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Document of

The World Bank

Report No. PAD1509

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$100.00 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

GUANGXI RURAL POVERTY ALLEVIATION PILOT PROJECT

November 30, 2016 Agriculture Global Practice East Asia and Pacific Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective)

Currency Unit = Renminbi (RMB) USD 1.00 = RMB RMB 1.00 = USD

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACWF BIC CAIP

All-China Women’s Federation Business Incubation Centers Cooperative Annual Investment Plan

CDF Cooperative Development Fund CNAO Chinese National Audit Office CPMO CPS

County Project Management Office Country Partnership Strategy

DA Designated Account EA Environmental Assessment EIRR Economic Internal Rate of Return EMDF Ethnic Minority Development Framework EMP Environmental Management Plan ESMF FM

Environment and Social Management Framework Financial Management

FMM Financial Management Manual FIRR FPCL

Financial Internal Rate of Return China Farmers’ Professional Cooperative Law

GAP Good Agricultural Practice GFB GHG HACCP IPF

Guangxi Autonomous Regional Finance Bureau Greenhouse Gases Hazard Analysis and Critical Control Points Investment Project Financing

IPM Integrated Pest Management IRR Internal Rate of Return IS Implementation Support LGOP Leading Group of Poverty Reduction and Development M&E Monitoring and Evaluation METT Management Effectiveness Tracking Tool MOF Ministry of Finance NPV Net Present Value OA Operating Account OCC Opportunity Cost of Capital

PAD Project Appraisal Document PDO Project Development Objective PMO Project Management Office PMP Pest Management Plan POM Project Operations Manual RMB RPMO

Renminbi Regional Project Management Office

RPF Resettlement Policy Framework SA SME TAG

Social Assessment Small and Medium Enterprises Technical Advisory Groups

Regional Vice President: Victoria Kwakwa

Country Director: Bert Hofman

Senior Global Practice Director: Juergen Voegele

Practice Manager: Nathan M. Belete

Task Team Leader: Paavo Eliste

TABLE OF CONTENTS

PAD DATA SHEET ....................................................................................................................... I

I. STRATEGIC CONTEXT ....................................................................................................... 1

A. COUNTRY, SECTORAL, AND INSTITUTIONAL CONTEXT ......................................................... 1 B. HIGHER-LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES .................................... 5

II. PROJECT DEVELOPMENT OBJECTIVES ..................................................................... 6

A. PDO. ....................................................................................................................................... 6 B. PROJECT BENEFICIARIES ......................................................................................................... 6 C. PDO-LEVEL RESULTS INDICATORS ........................................................................................ 7

III. PROJECT DESCRIPTION .................................................................................................. 7

A. PROJECT COMPONENTS ........................................................................................................... 7 B. PROJECT FINANCING ............................................................................................................. 10 C. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN ............................................. 11

IV. IMPLEMENTATION ...................................................................................................... 14

A. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENT .................................................... 14 B. RESULTS MONITORING AND EVALUATION ........................................................................... 16 C. SUSTAINABILITY ................................................................................................................... 17

V. KEY RISKS AND MITIGATION MEASURES ............................................................. 18

A. RISK RATINGS SUMMARY TABLE ......................................................................................... 18 B. OVERALL RISK RATING EXPLANATION ................................................................................ 18

VI. APPRAISAL SUMMARY ............................................................................................... 20

A. ECONOMIC AND FINANCIAL ANALYSES .............................................................................. 20 B. TECHNICAL ........................................................................................................................... 21 C. FINANCIAL MANAGEMENT ................................................................................................... 22 D. PROCUREMENT ..................................................................................................................... 22 E. SOCIAL (INCLUDING SAFEGUARDS) .................................................................................... 23 F. ENVIRONMENT (INCLUDING SAFEGUARDS) ........................................................................ 24 G. WORLD BANK GRIEVANCE REDRESS ................................................................................... 25 H. GREENHOUSE GAS EMISSIONS REDUCTION .......................................................................... 25

ANNEX 1: RESULTS FRAMEWORK AND MONITORING ................................................ 27

ANNEX 2: DETAILED PROJECT DESCRIPTION ................................................................ 32

ANNEX 3: IMPLEMENTATION ARRANGEMENTS .......................................................... 39

ANNEX 4: IMPLEMENTATION SUPPORT PLAN ............................................................... 57

ANNEX 5. PROJECT ECONOMIC AND FINANCIAL ANALYSIS .................................... 60

MAP-42223 .................................................................................................................................. 66

Financing Source Amount

.

PAD DATA SHEET China

Guangxi Rural Poverty Alleviation Pilot Project (P153892)

PROJECT APPRAISAL DOCUMENT

.

