A9.4. Several agro-enterprises are susceptible to relatively low adverse changes in output and operating cost streams.

Table A9.4: Economic Internal Rates of Return for Selected Enterprises

EIRR (%) Switching Values Agroenterprise Appraisal PCR Revenue Investment Operating

Gansua Fengyu 79.4 53.4 321.0 178.3 Hongyi 95.1 8.2 16.0 9.3 Jiaxin 75.7 23.5 40.7 36.2 Jinxing 4.0 (6.3) (37.6) (7.1) Jiulongshan 20.8 8.5 38.5 12.2 Lianminb, c n/a 4.9 10.1 5.2 Lidong 47.2 5.6 117.6 6.3 Maofeng 114.7 19.6 34.1 26.4 Menluo 26.8 13.9 27.8 17.4 Qin'an Jingmao 144.2 8.9 18.5 10.0 Qinglu 830.5 8.0 16.5 8.8 Sanli 23.0 3.3 7.2 3.7 Tiangong 2.1 (26.7) (60.4) (32.4) Zhongxing 42.9 35.5 221.5 73.3 Zhongyuan 52.6 8.3 16.7 9.4

Henan Beixu 25.4 40.5 6.4 12.4 7.0 Haofeng 48.9 56.4 10.5 370.1 12.1 Hongla 31.6 44.8 4.7 9.7 5.0 Longfei 28.1 72.1 12.5 445.4 14.5 Tianyu 37.1 10.7 (0.7) (1.9) (0.8) Yuhe 24.2 23.0 4.4 8.6 4.9

Shandong Jinzhongzib n/a 68.9 6.0 11.4 6.5 Longshengc 24.3 n/a 12.6 23.9 15.6 Yulongc 44.1 n/a 5.7 12.2 6.0 Zhenghangc 44.1 n/a 6.2 13.3 6.7

EIRR = economic internal rate of return, n/a = not applicable, PCR = project completion review. a Analysis for Gansu Province at appraisal was based on partnerships. EIRRs for individual agro-enterprises were not

estimated. b Not included in the analysis at appraisal. c No base case EIRR is estimated as the net cash flow is high relative to investment cost. Sources: PCR mission estimates are based on cash flow data provided by agro-enterprises. Appraisal estimates are from: ADB. 2008. Report and Recommendation of the President to the Board of Directors for the Proposed Loan and Administration of Grant People's Republic of China for Dryland Sustainable Agriculture Project. Manila.

12. Although it has not been possible to undertake an overall project economic analysis given that not all participating agro-enterprises provided cash flow data, the economic cash flows of the

48 Appendix 9

25 agro-enterprises analysed have been aggregated to provide an indication of the economic viability of this group of agro-enterprises as a whole. No account has been taken of project management costs in this estimate since project support and management (output 2) costs accounted for only 0.05% of total project costs (Appendix 2). The resulting EIRR is 22.7%. This exceeds the cut-off rate of 12%. Sensitivity analysis indicates that the project EIRR is susceptible to adverse changes in output and operating cost streams with switching values of 5.9 for outputs and 8.0 for operating costs. The EIRR is less susceptible to investment cost changes, with a switching value of 61.5.

Appendix 10 49

FINANCIAL RATIO ANALYSIS OF PARTICIPATING AGRO-ENTERPRISES

A. Introduction

1. Financial ratio analysis has been undertaken based on data provided by agro-enterprises that received Asian Development Bank financing under the project. In the absence of detailed financial statements for each agro-enterprise, which were due to be provided routinely to ADB, participating agro-enterprises were requested to provide the required financial information and ratios for years 2013 to 2017. Forty-four agro-enterprises (Gansu 28, Henan nine, and Shandong seven) responded and provided the necessary ratios. The analysis provides an assessment of whether agro-enterprises continue to meet the financial performance ratios that were established as a prerequisite for participation in the project and are required to be achieved on an on-going basis in accordance with project agreement paragraphs 15 to 17 inclusive. The ratios concerned are:

(i) Maximum debt-equity ratio of 1.5; (ii) Minimum debt-service coverage ratio of 1.5; (iii) Minimum current ratio of 1.5; and (iv) Minimum quick ratio of 0.8.

