Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: August 2017 Proposed Loan and Technical Assistance Grant People s Republic of China: Shanxi Inclusive Agricultural Value Chain Development Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS (as of 29 August 2017) Currency unit yuan (CNY) CNY1.00 = $ $1.00 = CNY ABBREVIATIONS ADB Asian Development Bank AVC agricultural value chain EMP environmental management plan IGO income-generating opportunity IEE initial environmental examination LIBM localized inclusive business mechanism PAC project agribusiness company PAC1 agricultural value chain project agribusiness company PAC2 inclusive project agribusiness company and cooperative PAM project administration manual PCG project county government PPMO provincial project management office PRC People s Republic of China SPG Shanxi Provincial Government TA technical assistance NOTE In this report, $ refers to United States dollars.

3 Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director Q. Zhang, Environment, Natural Resources, and Agriculture Division, EARD Team leaders Team members Peer reviewer T. Ueda, Senior Natural Resources Economist, EARD X. Shen, Senior Project Officer (Natural Resources and Agriculture), EARD M. Ancora, Climate Change Specialist, EARD M. Bezuijen, Senior Environment Specialist, EARD F. Connell, Principal Counsel, Office of the General Counsel O. Domagas, Senior Financial Control Specialist, Controller s Department H. Luna, Senior Operations Assistant, EARD D. Molina, Senior Operations Assistant, EARD M. Russell, Procurement Specialist, Operations Services and Financial Management Department N. Sapkota, Senior Social Development Specialist, EARD E. Sarapat, Associate Project Analyst, EARD K. Taniguchi, Senior Economist, Economic Research and Regional Cooperation Department S. Spohn, Committee Member, Rural Development and Food Security (Agriculture) Thematic Group; and Senior Investment Specialist, Private Sector Operations Department 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.

4 PROJECT AT A GLANCE CONTENTS Page I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impacts and Outcome 3 C. Outputs 3 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6 III. ATTACHED TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 7 C. Governance 7 D. Poverty, Social, and Gender 8 E. Safeguards 9 F. Summary of Risk Assessment and Risk Management Plan 10 V. ASSURANCES 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 14

5 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: Project Name Shanxi Inclusive Agricultural Value Department EARD/EAER Chain Development Project /Division Country China, People's Republic of Executing Agency Shanxi Provincial Government Borrower Ministry of Finance 2. Sector Subsector(s) ADB Financing ($ million) Agriculture, natural Agricultural policy, institutional and capacity development 4.50 resources and rural Agricultural production development Agro-industry, marketing, and trade Livestock Total Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth Pillar 2: Access to economic Adaptation ($ million) 7.96 (IEG) opportunities, including jobs, made Mitigation ($ million) 3.91 Environmentally sustainable growth (ESG) more inclusive Global and regional transboundary environmental concerns CO 2 reduction (tons per annum) 10,500 Climate Change impact on the Medium Project 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity development (GCD) Institutional development Organizational development Effective gender mainstreaming (EGM) Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas Knowledge sharing activities Pilot-testing innovation and learning Partnerships (PAR) Civil society organizations Implementation Private Sector Private sector development (PSD) Promotion of private sector investment 5. Poverty and SDG Targeting Location Impact Geographic Targeting Household Targeting SDG Targeting Yes No Yes Rural SDG Goals SDG1, SDG8 High.. 6. Risk Categorization: Low 7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C 8. Financing Modality and Sources Amount ($ million) ADB Sovereign Project (Regular Loan): Ordinary capital resources Cofinancing 0.00 None 0.00 Counterpart Government 3.50 Others Total Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-OTHERS) in the amount of $300,000. Source: Asian Development Bank This document must only be generated in eops Generated Date: 16-Aug :03:10 AM