EAST ASIA AND PACIFIC

0000009239

Report No.: PAD1509

Basic InformationProject ID EA Category Team Leader(s)

P153892 B - Partial Assessment Paavo Eliste

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

01-Jul-2017 31-Dec-2022

Expected Effectiveness Date Expected Closing Date

01-Mar-2017 30-June 2023

Joint IFC

No Practice Senior Global Practice

Manager/Manager Director Country Director Regional Vice President

Nathan M. Belete Juergen Voegele Bert Hofman Victoria Kwakwa

Borrower: PEOPLE'S REPUBLIC OF CHINA

Responsible Agency: Guangxi Foreign Capital Poverty Reduction Project Management Center

Contact: Canbin Huang Title: Deputy Director General

Telephone No.: 867715306052 Email: [email protected]

Project Financing Data(in USD Million)

[ X ] Loan [ ] IDA Grant [ ] Guarantee

[ ] Credit [ ] Grant [ ] Other

Total Project Cost: 182.54 Total Bank Financing: 100.00

Financing Gap: 0.00

I

II

Borrower 82.54

International Bank for Reconstruction and Development

100.00

Total 182.54

Expected Disbursements (in USD Million)Fiscal Year

2017 2018 2019 2020 2021 2022 2023 0000 0000 0000

Annual 2.00 6.00 10.00 15.00 30.00 30.00 7.00 0.00 0.00 0.00

Cumulati ve

2.00 8.00 18.00 33.00 63.00 93.00 100.00 0.00 0.00 0.00

Institutional Data

Practice Area (Lead)

Agriculture

Contributing Practice Areas

N/A

Proposed Development Objective(s)

The Project Development Objective is to increase income generation opportunities through demonstration of value chain development models in the project counties.

Components Component Name Cost (USD Millions)

Improvement of Pro-Poor Value Chains 90.22

Public Infrastructure and Services 62.79

Enhancing Investments in Poor Areas 10.41

Project Management, Monitoring and Evaluation, and Learning

10.83

Systematic Operations Risk- Rating Tool (SORT)

Risk Category Rating

1. Political and Governance Low

2. Macroeconomic Moderate

3. Sector Strategies and Policies Moderate

4. Technical Design of Project or Program Substantial

5. Institutional Capacity for Implementation and Sustainability Substantial

6. Fiduciary Substantial

7. Environment and Social Moderate

8. Stakeholders Moderate

III

9. Other

OVERALL Moderate

CompliancePolicy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Institutional Arrangements X CONTINUOUS

Description of Covenant

Project Agreement, Schedule, Section I.A: Provision requiring the maintenance of Project leading groups and Project management offices at the provincial, municipal and county levels.


Annual Work Plans X Yearly


Project Agreement, Schedule, Section I.B.1: Provision requiring by November 30 of each year, starting in 2017, the submission of consolidated annual work plans to the Bank.


Project Operations Manual X CONTINUOUS

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Project Agreement, Schedule, Section I.B.2 and I.E: Provision requiring the Project to be carried out in accordance with the Project Operations Manual, including the arrangements for providing grants to Project Farmer Cooperatives and Cooperating Agro-enterprise under the relevant agreement.


Safeguards Instruments X CONTINUOUS


Project Agreement, Schedule, Section I.D: Provision requiring the Project to be carried out in accordance with the Environmental and Social Management Framework, the Ethnic Minority Development Framework, the Pest Management Plan, the Resettlement Policy Framework (and any Resettlement Action Plans prepared thereunder).


Mid-term Review March 31, 2020


Project Agreement, Schedule, Section II.A.2: Provision requiring Guangxi to furnish to the Bank a mid- term review report for the Project, summarizing the result of the monitoring and evaluation activities carried out from the inception of the Project, and setting out the measures recommended to ensure the efficient completion of the Project and the achievement of the objectives thereof during the period following such data.

Team CompositionBank Staff

Name Role Title Specialization Unit

Paavo Eliste Team Leader (ADM Responsible)

Lead Agriculture Economist

GFA02

Yuan Wang Procurement Specialist (ADM Responsible)

Procurement Specialist

GGO08

Yi Geng Financial Management Specialist

Sr Financial Management Specialist

GGO20

Aimin Hao Safeguards Specialist

Social Development Specialist

GSU02

Ning Yang Safeguards Specialist

Senior Environmental Engineer

GEN2A

Son Thanh Vo Team Member Senior Rural Development Specialist

M&E GFA02

Yunqing Tian Team Member Program Assistant EACCF

5

Extended Team

Name Title Office Phone Location

Claude Saint Pierre Social Specialist 33 4670 40732

Josef Ernstberger Senior Agriculture Economist

49 6849 1616 Kirkel

Locations

Country First Administrative Division

Location Planned Actual Comments

Consultants (Will be disclosed in the Monthly Operational Summary)