2. The above ratios are those specified in the due diligence analysis undertaken at the time of appraisal.1 They are also contained within the Project Agreement, with the exception of the quick ratio which is not stipulated therein. Both the current and quick ratios, which are estimated from current assets and current liabilities, are susceptible to the nature of an enterprise’s business and may change significantly during the year. This is particularly the case for enterprises engaged in the processing of agricultural produce which is highly seasonal. Current assets in the form of raw materials immediately after harvest or finished goods on completion of the processing cycle, and current liabilities in the form of payments owed to farmers fluctuate throughout the year. Cash balances and short-term borrowing for working capital will vary accordingly. As such, only where ratios differ significantly from the required levels could an enterprise’s financial soundness be in serious doubt and require detailed review.

B. Profitability

3. All but one of the 44 agro-enterprises earned a profit each year from 2013 to 2017. Net profit at Haofeng in Henan Province has fallen significantly since 2015, when net profit stood at CNY1,062 million. In 2017, the enterprise made a loss of CNY359 million. This is a result of a downturn in demand for agricultural machinery manufactured by the enterprise.

4. Four agro-enterprises in Gansu Province, two agro-enterprises in Henan Province and five agro-enterprises in Shandong Province had a lower net profit in 2017 than in 2013. The remaining 33 agro-enterprises have all increased the level of net profit since 2013. Table 1 provides annual net profit figures for each agro-enterprise.

C. Financial Ratios

5. The financial ratios for each agro-enterprise that provided data are in the table below. Of the 28 agro-enterprises in Gansu Province, according to 2017 figures, three agro-enterprises (Dayou, Lianmin, and Sanli) failed to meet the maximum debt-equity requirement, two agro-

1 ADB. 2008. Report and Recommendation of the President to the Board of Directors for the Proposed Loan and

Administration of Grant People's Republic of China for Dryland Sustainable Agriculture Project. Manila. Appendix 5.

50 Appendix 10

enterprises (Lianmin and Sanli) failed to meet the minimum debt-service coverage requirement, and two agro-enterprises (Dayou and Sanli) failed to meet the minimum current ratio requirement. All agro-enterprises met the minimum quick ratio requirement.

6. In Henan Province, in 2017 all agro-enterprises with the exception of Haofeng met the maximum debt-equity requirement. Two agro-enterprises (Jiajiale and Longfei) failed to meet the minimum debt-service coverage requirement, and one agro-enterprise (Longfei) failed to meet the minimum current ratio requirement. All agro-enterprises met the minimum quick ratio requirement.

7. In Shandong Province all agro-enterprises met the requirement for all ratios. In all years from 2013 to 2017.

Agro-enterprise Net Profit and Financial Ratios (2013−2017) Eligibility Criterion 2017 2016 2015 2014 2013 Gansu Province Damoxing Net profit (CNY million) 1.75 3.30 2.30 3.60 1.80 Debt-equity ratio <= 1.5 0.65 0.51 1.40 0.84 1.16 Debt service coverage ratio >=1.5 1.50 1.50 1.50 1.50 1.80 Current ratio >= 1.5 1.70 1.90 1.80 1.70 1.08 Quick ratio >= 0.8 1.40 1.30 1.30 1.26 1.09 Dayou

Net profit (CNY million) 1.35 1.30 1.30 1.60 1.18 Debt-equity ratio <= 1.5 1.65 1.51 1.42 0.96 1.26 Debt service coverage ratio >=1.5 1.50 1.50 1.50 1.50 1.50 Current ratio >= 1.5 1.10 1.20 1.30 1.10 1.00 Quick ratio >= 0.8 1.00 1.10 1.20 1.60 1.90