6 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the People s Republic of China (PRC) for the Shanxi Inclusive Agricultural Value Chain Development Project. The report also describes the proposed technical assistance (TA) for the Shanxi Inclusive Agricultural Value Chain Development Project; and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the TA. 2. The project will help the Shanxi Provincial Government (SPG) increase income-generating opportunities (IGOs) from selected local specialty agricultural products, to alleviate poverty and narrow rural urban income disparity, by strengthening agricultural value chains (AVCs) and piloting inclusive business mechanism. A. Rationale II. THE PROJECT 3. Shanxi is in the northern PRC, forming a highland with mountains in the east and south. The province is known for rich mineral resources, including coal. In 2015, the provincial per capita gross domestic product of CNY34,919 was among the five lowest in the PRC. 1 Rural households have a per capita disposable income that is 36.6% of urban households per capita disposable income. The provincial poverty incidence remains substantial (9.6%), as compared to the national average of 5.7%. 4. Shanxi is undergoing a significant transformation from a coal-dependent economy, and is a key example of the PRC government s efforts to reduce rural urban income inequality and poverty. Shanxi is the second-largest coal producer in the PRC, supplying one-fourth of domestic coal production. 2 For the last 3 decades, the province has experienced rapid economic growth by literally fueling the economic growth of coastal regions of the PRC. However, this coal-dependent growth has made the provincial economy vulnerable to fluctuations in external coal price and demand. The coal price decline that began in 2011 has made Shanxi s coal industry financially unfeasible, and forced the province to reduce production during by at least 100 million tons, which is more than 10% of 2015 production level. 3 This is expected to significantly impact the rural population employed in the coal industry. Transforming the coal-dependent economy to a broad-based economy that creates viable IGOs for the rural population has become an urgent task for Shanxi Province. 5. The agriculture sector is the key to transforming the economy and addressing income disparity and poverty. Agriculture is an important means of livelihood for the rural population in Shanxi Province in 2015, 16.5 million rural inhabitants (45% of the provincial population) relied on agriculture as an income source. 4 Despite this, the sector contributed only 6.1% to the provincial gross domestic product, the lowest of all provinces in the PRC (excluding coastal provinces and municipalities with limited agricultural production). This is due to low productivity and low value addition in the agriculture sector, which thus creates insufficient IGOs for the rural population. 6. Small-scale and low-value addition in agriculture. The agriculture sector comprises various stakeholders, including farmers, cooperatives, and agribusiness companies involved in 1 National Bureau of Statistics of China China Statistical Yearbook. Beijing The province produced 944 million tons of raw coal in 2015, but lost CNY9.42 billion (CNY10 per ton of coal sold). 4 An average of 30% of the rural household income in Shanxi Province is generated from agricultural activities.

7 2 processing, marketing, and/or distribution. Those stakeholders form loose cooperation in the province. Poor performance of the agriculture sector in Shanxi stems from these underdeveloped value chains, which limits the ability to increase value addition and expand agricultural production. These weak value chains result primarily from the absence of agribusiness companies capable of leading the chains particularly processors that link the small farmers to the markets. Agribusiness companies in the province lack adequate business strategies and production facilities of sufficient size; when combined with a lack of collateral, this makes it difficult for those companies to access finance, and prevents them from expanding operations and realizing economies of scale. Primary production bases are small and scattered, making it difficult for those companies to source sufficient volumes of quality raw materials in a timely manner. It is crucial to strengthen the capacity of agribusiness companies to lead the AVCs, which will improve the agriculture sector s performance in the province. 7. Limited viable employment generation for poor and low-income people. Although it is important to nurture the leading agribusiness companies, their capacity to generate employment that would benefit poor and low-income people depends on their business strategies, which are in turn impacted by the government s industrial policy. Since 2012, the government has promoted agricultural industrialization by supporting dragon-head enterprises, which are defined as companies that have the potential to drive agricultural and rural economic restructuring; increase efficiency in agricultural production; and eventually increase farmer incomes. 5 Despite this effort, limited IGOs have been created for poor and low-income people. To reduce income disparity and eradicate poverty, agribusiness companies need to adopt pro-poor business strategies. 8. Strategic fit. Supporting inclusive economic growth is a strategic priority for the Asian Development Bank (ADB) in its country partnership strategy for the PRC. 6 SPG requested ADB assistance in eradicating extreme poverty and improving livelihoods in the poverty-stricken areas of Shanxi Province, by tapping the potential of the agriculture sector in developing rural IGOs. SPG particularly requested help in implementing the PRC s new rural development policy to promote agriculture-based industry for local specialty agricultural products, as part of the Shanxi Poverty Alleviation and Rural Development Program. This project supports the improvement of market connectivity and value-chain linkages, which is one of the four priority areas of ADB s Operational Plan for Agriculture and Natural Resources. 7 The improvement of rural livelihoods, and particularly eradicating extreme poverty by 2020, is a key priority under the PRC s Thirteenth Five-Year Plan on National Economic and Social Development, Lessons. The project design incorporates lessons from relevant projects financed by ADB and others in the PRC, including (i) enabling farmers and agribusiness companies to finance longer-term investment to increase production, improve productivity, and enhance value addition; (ii) engaging agribusiness companies to generate IGOs; (iii) helping farmers improve access to markets, and improve product quality control through cooperation with agribusiness companies; 5 According to the State Council in 2012, dragon head enterprises are defined as private or state-owned enterprises responsible for opening new markets, innovating in science and technology, driving farm households, and advancing regional economic development. Sixteen of the 19 project agribusiness companies and cooperative (PACs) have dragon-head enterprise status granted by the national, provincial, municipal, and/or county governments. 6 ADB Country Partnership Strategy: Transforming Partnership: People s Republic of China and Asian Development Bank, Manila. 7 ADB Operational Plan for Agriculture and Natural Resources: Promoting Sustainable Food Security in Asia and the Pacific in Manila. 8 Government of the PRC Outline of the Thirteenth Five-Year Plan for National Economic and Social Development, Beijing.