Consultants Required? Consultants will be required

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I. STRATEGIC CONTEXT

A. Country, Sectoral, and Institutional Context

1. China’s success in reducing extreme poverty during the economic reform period is widely recognized. Between 1981 and 2012, the World Bank estimates that the portion of the population consuming below the poverty line of USD 1.25 per day in 2005 PPP fell from 84.3 percent to 5.2 percent and the absolute number of poor fell from 837.5 million to 70.4 million. About 767 million people in China were lifted out of poverty; that is, roughly 80 percent of global extreme poverty reduction happened in China. Using the new international poverty line of USD 1.90 per day in 2011 PPP, the share of the population living in poverty fell from 88.3 percent in 1981 to 6.5 percent in 2012, while the absolute number of poor people fell from 877.8 million to 87.4 million. About 790 million Chinese escaped poverty during this period, representing 72 percent of global extreme poverty reduction. Based on different poverty lines, official government estimates confirm a similar sharp decline in poverty over the past three decades. Using China’s rural poverty line of annual per capita net income below CNY 2,300 (at 2010 constant prices and which is slightly above the USD 1.25/day in PPP terms), the number of poor people living in rural areas declined to 55.75 million in 2015 from 70 million in 2014. This represents a continued decline in rural poverty from 17.2 percent in 2010 to 8.5 percent in 2013.

2. Economic growth has been a key driver for poverty reduction in China, but poverty reduction programs and institutions have also played an important role. Established in 1986, the State Council Leading Group Office of Poverty Alleviation and Development of China (LGOP) plays the lead role in orchestrating a wide range of rural poverty reduction programs. During the 1990s and 2000s, the government’s approach to rural poverty alleviation was development- oriented and targeted to poor areas. The 2011-2020 Poverty Reduction Outline for Development- oriented Poverty Reduction for China’s Rural Areas, on the other hand, represented a shift from poor areas to poor households, and broadened the poverty reduction programs by improving access to education and health care, and upgrading the rural social assistance and pension systems.

3. Agriculture has also had an important role in poverty reduction in China. Research carried out by the World Bank shows that the primary (mainly agricultural) sector was the main driving force in China’s spectacular success in poverty reduction, rather than the secondary (manufacturing) or tertiary (services) sector. In fact, agricultural growth had a four times greater impact on poverty reduction in China than growth in the secondary and tertiary sectors.1

4. However, the rate of poverty reduction has become less responsive to economic growth in recent years, including the rate of agricultural growth. The poverty elasticity of China’s agricultural growth declined from –2.7 during the 1990s to about –1.5 in the 2000s. A slower pace of economic growth under “new normal” conditions is expected to bring about even slower household income growth and hence a reduced rate of poverty decline. This decline is particularly evident in rural areas where real growth in average net household income declined from 12.1

1 Montalvo, J. G., and Ravallion, M. (2010). “The pattern of growth and poverty reduction in China.” Journal of Comparative Economics 38; and Ravallion, M., and Chen, S. (2007). “China’s (uneven) progress against poverty.” Journal of Development Economics 82.

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percent in 2011 to 7.5 percent in 2015. Migrant workers in urban areas have also been affected as the average annual growth of disposable incomes of urban households declined from above 8 percent between 2010 and 2012 to only 6.6 percent in 2015. This pattern is likely to continue in the medium term.

5. The remaining poor are increasingly dispersed and harder to target. Geographically, the remaining pockets of poverty, including chronic poverty, are largely concentrated in rural areas, especially in mountainous and remote areas in western and inland provinces of China, in upland villages, among ethnic minorities, and in households with low education. These areas are usually characterized by a challenging natural environment with water scarcity, low soil fertility, poor endowment of natural resources, and/or remoteness from infrastructure and markets. The Government has classified 14 zones (crossing provincial boundaries) as the focus for its rural poverty alleviation efforts. The 14 zones contain 592 nationally designated poverty counties that benefit from special financial support under the government’s rural poverty alleviation programs. A majority of these poverty counties are concentrated in the mountainous areas of central and western China with an often high proportion of ethnic minority population and of other disadvantaged groups, such as people with disabilities and the elderly.

6. The LGOP’s core poverty reduction program, the 2011 “Outline for Development-oriented Poverty Reduction for China’s Rural Areas 2011-2020,” has reinforced a two-pronged approach with both improved access to social services and infrastructure and market-based income generation. The latter is called “Promoting Poverty Reduction through Industrialization” (“chanye fupin”), and states that “The Government will promote utilization of advanced and practical agro- techniques, nurture specialty and pillar industries, and advanced tourism-backed poverty relief programs, while giving full play to ecological environment and natural resource advantages of poverty-stricken areas. It will endeavor to promote industrial restructuring, help poor households develop production through leading enterprises, farmers’ specialty cooperatives, and mutual help organizations, and guide and encourage enterprises to invest in poor areas so as to help poor households increase income.”