Fengyu

Net profit (CNY million) 0.30 6.30 2.50 1.20 0.04 Debt-equity ratio <= 1.5 0.25 0.14 0.10 0.18 0.65 Debt service coverage ratio >=1.5 11.00 15.00 20.00 20.00 15.00 Current ratio >= 1.5 3.60 3.90 2.80 2.60 2.50 Quick ratio >= 0.8 2.10 2.50 1.40 1.20 1.10

Fengshou

Net profit (CNY million) 12.26 23.09 19.17 23.39 14.59 Debt-equity ratio <= 1.5 0.82 0.65 0.77 0.84 0.41 Debt service coverage ratio >=1.5 1.81 2.02 1.93 2.41 2.12 Current ratio >= 1.5 6.83 6.84 3.46 3.41 2.42 Quick ratio >= 0.8 1.53 1.52 1.18 1.91 0.92

Zhongxing

Net profit (CNY million) 26.94 38.96 22.04 33.23 26.19 Debt-equity ratio <= 1.5 0.30 0.01 0.08 0.42 0.30 Debt service coverage ratio >=1.5 11.20 21.00 9.80 10.40 12.60 Current ratio >= 1.5 20.35 8.33 10.21 4.16 4.00 Quick ratio >= 0.8 20.21 8.24 9.90 3.86 3.31

Taishengxiang

Net profit (CNY million) 1.12 0.75 1.06 0.84 0.96 Debt-equity ratio <= 1.5 0.92 0.62 1.07 0.62 0.83 Debt service coverage ratio >=1.5 1.82 1.68 1.56 1.51 1.62 Current ratio >= 1.5 1.84 1.71 1.52 0.89 1.12 Quick ratio >= 0.8 1.12 1.03 0.48 0.94 0.86

Jiulongshan

Net profit (CNY million) 8.33 8.23 7.38 6.98 4.32

Appendix 10 51

Eligibility Criterion 2017 2016 2015 2014 2013 Debt-equity ratio <= 1.5 0.31 0.28 0.25 0.51 0.62 Debt service coverage ratio >=1.5 1.60 1.40 1.70 1.80 1.90 Current ratio >= 1.5 1.71 1.68 1.18 1.61 2.65 Quick ratio >= 0.8 1.59 1.55 1.12 1.44 2.36

Kanghong

Net profit (CNY million) 2.62 2.70 2.20 2.99 2.10 Debt-equity ratio <= 1.5 0.19 0.16 0.06 0.07 0.06 Debt service coverage ratio >=1.5 1.60 1.70 1.50 1.50 1.50 Current ratio >= 1.5 2.30 2.40 1.50 1.30 1.50 Quick ratio >= 0.8 1.40 1.50 1.00 1.30 1.00

Kangsheng

Net profit (CNY million) 4.17 4.05 4.83 4.43 5.33 Debt-equity ratio <= 1.5 1.32 1.37 1.42 1.16 1.23 Debt service coverage ratio >=1.5 1.85 1.74 1.58 1.62 1.52 Current ratio >= 1.5 2.91 3.96 2.90 2.74 2.45 Quick ratio >= 0.8 2.61 3.56 2.71 2.53 2.35

Jiaxin

Net profit (CNY million) 9.00 8.00 9.00 7.00 9.00 Debt-equity ratio <= 1.5 0.60 0.80 0.78 0.95 1.09 Debt service coverage ratio >=1.5 1.80 1.70 1.68 1.66 1.65 Current ratio >= 1.5 1.62 1.43 1.60 1.50 1.60 Quick ratio >= 0.8 1.39 0.92 1.30 1.20 1.20

Lidong

Net profit (CNY million) 2.17 2.94 4.20 3.97 2.16 Debt-equity ratio <= 1.5 0.68 0.96 1.25 1.80 0.78 Debt service coverage ratio >=1.5 2.64 2.10 1.13 1.09 1.15 Current ratio >= 1.5 1.54 1.39 1.12 1.19 1.20 Quick ratio >= 0.8 1.10 1.09 0.85 0.91 0.12