8 3 and (iv) engaging agribusiness companies to involve farmers and cooperatives for improved production bases and equitable benefit sharing. 9 B. Impacts and Outcome 10. The project is aligned with the following impacts: (i) all rural residents falling below the PRC s current poverty line and all poor counties lifted out of poverty, and poverty alleviation in all regions achieved (footnote 8); and (ii) rural urban income disparity narrowed, and the proportion of the population in the middle-income class increased. 10 The project will have the following outcome: IGOs from selected local specialty agricultural products increased. 11 C. Outputs 11. The outcome will be accomplished through two outputs: (i) AVCs strengthened, and (ii) inclusive business mechanism piloted. These outputs will primarily be implemented (with government support) by the 19 project agribusiness companies and cooperative (PACs) that are capable of leading value chains of different specialized agricultural products in different parts of the province. The 19 PACs are divided into two groups: 9 PACs that will be engaged to demonstrate model AVCs under output 1 (PAC1s), and 10 PACs that will be engaged to demonstrate model inclusive businesses under output 2 (PAC2s). 12. Output 1: Agricultural value chains strengthened. Nine PAC1s (five companies producing, processing, and/or marketing fruits, vegetable, mushrooms, and wine; and four operating livestock and poultry farms) will demonstrate respective value chain strengthening through investment and capacity building that provides possible approaches to overcoming the limitations of agriculture in the province, in terms of scale of operation and extent of value addition. Investment components will help PAC1s scale up and/or upgrade their primary production bases, processing facilities and cold storage facilities, animal sheds, a biogas digester, and research and development facilities based on their respective investment designs. 12 Non-investment components will comprise (i) technical support for PAC1s, including training and advisory services; (ii) preparation of the AVC action plans for six PAC1s based on PAC-wise value chain analyses and implementation of the AVC plans to demonstrate model AVCs; 13 (iii) training for agribusiness companies, cooperatives, farmers, and relevant government agencies on the value chain approach; (iv) training for cooperatives and farmers on institutional and financial management; and cooperation arrangements in production, processing, and contracting; (v) awareness-raising and training for service providers such as financial institutions and logistics services providers on business opportunities in AVC; and (vi) study tours on best practices on AVCs. 14 This project will be the first ADB sovereign project in the PRC to take a value chain 9 Recent projects include ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Fujian Farmland Sustainable Utilization and Demonstration Project. Manila; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Henan Sustainable Livestock Farming and Product Safety Demonstration Project. Manila. 10 Shanxi Provincial Government Thirteenth Five-Year Plan for Economic and Social Development of Shanxi Province. Taiyuan. 11 The design and monitoring framework is in Appendix The investment areas of each PAC are provided in Annex 4 of the project administration manual (PAM). 13 Technical Report on Agricultural Value Chain (accessible from the list of linked documents in Appendix 2). 14 During project preparation, four model PAC1s (i.e., date processing, vegetable wholesale, mushroom production, and poultry rearing) were selected, and their action plans prepared. Technical Report on Agricultural Value Chain (accessible from the list of linked documents in Appendix 2). During project implementation, action plans will be prepared for up to eight PAC1s (not all 11 PACs will have plans prepared because of consulting services budget limitations).