7. In 2015, the Government launched a new program called “accurate poverty alleviation” to address the remaining rural poverty by 2020 and improve the targeting of existing poverty reduction programs. As a first step, a census data collection of all remaining poverty households was carried out in 2015 nationwide. The accurate poverty targeting program is expected to generate more reliable poverty data that will be the basis for tracking the progress of achieving the national goal of eliminating rural poverty by 2020.

8. There are emerging economic opportunities in poor rural areas of China. The situation is evolving in a context in which some business-minded individuals are developing innovative rural economic initiatives, based on their localized natural advantages, often developing socially and/or environmentally oriented micro-enterprises or farmer cooperatives that have potential to help reduce poverty in these areas. Increasing numbers of migrants are returning to rural areas in search of new economic opportunities due to declining economic growth and residency (hukou) restrictions in urban areas. These individuals, who include both men and women, have often accumulated knowledge, experience, and capital from their work in urban areas and seek to invest in rural micro-enterprises or farmer cooperatives. Local governments in the project area are

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actively encouraging the return of such migrants through various incentives and support policies. In doing so, they seek to attract individuals with higher skills, especially business and managerial skills, and to resolve the increasingly pressing issue of “aging” villages that have seen a significant outflow of active labor force to urban areas. There is also active tourism development in the more scenic parts of mountainous regions and a growing offer of outdoor activities. Rural tourism could also become an opportunity for poverty reduction, provided models allowing inclusion of the poor are identified.

9. Poverty reduction through agricultural industrialization. The poverty reduction approach through industrialization (“chanye fupin”) aims to develop local agriculture-based industries through the development of economic opportunities for rural poor households in partnership with various stakeholders in the value chain. It could benefit primarily those income-poor people who have necessary human capital and endowments of productive assets to enable them to escape poverty by participating in cooperative income-generation activities. It also requires that both relatively better-off and poorer rural households join their forces to achieve their economic goals. The industrialization approach is thus embedded in a long-term approach of self-development of poor households.

10. Since the beginning of the 2010s, the agricultural industrialization approach has been increasingly promoting the development of local specialty and “pillar industries” in poor areas, that is, agricultural products that market operators can easily associate with one or a few counties. In recent years, LGOP has started to develop farmer cooperatives in villages designated as poor as a key entry point for the industrialization approach, often in partnership with agribusiness enterprises. The strategy to reduce poverty is thus to help the more remote areas participate in modern food value chains. Agribusiness enterprises have an important role in linking farmers to urban markets and building value chains that respond both to consumer needs and to the specific features of generally remote mountainous areas. In today’s food markets, new economic value will be derived less from local processing than from improved linkages to end consumers in urban areas. Dynamic agribusinesses that are already close to consumers in high-end urban markets can also shorten value chains by sourcing produce directly from producers in poor areas. Their focus is not on quantity but on the creation of value through quality, safety of food products, and innovative marketing strategies. This is a fundamental difference from previous approaches in which only a limited number of local enterprises, often with limited knowledge of consumer needs in high-end urban markets, have been selected to work with cooperatives through various government incentive programs.

11. Agricultural transformation process. Over the past several decades, China’s agricultural sector has performed exceptionally well. Agricultural GDP increased in real terms at an average annual rate of 4.6 percent from 1978 to 2013, four times the rate of population growth, and average per capita rural income grew in real terms at an annual rate of about 6.5 percent between 1980 and 2010. Because of the increased productivity of much of its agricultural land and its investments in agricultural research and development, China has been able to produce much more food than expected given its income level and land and water endowments.

12. On the other hand, China’s agricultural sector faces many challenges such as rapidly rising production costs, the higher price of its agricultural commodities than in the international market,

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and increased difficulty in ensuring an adequate supply of agricultural products. The diminishing land and water resources and soil and water pollution from industrial sources will continue to increase pressure on the safety and sustainability of food systems in China. In order to meet these challenges, China’s agricultural and food production systems have entered into a period of transformation to provide more and better quality food at a time when the natural resource base is becoming progressively more fragile, weather and temperature patterns are shifting, and food safety is increasingly being called into question. This transformation process is further driven by rapid urbanization, which will continue to shape food consumption patterns in China in the years to come.