Jinxing

Net profit (CNY million) 0.21 0.18 0.17 0.13 0.10 Debt-equity ratio <= 1.5 1.48 1.52 1.10 0.90 1.00 Debt service coverage ratio >=1.5 2.30 2.60 3.00 2.50 1.80 Current ratio >= 1.5 1.56 1.59 1.65 1.68 1.59 Quick ratio >= 0.8 1.08 1.03 1.06 0.90 0.85

Hongyi

Net profit (CNY million) 3.26 2.91 2.70 2.33 1.90 Debt-equity ratio <= 1.5 0.11 0.12 0.13 0.14 0.15 Debt service coverage ratio >=1.5 19.17 18.42 21.87 23.47 19.21 Current ratio >= 1.5 13.44 12.46 10.42 12.52 9.84 Quick ratio >= 0.8 10.18 9.15 8.33 9.53 7.28

Qin'an Jingmao

Net profit (CNY million) 11.34 11.98 10.07 7.59 6.26 Debt-equity ratio <= 1.5 0.04 0.05 0.06 0.07 0.10 Debt service coverage ratio >=1.5 2.80 2.60 2.50 1.02 1.96 Current ratio >= 1.5 2.09 2.14 3.56 2.30 1.60 Quick ratio >= 0.8 1.10 1.30 1.06 0.90 1.08

Xingyuan

Net profit (CNY million) 9.60 9.70 9.40 8.30 7.70 Debt-equity ratio <= 1.5 1.10 1.24 1.31 1.17 1.10 Debt service coverage ratio >=1.5 1.60 1.60 1.60 1.60 1.60 Current ratio >= 1.5 1.52 1.57 1.51 1.61 1.72 Quick ratio >= 0.8 1.08 1.14 0.96 0.98 0.86

Fenggu

Net profit (CNY million) 231.53 237.37 46.79 36.42 22.56

52 Appendix 10

Eligibility Criterion 2017 2016 2015 2014 2013 Debt-equity ratio <= 1.5 0.83 0.65 0.71 0.72 0.69 Debt service coverage ratio >=1.5 1.89 1.92 1.88 1.78 1.71 Current ratio >= 1.5 2.47 1.74 1.68 1.65 1.62 Quick ratio >= 0.8 0.94 0.81 0.83 0.89 0.87

Maofeng

Net profit (CNY million) 10.51 12.52 11.85 6.81 5.39 Debt-equity ratio <= 1.5 1.50 1.45 1.50 1.48 1.47 Debt service coverage ratio >=1.5 1.56 1.54 1.63 1.52 1.86 Current ratio >= 1.5 1.52 1.53 1.62 1.51 1.52 Quick ratio >= 0.8 0.82 0.80 0.81 0.83 0.81

Xilian

Net profit (CNY million) 10.00 8.36 7.99 7.82 5.88 Debt-equity ratio <= 1.5 0.10 0.07 0.09 0.10 0.11

Debt service coverage ratio >=1.5 1.94 1.83 1.71 1.64 1.57 Current ratio >= 1.5 2.10 1.93 1.80 1.74 1.69 Quick ratio >= 0.8 1.25 1.18 1.24 0.92 0.86

Zhongyuan

Net profit (CNY million) 5.45 5.03 4.91 4.76 3.99 Debt-equity ratio <= 1.5 0.17 0.20 0.25 0.29 0.38 Debt service coverage ratio >=1.5 6.31 4.63 5.31 4.35 3.74 Current ratio >= 1.5 1.54 1.62 1.59 1.39 1.61 Quick ratio >= 0.8 0.86 0.91 0.78 0.89 0.94

Changsheng

Net profit (CNY million) 8.97 8.68 8.66 8.07 6.82 Debt-equity ratio <= 1.5 0.23 0.35 0.12 0.14 0.15 Debt service coverage ratio >=1.5 2.28 2.43 3.79 3.52 3.68 Current ratio >= 1.5 1.92 1.87 1.68 1.62 1.55 Quick ratio >= 0.8 1.24 1.28 1.21 1.12 1.05