9 4 approach, in which agribusiness companies will be guided by value chain analyses in implementing the project. 15 Business opportunity training is expected to facilitate value chain financing by financial institutions in Shanxi Province and ease access to financing for farmers and agribusiness companies in the medium term. 13. Output 2: Inclusive business mechanism piloted. Ten PAC2s will demonstrate inclusive business models through investment and capacity building that will generate substantive employment that targets poor and low-income people. They include eight companies producing, processing, and/or trading various products (e.g., coarse grains, mushrooms, fruits, vegetables, seedlings, and herbal plants); and two companies operating a livestock farm and a poultry farm. This output will also establish and pilot-test the localized inclusive business mechanism (LIBM). The investment component will help PAC2s scale up and/or improve their primary production bases, processing workshops, storages, animal sheds, a biogas digester, and product quality control facilities based on PAC-specific investment designs; 16 and further demonstrate inclusive business models based on inclusive business action plans. 17 The noninvestment component will comprise (i) technical support to PAC2s, including training and advisory services; 18 (ii) support to SPG in the design and implementation of the LIBM, which entails company appraisal, incubation, monitoring, evaluation, and recognition, to systematically promote inclusive business; (iii) preparation of inclusive business action plans for all PAC2s and assistance in their implementation; (iv) LIBM training for the Shanxi Poverty Alleviation and Development Office and the Shanxi Provincial Agriculture Department; (v) training for agribusiness companies on the inclusive business approach; (vi) preparation and sharing of experiences and a policy brief on the LIBM with SPG and the government for their consideration to incorporate the LIBM in the PRC s Fourteenth Five-Year Plan; (vii) study tours on best practices on inclusive business; and (viii) dissemination of LIBM implementation achievements. 14. Inclusive business approach. 19 Inclusive business refers to a business model that is commercially viable and provides scaled up, innovative, and systemic solutions to the relevant problems of poor and low-income people. Inclusive business has become a global initiative that tackles poverty and persistent inequality through private sector engagement, and national-level action has been called for. This project will be the first donor-funded sovereign project in the PRC to implement an inclusive business approach. The approach has been selected specifically to generate employment opportunities for farmers, and particularly poor and low-income people. Project design features include PAC selection based on inclusive business criteria (footnote 16); development of inclusive business action plans, which ensures the qualification of PAC2s for inclusive business and intended social impacts; inclusive business advisory services to the 15 Value chain analysis involves breaking a chain into its constituent parts to better understand its structure and function. It has been widely used in business, development, and academia, and for different sectors. 16 The selection was made during project preparation based on an assessment of the companies current operation and performance and project investment plans using an inclusive business appraisal tool that rates markets and value chains, financial performance, and the investment s social impact and innovation, and aggregates the scores into a single index to identify inclusive businesses. Development of the inclusive business scoring tool and its application for company selection (Annex 1 of the PAM) was supported by ADB Technical Assistance for Inclusive Business Support. Manila (TA 8550-REG). 17 Inclusive business models in agribusiness firms are characterized by three major social impact channels: (i) generation of employment and IGOs on a large scale through business expansion, (ii) better payment than competitors by sourcing higher-value products or paying better prices, and (iii) improvement of livelihoods through reduced risks and better living conditions. 18 Technical Report on Inclusive Business (accessible from the list of linked documents in Appendix 2). 19 The Group of Twenty (G20) and the international development agencies agreed on the G20 Inclusive Business Framework to propose a way forward for governments, the private sector, and other stakeholders. The G20 is an international forum for the governments and central bank governors from 20 major economies.

10 5 PAC2s to help them ensure financial feasibility, while achieving target social impacts; and piloting of the LIBM to ensure the inclusive business approach can be sustained and replicated to achieve wider social impacts in the province. D. Summary Cost Estimates and Financing Plan 15. The project is estimated to cost $147.9 million (Table 1). Detailed cost estimates are included in the project administration manual (PAM). 20 Table 1: Summary Cost Estimates ($ million) Item Amount a A. Base Cost b 1. Agricultural value chains strengthened Inclusive business mechanism piloted Project management 9.6 Subtotal (A) B. Contingencies c 16.8 C. Financing Charges During Implementation d 6.8 Total (A+B+C) a Includes taxes and duties of $10.0 million, which does not represent an excessive share of the project cost. b In mid-2017 prices as of 31 May c Physical contingencies computed at 8.0% for all expenditure categories. Price contingencies computed at average of 1.9% on foreign exchange costs and 2.8% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Interest during construction for the ordinary capital resources loan has been computed at the 5-year United States dollar fixed swap rate plus an effective contractual spread of 0.50%. Commitment charges for the ordinary capital resources loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates. 16. The government has requested a regular loan of $90 million from ADB s ordinary capital resources to help finance the project. The loan will have a 20-year term, including a grace period of 5 years; an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions as set forth in the draft loan agreement SPG will onlend majority of the loan proceeds to the project county governments (PCGs) through the relevant municipal governments on the same terms and conditions as those of the ADB loan to the government. The PCGs will further onlend the loan proceeds to the 19 PACs with interest rates not less than the central government policy lending rate with a term of 5 8 years and grace period of 2 3 years depending on the activity. The loan proceeds repaid by PACs will be re-loaned for investment in other agribusiness companies and/or cooperatives in the project counties during the loan term. 18. The summary financing plan is in Table 2. ADB will finance the expenditures in relation to works, equipment, materials, consulting services, and training, including taxes and duties for eligible ADB-financed expenditures. SPG will make counterpart funds available for training, project management, contingencies, and financing charges. Each PAC will provide a specified portion of subproject costs, and all cost overruns, from their own budgetary resources. 20 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 21 Based on the straight-line repayment method, the average maturity is years; a maturity premium is not payable to ADB. Interest and other charges during construction will not be capitalized.