13. Emerging economic opportunities for poor farmers. China has a growing urban-based market for organic, pollution-free, and other quality food products with strong local characteristics but producers need to meet consumer preferences for food variety, food safety, nutrition, and ethics. Technological advances, ICT, logistics, and the development of transportation infrastructure are helping farmers in remote areas now to meet such preferences by connecting them directly with market operators and consumers through various emerging e-commerce platforms, or helping consumers to connect production areas through direct contracting and pre- ordering of specific products. This could offer new opportunities for poverty reduction in remote mountainous areas, which possess unique agro-ecological conditions and are less exposed to industrial pollution, provided that producers are able to meet consumer preferences. Poor farmers in remote areas do not have competitive advantages in bulk agricultural commodity markets because of their higher production costs. However, relative remoteness means that farmers in such areas could differentiate themselves from lower cost, bulk commodity producers in high-potential areas. Poor farmers in remote mountainous areas may thus have an opportunity to turn their geographical disadvantages into advantages by producing agricultural and food products for urban- based markets in which consumers are willing to pay higher prices for assured clean produce, needed to compensate for the higher cost of production.

14. Farmer cooperatives have an important role in the agricultural industrialization approach. The Government enacted the China Farmers’ Professional Cooperative Law (FPCL) in 2007, which led to rapid growth in the number of farmer cooperatives. The recent World Bank study on farmer cooperatives identified that the majority of the farmer cooperatives provide their members with marketing services, purchasing inputs, and technical training.2 About half of the cooperatives were able to obtain various food safety certificates or registered trademarks for their products. These cooperatives have played a useful role in enabling farmers to engage with the rapidly changing market for agricultural products, improving production efficiency, extending new technologies, and standardizing agricultural production. Since 2015, farmer cooperatives can become full economic entities and access credit. New developments can be expected during project implementation in relation to poorer areas and the participation of poor farmers in cooperative operations.

15. However, there are also shortcomings that relate to institutional weaknesses that are prevalent among farmer cooperatives in China. These weaknesses are reflected by weak

2 The World Bank (2016). “Enhancing the Role of Farmer Cooperatives in Inclusive Agricultural Growth in China.” Washington, DC. World Bank.

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management and lack of compliance with those provisions of the cooperative law that relate to the ownership structure of the cooperatives. On the latter, the main concern is the concentration of control of cooperatives and their assets by a small number of individuals who have made the largest investments and the relatively weak democratic control of cooperative decision-making processes. China’s policymakers are well aware of these challenges, and are aiming to strengthen cooperative development in the legal framework.

B. Higher-Level Objectives to Which the Project Contributes

16. The proposed project directly contributes toward the achievement of the World Bank Group (WBG) strategic goals of ending extreme poverty and boosting shared prosperity. The project supports implementation of the national rural poverty reduction strategy as well as Guangxi’s rural development and poverty reduction strategies and programs. The Chinese Government gives high emphasis to eradicating poverty and sharing prosperity and has set itself a goal of eliminating rural poverty by 2020. Achieving this target would require lifting 70 million poor rural residents from poverty during the 13th Five-Year Plan (13FYP) of 2016-2020. Guangxi ranks as the fifth province in the nation in terms of number of absolute poor. Out of its total population of 55.2 million in 2015, 43.1 million people are living in rural areas where 4.5 million are classified as poor (10.5 percent).

17. The proposed project is closely embedded in national poverty reduction policies. Although the project is fully supportive of the Government policy of eliminating rural poverty by 2020, it also considers the medium- to long-term perspective of sustainable poverty alleviation by supporting the development of industries and organizational value chain arrangements. This includes developing longer-term market relationships, building on market opportunities and competitiveness, and developing agricultural industries that may need time to bear fruits and generate income. The project will therefore maintain both short- and long-term poverty solutions by piloting and demonstrating value chain development models with promising perspectives for self-development of rural households and sustainable poverty alleviation.

18. In addition to the achievement of the WBG strategic goals, the project will contribute to the climate change agenda. Climate change represents a significant challenge for agriculture-based economic activities in the karst mountains. These areas are exposed to extreme events such as heavier rains and floods and to a lesser extent longer dry spells on a seasonal basis, as well as climate variability. Weak adaptive capacity further exacerbates the vulnerability of karst mountain areas to climate variability and change. The project will reduce agriculture’s contribution to climate change (mitigation) and strengthen farmers’ resilience to climate change and disaster risks (adaptation). It aims to contribute to China’s stated climate change policies and measures, as outlined in its Intended Nationally Determined Contribution (INDC), which also takes into account several actions, specified in other relevant national processes. China’s INDC focuses, among other points, on proactively adapting to climate change by enhancing mechanisms and capacities to effectively defend against climate change risks in key areas including agriculture, while progressively strengthening disaster reduction mechanisms. With respect to climate change mitigation, the INDC is also inclusive in promoting low-carbon development in agriculture. The project contributes to these commitments by building the resilience of rural households while achieving mitigation co-benefits.