Changle

Net profit (CNY million) 3.23 3.19 3.11 2.97 2.83 Debt-equity ratio <= 1.5 0.90 1.00 1.00 1.00 1.00 Debt service coverage ratio >=1.5 1.70 1.80 1.70 1.60 1.60 Current ratio >= 1.5 3.50 3.50 3.40 3.30 3.20 Quick ratio >= 0.8 1.80 1.80 1.90 1.90 1.80

Yuxin

Net profit (CNY million) 5.05 6.31 5.54 4.01 3.10 Debt-equity ratio <= 1.5 0.60 0.80 0.78 0.95 1.09 Debt service coverage ratio >=1.5 1.80 1.70 1.68 1.66 1.65 Current ratio >= 1.5 1.62 1.43 1.60 1.50 1.60 Quick ratio >= 0.8 1.39 0.92 1.30 1.20 1.20

Qinglu

Net profit (CNY million) 2.19 2.17 2.14 2.09 1.82 Debt-equity ratio <= 1.5 0.80 0.80 0.80 0.80 0.90 Debt service coverage ratio >=1.5 2.30 2.30 2.20 2.10 2.10 Current ratio >= 1.5 3.10 3.00 2.90 2.70 2.60 Quick ratio >= 0.8 1.30 1.20 1.90 1.80 1.60

Tiangong

Net profit (CNY million) 2.17 1.93 1.85 1.72 1.65 Debt-equity ratio <= 1.5 0.80 0.80 0.80 0.90 0.80 Debt service coverage ratio >=1.5 2.30 2.30 2.40 2.20 2.20 Current ratio >= 1.5 3.10 3.00 3.10 2.90 2.80 Quick ratio >= 0.8 1.30 1.20 1.50 1.60 1.30

Senyuan Market

Net profit (CNY million) 2.33 2.28 2.20 2.00 1.90

Appendix 10 53

Eligibility Criterion 2017 2016 2015 2014 2013 Debt-equity ratio <= 1.5 0.80 0.80 0.90 0.90 0.90 Debt service coverage ratio >=1.5 2.40 2.30 2.30 2.20 2.20 Current ratio >= 1.5 3.20 3.10 3.00 2.90 2.70 Quick ratio >= 0.8 1.40 1.30 1.50 1.60 1.60

Yiweisi

Net profit (CNY million) 2.90 2.87 2.43 1.93 2.43 Debt-equity ratio <= 1.5 1.51 1.51 1.53 1.56 1.59 Debt service coverage ratio >=1.5 1.51 1.54 1.55 1.57 1.59 Current ratio >= 1.5 1.53 1.56 1.58 1.59 1.60 Quick ratio >= 0.8 0.82 0.88 0.93 0.97 0.92

Lianmin

Net profit (CNY million) 7.60 7.80 6.70 7.00 7.00 Debt-equity ratio <= 1.5 1.64 1.85 1.55 1.52 1.89

Debt service coverage ratio >=1.5 1.27 0.98 1.63 1.94 1.85 Current ratio >= 1.5 1.53 1.63 1.25 1.53 1.64 Quick ratio >= 0.8 0.82 0.75 0.85 0.76 0.92

Sanli

Net profit (CNY million) 3.20 3.60 4.20 7.50 8.60 Debt-equity ratio <= 1.5 1.60 0.59 0.65 0.85 0.72 Debt service coverage ratio >=1.5 0.57 1.59 1.51 1.51 1.35 Current ratio >= 1.5 0.90 1.52 1.55 1.36 1.59 Quick ratio >= 0.8 0.72 0.84 0.87 0.86 0.81

Henan Province

Beixu

Net profit (CNY million) 51.20 49.60 48.50 46.50 41.20 Debt-equity ratio <= 1.5 1.15 1.20 1.05 1.10 1.02 Debt service coverage ratio >=1.5 1.80 2.10 1.75 1.60 1.58 Current ratio >= 1.5 2.40 2.10 2.50 2.60 1.80 Quick ratio >= 0.8 1.50 1.42 1.38 1.20 1.15