11 6 Table 2: Summary Financing Plan Amount ($ million) Share of Total (%) Source Asian Development Bank Ordinary capital resources (regular loan) Project agribusiness companies and cooperative Shanxi provincial and project county governments Total Source: Asian Development Bank estimates. 19. Climate mitigation is estimated to cost $5.9 million and climate adaptation is estimated to cost $12.8 million. 22 ADB will provide $3.9 million (67.2%) in mitigation financing and $8.0 million (62.2%) in adaptation financing. E. Implementation Arrangements 20. SPG is the executing agency. A provincial project management office (PPMO), established under the Shanxi Poverty Alleviation and Development Office, will provide oversight, coordination, and project management. The PCGs are the implementing agencies. The 19 PACs are the project implementation units. The implementation arrangements are summarized in Table 3 and described in detail in the PAM. Table 3: Implementation Arrangements Arrangements Aspects Implementation period January 2018 December 2022 Estimated completion date 31 December 2022 Estimated loan closing date 30 June 2023 Management (i) Oversight body Provincial project leading group Chair: vice governor of the Shanxi Provincial Government (ii) Executing agency Shanxi Provincial Government, represented by the Shanxi Poverty Alleviation and Development Office (iii) Key implementing agencies 17 project county governments (Datong, Fenxi, Fushan, Guangling, Heshun, Jishan, Liulin, Qin, Quwo, Ruicheng, Shilou, Taigu, Xiangning, Xinjiang, Yanhu District, Yaodu District, and Yuanqu) a (iv) Implementation units 19 project agribusiness companies and cooperative Procurement International competitive bidding 3 contracts $17.97 million National competitive bidding 34 contracts $79.09 million Shopping 1 contract $0.05 million Consulting services Retroactive financing and/or advance contracting Disbursement a Yaodu and Yanhu districts are county-level districts. Source: Asian Development Bank. Quality- and cost-based 2 contracts (102.5 selection person-months) $2.20 million Retroactive financing and advance contracting are expected for consulting services. The loan proceeds will be disbursed following the Asian Development Bank s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the Asian Development Bank and the Government of the People s Republic of China. 22 Details on the estimates of climate risk adaptation and mitigation measures can be found in the Climate Vulnerability Assessment and Management Report (accessible from the list of linked documents in Appendix 2).

12 7 III. ATTACHED TECHNICAL ASSISTANCE 21. The outputs of the transaction TA will comprise (i) capacity building of the implementing agencies and PACs on safeguards, financial management, and procurement; and (ii) project implementation monitoring and reporting. The executing agency is SPG. Although the PPMO has experience with an ADB project, loan implementation consultants to be financed by the TA will be necessary for proper management of the project. The outputs and activities, cost estimates, financing plan, and implementation arrangements of the TA are described in the attached TA report. 23 The TA is estimated to cost $300,000 to be financed on a grant basis by ADB s Technical Assistance Special Fund (TASF-other sources). The TA implementation period is the same as the project implementation period. IV. DUE DILIGENCE A. Technical 22. Climate change. A climate vulnerability assessment and management report found the threat posed to project viability by climate change as medium to low. Climate projections suggest that temperature and precipitation will increase during compared with the baseline period ( ). Extreme weather events (e.g., droughts, severe storms) will likely become more intense and frequent in Shanxi Province. Adaptation measures were incorporated in the project design to (i) cope with anticipated climate change impacts, and (ii) manage the emission of greenhouse gases from project activities. The adaptation measures include those for the protection of livestock, crops, and facilities from excessive heat or cold, including through upgraded greenhouse structures; improved disease control; and water-saving measures to cope with increased water demands for crops and trees, and drought. The mitigation measures include adoption of energy-saving technologies, livestock waste biogas recovery or fermentation technologies; upgraded insulation for all buildings; light-emitting diode lighting and energyefficiency equipment; and green belts with trees and grass for shading and increasing rainfall absorption and drainage capacity. The adaptation and mitigation measures have been incorporated in the project design. B. Economic and Financial 23. The economic analysis indicated that the project is viable with an economic internal rate of return of 23.3% and an economic net present value of CNY1,888 million. The analysis also confirms the economic viability of all subprojects, with economic internal rates of return ranging from 9.2% to 36.5%, above the economic opportunity cost of capital of 9%. Sensitivity analysis confirmed the project is economically viable even under negative scenarios. The financial analysis confirmed the project s financial viability and sustainability. The financial evaluation found all subprojects and the entire project were financially viable, with financial internal rates of return of 4.4% to 34.2%, above the weighted average cost of capital. The entity financial analysis showed that all PACs will be able to maintain reasonable financial performance over time based on financial ratios computed from their respective projected financial statements. 24 C. Governance 24. The financial management assessment was conducted for SPG, PCGs, and PACs; and concluded that, in light of the mitigation measures, the prevailing structure and system of project 23 Attached Technical Assistance (accessible from the list of linked documents in Appendix 2). 24 Economic Analysis and Financial Analysis (accessible from the list of linked documents in Appendix 2).