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19. The proposed project is consistent with the FY 13-16 Country Partnership Strategy (CPS): Report No. 95709-CN, discussed by the Board of Executive Directors on November 6, 2012. The project would support the CPS’s strategic theme two: promoting more inclusive development, by geographically focusing on lagging regions and small towns and by supporting policies and demonstration projects that address inequalities. It would contribute to the CPS outcome 2.3: enhancing opportunities in rural areas and small towns, by piloting new ways to boost rural incomes and reduce poverty under the umbrella of the new Poverty Reduction for China’s Rural Areas Strategy (2011-2020) and by promoting inclusive innovation to decrease disparities.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

20. The Project Development Objective (PDO) is to increase income generation opportunities through demonstration of value chain development models in the project counties.

21. The tentative list of models of value chains (i.e., industries) supported through cooperative investments includes fruits and tree crops, timber and non-timber forest products and livestock products, and potentially farmer-based rural tourism. Agricultural activities will be carried out either by cooperatives independently or through partnerships with agribusiness enterprises, while appropriate models for rural tourism are in the process of being identified. The actual activities can change with market and economic opportunities. Almost every cooperative supported under the project could be viewed as a demonstration given the diversity of the products, specific economic activities along the value chain, initial capacity levels, institutional set-ups, governance arrangements, geographic locations, ethnic composition, and other factors. Therefore, for the purposes of this project, the demonstration of value chain development models will be tracked and evaluated as the performance of the targeted cooperatives.

B. Project Beneficiaries

22. The proposed project areas are located in the rural areas of the Yunnan-Guangxi-Guizhou karst area of Western Guangxi. Within this area, 10 project counties under the two prefecture-level cities of Baise and Hechi are proposed. These include Tiandong, Tianlin, Leye, Donglan, Bama, Fengshan, Dahua, Du´an, and Pingguo counties and Yizhou City. All of the selected counties and the selected city are characterized by a high level of poverty combined with poor natural resource conditions, difficulties in water management, limited availability of farm land, and a rural population that comes almost fully from ethnic minorities.

23. The project covers 54 townships and 117 administrative villages, out of which 95 are classified as poor villages. The project is expected to benefit about 64,000 households or about 260,000 people who live in these targeted villages. Of these, around 33,000 households are expected to become members of project-supported cooperatives, whereas all households within the villages would benefit from various project-supported activities. It is expected that at least 35 percent of the farmers who will become cooperative members are currently registered as poor (based on their poverty status as of the end of 2014). Cooperative membership would target around

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60 percent of the poor households in the villages by the end of the project, and women would make up at least 40 percent of active cooperative members.

24. The selection of project villages followed poverty criteria and economic development potential for agricultural and non-agricultural activities. The villages included under the project would need to have a long-term development perspective (e.g., stable communities by having availability of labor and access to natural resources) and not be subject to ongoing or future resettlement under the government ecological resettlement programs. A further competitive selection process was applied to identify project villages to encourage communities to bring forward economic proposals that reflect their resource endowments.

C. PDO-LEVEL RESULTS INDICATORS

25. The achievement of the PDO would be measured by: (i) the number of project-supported cooperatives making a profit; (ii) the number of acknowledged certificates and brand names obtained under the project; and (iii) the number of farmers reached with agricultural assets and services provided by the project.

III. PROJECT DESCRIPTION

A. PROJECT COMPONENTS

26. The project comprises four components, which are summarized below. Annex 2 provides more details on the project description. The project would be implemented over a period of six years.

27. Component 1: Improvement of Pro-Poor Value Chains (USD 90.22 million, of which IBRD USD 61.26 million). This component aims to address market failures in the development of agricultural and non-agricultural rural value chains and key industries with a particular focus on increasing the value of economic activities of targeted farmer cooperatives. Component 1 has the following two subcomponents:

a) Cooperative Development Fund (CDF) (USD 57.91 million, of which IBRD USD 28.96

million) would provide grant financing to new or existing cooperatives, which are established following the FPCL (about 10 per county and 120 over the project implementation). The CDF will be managed by the selected farmer and non-farmer cooperatives that will implement their investment plans for value chain development. These investment plans would be initiated by cooperatives and formulated with the help of technical experts and county governments. Partnerships with agro-enterprises will be encouraged where relevant. The cooperatives would need to provide a beneficiary contribution at levels reflecting the financial capacity of the individual cooperatives. Investment proposals would be subject to appraisal and approval by the county and regional Project Management Offices (PMOs). Funds could be used by the cooperatives to invest primarily in the fixed value-adding production and processing equipment and facilities, nurseries, advanced breeding stations, equipment for improved seed production, storage