Furen

Net profit (CNY million) 1,988.00 429.00 903.00 738.00 426.00 Debt-equity ratio <= 1.5 0.57 0.50 0.52 0.60 0.64 Debt service coverage ratio >=1.5 1.95 1.86 1.84 1.70 1.63 Current ratio >= 1.5 1.51 1.89 1.67 1.56 1.53 Quick ratio >= 0.8 0.93 0.88 0.94 0.85 0.82

Haofeng

Net profit (CNY million) (359.00) 353.00 1,062.00 972.00 962.00 Debt-equity ratio <= 1.5 3.98 3.65 3.91 4.77 3.06 Debt service coverage ratio >=1.5 1.53 1.58 1.56 1.52 1.54 Current ratio >= 1.5 1.58 1.49 1.51 1.57 1.53 Quick ratio >= 0.8 0.92 0.85 0.87 0.85 0.82

Hongla

Net profit (CNY million) 0.39 0.05 Debt-equity ratio <= 1.5 0.62 0.64 Debt service coverage ratio >=1.5 1.85 1.63 Current ratio >= 1.5 1.90 1.70 Quick ratio >= 0.8 1.20 0.90

Jiajiale

Net profit (CNY million) 10.55 17.05 32.78 44.40 41.78 Debt-equity ratio <= 1.5 0.14 0.03 0.03 - - Debt service coverage ratio >=1.5 0.62 0.87 1.30 4.39 5.32 Current ratio >= 1.5 3.98 2.95 3.73 2.90 3.06 Quick ratio >= 0.8 3.93 2.90 3.53 2.81 2.90

54 Appendix 10

Eligibility Criterion 2017 2016 2015 2014 2013 Longfei

Net profit (CNY million) 28.69 33.47 31.06 38.24 27.72 Debt-equity ratio <= 1.5 0.21 0.24 0.22 0.23 0.33 Debt service coverage ratio >=1.5 0.71 0.95 0.79 0.69 0.60 Current ratio >= 1.5 1.45 1.42 1.64 1.48 1.41 Quick ratio >= 0.8 1.09 1.00 1.11 0.99 0.95

Maozhuanflvyuan

Net profit (CNY million) 0.58 0.51 0.48 0.50 0.45 Debt-equity ratio <= 1.5 1.38 1.40 1.42 1.45 1.48 Debt service coverage ratio >=1.5 1.80 1.75 1.73 1.70 1.60 Current ratio >= 1.5 1.85 1.82 1.76 1.60 1.55 Quick ratio >= 0.8 0.95 0.92 0.90 0.88 0.85

Tianyu

Net profit (CNY million) 92.54 90.42 89.27 88.76 69.12

Debt-equity ratio <= 1.5 1.36 1.33 1.32 1.31 1.34 Debt service coverage ratio >=1.5 1.59 1.54 1.55 1.56 1.57 Current ratio >= 1.5 2.40 1.96 1.89 1.61 1.64 Quick ratio >= 0.8 1.15 0.97 0.92 0.89 0.87

Yuhe

Net profit (CNY million) 286.20 316.80 326.60 196.50 101.30 Debt-equity ratio <= 1.5 1.31 1.40 1.38 1.46 1.30 Debt service coverage ratio >=1.5 2.80 2.60 2.50 2.30 2.10 Current ratio >= 1.5 4.60 3.80 4.30 4.10 3.20 Quick ratio >= 0.8 1.80 1.50 1.90 1.60 1.40

Shandong Province

Jinzhongzi

Net profit (CNY million) 2.58 2.12 1.68 2.36 3.15 Debt-equity ratio <= 1.5 0.80 0.79 0.80 0.80 0.89 Debt service coverage ratio >=1.5 1.81 1.90 1.83 1.51 1.84 Current ratio >= 1.5 2.53 3.10 3.27 3.25 3.12 Quick ratio >= 0.8 1.25 1.93 2.10 2.02 2.21