13 8 financial management is appropriate. The overall project financial management risk is moderate on a pre-mitigation basis. The assessment recommended an action plan to mitigate the identified financial management risks, including training on ADB financial management requirements such as loan disbursement; this is to be implemented by SPG during the project. The procurement risk assessment indicated that (i) SPG and the PCGs have the experience to undertake public procurement of consulting services, goods, and works; and (ii) monitoring and internal controls regarding procurement are generally in place, but PACs lack experience on foreign-funded projects. Mitigation measures will include (i) early engagement of a procurement agent and project implementation consultant, and (ii) provision of training on ADB procurement policies and procedures during the project. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, SPG, and PACs. The specific policy requirements and supplementary measures are described in the PAM. D. Poverty, Social, and Gender 25. Poverty and social. The project is classified as targeted intervention-geographic for poverty reduction, emphasizing generation of IGOs for farmers in poverty-stricken areas. Poor and low-income people comprise significant portions of the project beneficiaries. A total of 73,250 households with 209,100 persons, of whom 49% are women and 54% are low-income people, are expected to benefit from cooperation with PACs, including as employees, contractual farmers, raw material suppliers, and recipients of subsidized inputs and services. The inclusive business approach is expected to enhance the socioeconomic benefits for low-income people and contribute to inclusive social development and poverty reduction in the project areas. A poverty and social analysis has been undertaken and a social development action plan prepared, with specific targets committed to by PACs. Consultations have been held with farmers and stakeholders during project preparation, and consultation and participation measures for project implementation have been included in the social development action plan. 26. Gender. The project is classified as effective gender mainstreaming, following the Guidelines for Gender Mainstreaming Categories of ADB Projects. 25 The project is expected to benefit women significantly (majority of the agricultural workforce are women). A gender action plan has been prepared based on gender analyses to ensure the project contributes to improved gender equality. The gender action plan includes specific targets: (i) women are to (a) hold 40% 50% of jobs in PACs operations; (b) make up 45% 50% of beneficiaries in contract farming and raw material supply to PACs; (c) hold 30% of jobs in construction; (d) have workplace facilities separate from those for men; (e) make up 30% of project staff; (f) account for 50% of farmers involved in consultation, participation, and capacity building; and (ii) gender-disaggregated data are to be collected for monitoring. Key gender indicators have been included in the design and monitoring framework. 27. Capacity for implementation and monitoring of social measures. The PPMO has experience in implementing projects, including an ADB-financed agriculture project. 26 However, it does not have experience with projects that require monitoring of social measures compliance by a private company. To implement social measures properly, (i) the PPMO, the county project management offices, and PACs will each appoint a staff member as a social focal point, who will be provided training on social measures; and (ii) an external social expert will be recruited to 25 ADB Guidelines for Gender Mainstreaming Categories of ADB Projects. Manila. 26 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grants to the People s Republic of China for the Shanxi Integrated Agricultural Development Project. Manila.

14 9 monitor the implementation of social measures and train relevant staff of PPMOs, county project management offices, and PACs. E. Safeguards 28. In compliance with ADB s Safeguard Policy Statement (2009), the project s safeguard categories are as follows Environment (category B). An initial environmental examination (IEE) report and an environmental management plan (EMP) have been prepared; these were based on the approved domestic feasibility study reports, environmental assessments, and site visits. Consultations were held with affected people and government agencies, and the outcomes integrated in the project design. The draft IEE was disclosed on the ADB website on 28 June SPG, through the PPMO, will be responsible for the EMP implementation and compliance, including inspection, monitoring, reporting, and initiating corrective actions or measures. The PCGs serving as implementing agencies lack prior experience with ADB safeguard procedures, and loan implementation consultants and a capacity building program have been included in the project design. The IEE will be updated as needed during detailed project design preparation. 30. The project is expected to achieve environmental benefits, including improved management of wastewater, livestock manure, and agricultural chemicals; and increased efficiency of water resource use in existing and new facilities. Anticipated construction impacts include localized and temporary air, dust, noise, vibration, and erosion impacts. Potential operational risks include the unsustainable use of groundwater or surface water, and increased use of agricultural chemicals. The risk of indirect, cumulative, and/or induced impacts was assessed. Mitigation measures have been described in the EMP; these included the preparation of subproject water management plans, waste treatment systems, and improved management of pesticides and fertilizers. All project activities will be located on lands already zoned and modified for development and that support existing PAC facilities. The livestock subprojects comply with domestic requirements for minimum distances from residential areas. The IEE concludes that effective EMP implementation, together with the prescribed training, will result in residual impacts within the limits of PRC and/or international standards as defined in the EMP. 31. Involuntary resettlement (category C). The project will not involve involuntary land acquisition and resettlement impacts, but will involve voluntary land use by PACs, affecting a total of 19,857 mu (1,324 hectares) of land. 28 The land use rights for most of this land (19,315 mu) have been leased from 1,819 households, while the remaining 542 mu is state-owned land. Due diligence has concluded that the land use agreements have followed required procedures: farmers were informed and consulted regarding the land use; agreements were voluntary; farmers will benefit fairly from rents as well as other benefits, such as employment to be provided by PACs; and the project will not have adverse impacts on the farmers. Due diligence has also confirmed that no issues will trigger involuntary resettlement requirements under the ADB Safeguard Policy Statement. With the help of an external social expert (who will serve under the project), SPG has agreed to monitor land leases, resolve any issues, and report findings annually during project implementation. 27 ADB. Safeguard Categories A mu is a Chinese unit of measurement (1 mu = hectares).