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facilities for agricultural produce, and other small-scale cooperative-level infrastructure, goods, and related capacity building and technical assistance services. Depending on the actual needs of cooperatives, these investments could be associated with agricultural production (such as herbs, dragon fruit, kiwi, oil tea, etc.), livestock (goats, pigs, chickens, etc.), rural tourism, and related processing and marketing equipment and equipment, infrastructure, and services. The component would also pay attention to strengthening the institutional and management structures of the cooperatives by allocating a proportion of the CDF fund for capacity building and training of cooperatives, which would be mandatory before investments in economic activities would be made available. The cooperative training activities supported through the project would cover management and technical topics. Specific measures would be taken to ensure participation of women in cooperatives both as individual members and on management boards. The governance structures of the beneficiary cooperatives must be aligned with the provisions of the cooperative law, and the CDF review and approval process will pay close attention to the proposed ownership structures to ensure equitable sharing of benefits. The project will monitor the institutional development aspects of farmer cooperatives by using the Management Effectiveness Tracking Tool (METT).

b) Matching Grant for Enterprises (MG) (USD 32.31 million, of which IBRD USD 32.31

million) would provide matching grants to finance enterprise investments, which demonstrate innovative linkages and benefit-sharing arrangements with targeted cooperatives of poor farmers. It is expected that 20‒30 grants could be awarded to eligible enterprises individually or in partnership with farmer cooperatives. These grants will be identified during the project implementation. The numbers of poor farmers and their cooperatives participating in value-adding income-generation activities with fair benefit- sharing arrangements would be key selection criteria for such matching grants. The grants would be provided based on the application process, which includes a transparent evaluation process (details will be defined in the Operations Manual). To ensure ownership and to demonstrate commitment, the selected enterprises would need to match the grant amount with their own funds at a negotiated level of cost-sharing requirement, which would need to come from the enterprises’ own resources and/or from commercial lending. The project will provide matching grants up to 30 percent from the total investment cost. The matching grants aim to leverage private investments with strong public good characteristics, such as income-generating activities for poor farmers, and would focus on investments in the following key areas: storage and logistics systems; processing; and marketing (branding, certification, etc.) and product quality (including food safety improvement). The management and implementation of this subcomponent would be done at the regional level.

28. Component 2: Public Infrastructure and Services (USD 62.79 million, of which IBRD USD 9.21 million). This component would support the establishment and strengthening of public infrastructure and service systems in support of value chain/key industry development under Component 1 and would have two subcomponents:

a) Rural infrastructure (USD 53.58 million), which would be identified, to the extent possible,

to complement the CDF investments under Component 1. The component would support (i) rehabilitation and construction of production road infrastructure, such as off-grade

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access roads to village/cooperative production areas or processing and marketing facilities, and rehabilitation and construction of tractor roads, field tracks, and foot paths; (ii) rehabilitation and construction of small-scale water storage facilities and related irrigation systems; (iii) establishment of IT and telecommunication infrastructure and procurement of related equipment; and (iv) rehabilitation or construction of public market facilities, electricity supply and other infrastructure, and procurement of related equipment.

b) Risk management (USD 9.21 million, of which IBRD USD 9.21 million), which would

support the development of value chain or industry-level comprehensive risk assessment and risk mitigation plans for a cluster of counties. The plans would consider (i) production risks (e.g., natural disasters, outbreaks of diseases, etc.); (ii) marketing risks including potential risk of food safety and food quality violation and the impact on consumer trust by the project beneficiaries or outside fellow producers/suppliers; and (iii) financial risk such as cash flow constraints and working capital requirements. The risk management and mitigation plans would identify the responsibilities of public and private stakeholders (the main audience of these plans) such as producers, processors, food safety testing and quality institutions, insurance companies, etc., and identify gaps and bottlenecks, which will be addressed under the project. The project investment would follow the priorities identified in the risk mitigation plans and could include, inter alia, investments in food safety testing and control (tests according to a testing regime or if necessary additional training and equipment for the related public-sector testing/controlling institutions, such as local FDA offices), etc. Marketing risk mitigation support could include the development, registration, and protection of local/regional brands, geographical indication, as well as strategic product marketing and promotion. This component would finance mainly Technical Assistance (TA), consultant services, and equipment.

29. Component 3: Enhancing Investments in Poor Areas (USD 10.41 million, of which IBRD USD 10.41 million). This component would improve and facilitate investments in poor areas by existing and new micro-entrepreneurs and business entities, such as small and medium enterprises (SMEs), migrant returnees, or cooperatives, and would include two activities:

a) Business incubation (USD 8.55 million, of which IBRD USD 8.55 million), which would

support the setting up and operation of Business Incubation Centers (BICs) in each county. The BICs would support existing and start-up businesses in the development of marketing skills and enable market linkages by reducing information asymmetries, building trust, and creating shared value between value chain actors. They would also provide training on financial management skills and help enterprises with access to finance by facilitating linkages with partnering financial institutions. In addition, BICs will offer business development services such as training (business management, business planning) and provide assistance with navigating regulatory requirements, standards, and compliance. Other services could include promotion of business networks and fairs and media events to promote the products of participating enterprises. Finally, the BICs would offer their clients office facilities and meeting rooms with reliable internet connection to enable sales, procurement, and management functions to operate in a professional environment. The component would provide seed funding in the form of a grant but the BICs are expected to become financially sustainable over time by generating their own revenue to reach a point where they can cover their ongoing operating expenses through service fees. This