Longsheng

Net profit (CNY million) 35.12 37.86 46.18 57.46 54.28 Debt-equity ratio <= 1.5 0.78 0.63 0.44 0.45 0.17 Debt service coverage ratio >=1.5 1.55 1.98 1.61 1.56 2.65 Current ratio >= 1.5 2.01 1.99 1.92 1.73 1.60 Quick ratio >= 0.8 1.33 1.02 1.49 0.94 1.00

Mishui

Net profit (CNY million) 43.82 39.97 38.47 102.00 79.47 Debt-equity ratio <= 1.5 0.41 0.25 0.32 0.11 0.08 Debt service coverage ratio >=1.5 2.08 2.33 2.40 2.07 3.08 Current ratio >= 1.5 2.89 2.32 2.19 2.34 2.15 Quick ratio >= 0.8 1.01 0.98 0.85 0.99 0.89

Wandefu

Net profit (CNY million) 1.47 1.42 1.40 1.20 1.18 Debt-equity ratio <= 1.5 1.10 1.11 1.11 1.13 1.15 Debt service coverage ratio >=1.5 2.00 2.00 2.10 2.00 2.20 Current ratio >= 1.5 2.00 2.10 2.00 2.10 2.30 Quick ratio >= 0.8 1.50 1.40 1.42 1.30 1.20

Yulong

Net profit (CNY million) 2.30 2.34 4.33 5.54 5.31 Debt-equity ratio <= 1.5 0.12 0.12 0.12 0.09 0.09 Debt service coverage ratio >=1.5 7.37 7.92 7.50 6.29 5.37 Current ratio >= 1.5 7.30 6.04 3.39 2.68 2.62

Appendix 10 55

Eligibility Criterion 2017 2016 2015 2014 2013 Quick ratio >= 0.8 2.67 3.19 1.49 1.05 1.36

Zhenghang

Net profit (CNY million) 3.00 3.30 3.30 3.70 3.60 Debt-equity ratio <= 1.5 0.77 0.81 0.83 0.86 0.90 Debt service coverage ratio >=1.5 2.62 2.08 1.95 1.90 1.73 Current ratio >= 1.5 1.57 1.54 1.54 1.52 1.50 Quick ratio >= 0.8 0.88 0.86 0.85 0.83 0.80

Zhongkang

Net profit (CNY million) 35.56 31.12 29.03 25.26 23.38 Debt-equity ratio <= 1.5 0.97 0.89 1.10 1.03 0.98 Debt service coverage ratio >=1.5 1.69 1.63 1.58 1.67 1.62 Current ratio >= 1.5 2.03 1.98 2.11 1.78 1.64 Quick ratio >= 0.8 1.02 1.15 1.27 1.06 1.57

56 Appendix 11

SUMMARY OF PHYSICAL ACHIEVEMENTS

Item Unit Gansu Henan Shandong

Participating agroenterprises No. 28 12 9

Support service entities established No. 38 4

Area of production base improveda mu 347,100 466,681 163,800

Area of production base improveda ha 23,140 31,112 10,920

Area of farm tracks constructed/repaired m2 89,000 483,415

Wells constructed No. 797 316

Water storage facilities constructed No. 0 19

Underground pipelines constructed m 268,000 88,906

Canals constructed m 136,350

Canals repaired m 95,000 36,000

Area of processing plants constructed m2 119,379 40,510 42,057

Processing lines installed No. 59 11 3

Equipment sets installed No. 2,556 1,017 385

Cold storage facilities constructed m2 13,824 8,005 9,148

Warehouse facilities constructed m2 22,693 14,448 8,405

Improved-breed animals introduced No. 396,100 0 0

ha = hectare, m = meter, m2 = square meter, mu = Chinese unit of measurement (1 mu = 666.67 square meters). a For Gansu the area refers only to the production base subject to contract farming arrangements

between agro-enterprises and farmers. No production base improvement was proposed for Gansu Province.

Source: Provincial project management units project completion summaries.