15 Indigenous peoples (category C). The project will not impact any distinct and vulnerable ethnic minority communities, and not trigger indigenous people s requirements under the ADB Safeguard Policy Statement. F. Summary of Risk Assessment and Risk Management Plan 33. The risk assessment of the overall project is medium, and the benefits and impacts are expected to outweigh the costs. Risks (which were all rated low or moderate) and mitigation measures are described in detail in the risk assessment and risk management plan. 29 V. ASSURANCES 34. The government and SPG have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 35. The government and SPG have agreed with ADB on certain covenants for the project, which are set forth in the draft loan and project agreements. Withdrawals from the ADB loan account will not be made for any onlending to a PAC until it has signed an onlending agreement with the relevant PCG. VI. RECOMMENDATION 36. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $90,000,000 to the People s Republic of China for the Shanxi Inclusive Agricultural Value Chain Development Project, from ADB s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility; for a term of 20 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board. 29 August 2017 Takehiko Nakao President 29 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

16 Appendix 1 11 Impacts the Project is Aligned with DESIGN AND MONITORING FRAMEWORK All rural residents falling below the current poverty line of the People s Republic of China and all poor counties lifted out of poverty, and poverty alleviation in all regions achieved (Thirteenth Five-Year Plan for National Economic and Social Development) a Rural urban income disparity narrowed and the proportion of the population in the middle-income class increased (Shanxi Provincial Thirteenth Five-Year Plan for Economic and Social Development) b Results Chain Outcome Incomegenerating opportunities (IGOs) from selected local specialty agricultural products increased Outputs 1. Agricultural value chains (AVCs) strengthened Performance Indicators with Targets and Baselines a. 6,151 new jobs created by project agribusiness companies and cooperative (PACs) under the project, of which at least 50% are for poor and lowincome households; and 42% are for women, by Q (2017 baselines: 0, 0%, 0%) c b. At least 67,099 households (at least 50% of which are poor and low-income households), with 202,949 persons (including 49% women), benefited from IGOs (contract farming, raw material supplies, agricultural inputs, and other benefits) under the project by Q (2017 baselines: 0 households, 0%; 0 person, 0%) c c. Each dollar of investment financed by the Asian Development Bank (ADB) in PAC2s benefited 1.5 times as many low-income and poor beneficiaries as each dollar of ADB-financed investment in PAC1s, by Q (2017 baseline: Not applicable) d 1a. Nine PAC1s, including seven small- and medium-sized PACs, implemented their respective investments by Q (2017 baselines: 0, 0) d 1b. Primary production capacity expanded by seven PAC1s, packaging and/or processing capacity increased by three PAC1s, and storage capacity increased by two PAC1s, by Q d (2017 baselines: 0, 0, 0) e 1c. Eight AVC action plans prepared by Q (2017 baseline: 4) 1d. At least 180 staff and farmers from agribusiness companies and cooperatives, at least 40% of whom are women, report improved understanding of AVCs by Q (2017 baselines: 0, 0%) f 1e. Representatives from at least eight financial institutions report improved understanding of value chain financing by Q (2017 baseline: 0) Data Sources and Reporting Mechanisms a. c. Project progress reports, social monitoring reports, and the inclusive business consultant reports 1a. e. Project progress reports and the AVC consultant reports Risks PACs capacity to generate IGOs is hampered by substantial rural labor cost increases resulting from favorable urban labor opportunities PACs do not reach full production capacity as scheduled due to external factors (e.g., product price declines, animal disease)

17 12 Appendix 1 Results Chain 2. Inclusive business mechanism piloted Key Activities with Milestones Performance Indicators with Targets and Baselines 2a. 10 PAC2s, including 7 small and medium-sized PACs, implemented their respective investments by Q (2017 baselines: 0, 0) d 2b. At least 100 participants from agribusiness companies and the Shanxi Provincial Agriculture Department, at least 40% of whom are women, report improved knowledge on inclusive business approach by Q (2017 baselines: 0, 0%) f 2c. At least 10 agribusiness companies in Shanxi province, including PACs, are rewarded through the inclusive business award program by Q (2017 baseline: 0) f 2d. A policy brief on the inclusive business approach and its application in the project is drafted and shared with the provincial and central government agencies by Q (2017 baseline: 0) 2e. At least eight PAC2s paid salaries and raw material purchase prices equal to or higher than the prevailing market rates by Q (2017 baseline: 0) d 1. Agricultural value chains strengthened a. Investment component Data Sources and Reporting 2a. e. Project progress reports and inclusive business consultant reports Risks 1.1 Prepare the detailed design and bidding documents based on the investment plan and the AVC action plan, if applicable, of each PAC1 (Q Q3 2020) d 1.2 Conduct procurement of civil works and/or equipment for each PAC1 (Q Q4 2021) d 1.3 Conduct civil works construction, equipment installation, and/or procurement of materials for each PAC1 (Q Q2 2022) d b. Non-investment component 1.4 Provide technical support to the PAC1s (training and advisory services) (Q Q4 2021) d 1.5 Conduct value chain analysis for preparation of the AVC action plans for selected PAC1s (Q Q3 2018) d 1.6 Implement the AVC action plans by selected PAC1s (Q Q4 2022) d 1.7 Train agribusiness companies, cooperatives, farmers, and relevant government agencies on the value chain approach (Q Q2 2022) 1.8 Train cooperatives and farmers on institutional and financial management, and cooperation arrangements in production and processing, and contracting (Q Q2 2022) 1.9 Conduct awareness-raising and training for financial institutions and logistics service providers on business opportunities in AVCs (Q Q2 2022) 1.10 Conduct study tours on best practices on AVCs for PACs and relevant government agencies (Q Q3 2022) 2. Inclusive business mechanism piloted a. Investment component 2.1 Prepare the detailed design and bidding documents based on the investment plan and the inclusive business action plan, if applicable, of each PAC2 (Q Q3 2020) d 2.2 Conduct procurement of civil works and/or equipment for each PAC2 (Q Q4 2021) d

18 Appendix Conduct civil works construction, equipment installation, and/or procurement of materials for each PAC2 (Q Q2 2022) d b. Non-investment component 2.4 Provide technical support to PAC2s, including the support for preparation and update (Q Q4 2018), and implementation of the inclusive business action plans (Q Q4 2022) d 2.5 Assist the provincial project management office in developing a localized inclusive business mechanism (LIBM) (Q Q4 2018) 2.6 Prepare and share a policy brief on the LIBM and experiences with the national and provincial governments (Q Q4 2018) 2.7 Implement the PAC2 inclusive business action plans (Q Q4 2022) d 2.8 Train Shanxi Provincial Poverty Alleviation and Development Office and the Shanxi Provincial Agriculture Department on the LIBM (Q1 Q2 2019) 2.9 Train agribusiness companies on the inclusive business approach (Q Q3 2022) 2.10 Implement the LIBM (impact monitoring and award program) (Q Q4 2022) 2.11 Conduct study tours on best practices in the inclusive business for PACs and relevant government agencies (Q Q3 2022) 2.12 Disseminate the achievements of the LIBM pilot (Q Q2 2022) Project Management Activities Recruit the project implementation consultants, the AVC consultants, and the inclusive business consultants (Q Q1 2018) Conduct training on project management (Q Q4 2018) Establish the project performance management system, monitor the project implementation progress, and submit the quarterly project progress reports to ADB (Q Q4 2022) Implement the environmental management plan, and submit the semiannual environmental safeguards monitoring reports to ADB (Q Q4 2022) Implement the gender and social development action plans, and submit the annual social monitoring reports to ADB (Q Q4 2022) Inputs ADB (ordinary capital resources loan): PACs: Shanxi provincial and project county governments: $90.0 million $54.4 million $ 3.5 million ADB (Technical Assistance Special Fund [TASF-other sources]): $ 0.3 million a Government of the People s Republic of China Thirteenth Five-Year Plan on National Economic and Social Development. Beijing. b Shanxi Provincial Government Thirteenth Five-Year Plan for Economic and Social Development of Shanxi Province. Taiyuan. c Baselines referred to poverty and social analysis (accessible from the list of linked documents in Appendix 2). d The project agribusiness companies and cooperative (PACs), which comprise 14 medium- and 4 large-sized companies, and 1 cooperative, are divided into two groups: (i) 9 PACs assessed to have the potential for value chain development (PAC1s); and (ii) the other 10 PACs selected for the potential for inclusive business (PAC2s). e Baselines referred to Annex 4: Subproject Investment Areas of the project administration manual (accessible from the list of linked documents in Appendix 2). f Agribusiness companies include those other than PACs. Source: Asian Development Bank.