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component will finance equipment, TA and related consultancy services, necessary office equipment, and operating costs associated with the running of BICs (e.g., 100% during years 1‒2 and 50% from year 3 onward).

b) Improved access to financing (USD 1.86 million, of which IBRD USD 1.86 million) will

support, in cooperation with local finance institutions, the scaling-up of the government program of a comprehensive household credit rating piloted in Tiandong County of Guangxi. It will carry out validation of rural assets, which can be used as collateral required for individual households and cooperatives to obtain loans from designated finance institutions. Credit rating will be done on a biannual basis (twice under the project) for all households in the project villages. The validation of assets will help cooperatives to access loans, including loans for working capital. The project support of the credit rating would be output based with a prior agreed payment per each rated household for the rating teams. The project would recruit professional service providers such as asset validation firms or accounting companies.

30. Component 4: Project Management, M&E, and Learning (USD 10.83 million, of which IBRD USD 10.83 million). This component would strengthen the administrative and technical capacity of the staff of the Project Management Offices at the county, prefecture, and regional level. The component would establish a rigorous monitoring and evaluation and impact evaluation system in order to enable learning from its pilot activities, with an external professional monitoring agency to be engaged under the project. This component would also support regular supervision, progress monitoring, acceptance checks, and implementation supervision and monitoring of safeguards compliance.

B. PROJECT FINANCING

Lending Instrument 31. The selected lending instrument is an Investment Project Financing (IPF). IBRD will be a US dollar, variable spread loan of USD 100 million for the project, with a maturity of 26 years, including a 6-year grace period.

Project Cost and Financing

32. Project cost. Total project costs are estimated at USD 182.54 million (RMB 1,186.50 million). The project costs are proposed to be financed by a loan from IBRD of USD 100 million and government counterpart funds of USD 82.54 million (RMB 536.50 million).

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Table 1: Project Cost (USD million)

A. Improvement of Pro-Poor Value Chains Cooperative Development Fund Matching Grant for Enterprises

Subtotal Improvement of Pro-Poor Value Chains B. Improving Public Infrastructure and Services

Rural Infrastructure Risk Management

Subtotal Improving Public Infrastr. & Services C. Enhancing Investments in Poor Areas

Business Incubation Centers Access to Financing

Subtotal Enhancing Investments in Poor Areas D. Project Management, M&E, and Learning

Management M&E

Subtotal Project Management, M&E, and Learning Total Project Cost

Interest During Implementation Commitment Charges Front-end fees

Total Financing Required

Total Cost

(US$ million)

% of Total Cost

IBRD

Financing

% IBRD

Financing

57.91

31.7

28.96

50.0 32.31 17.7 32.31 100.0

90.22 49.4 61.26 67.9

53.58 29.4 - -9.21 5.0 9.21 100.0

62.79 34.4 17.24 14.7

8.55 4.7 8.55 100.0 1.86 1.0 1.86 100.0

10.41 5.7 10.41 100.0

8.73 4.8 8.73 100.0 2.10 1.1 2.10 100.0

10.83 5.9 10.83 100.0174.25 95.5 99.75 57.2

7.18 3.9 7.18 1000.86 0.5 0.86 1000.25 0.1 0.25 100

182.54 100.0 100.00 54.8

33. Retroactive Financing. Retroactive Financing will be available for eligible expenditures under all project components up to an aggregate amount not to exceed USD 10 million for payments on or after July 1, 2016, and is specified in the Loan Agreement.

C. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN

34. The Bank has gained experience and insights from a large number of projects3 and programs, both Bank and non-Bank financed, for which private-sector entities and businesses are

3 For some important project-level experiences, see: 1. World Bank. “Turkey Technology Development Project.” Project Appraisal Document. Washington, DC:

World Bank. 2. World Bank. “China Agriculture Technology Transfer Project.” Project Appraisal Document and

Implementation Completion Report. Washington, DC: World Bank. 3. World Bank. “Zambia Smallholder Agricultural Commercialization Strategy.” Report No. 36573-ZM.

Washington, DC: World Bank. 4. World Bank. 2008. “Vietnam Agriculture Competitiveness Project.” Project Appraisal Document. Washington,

DC: World Bank.

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important development partners.4 The design of the proposed project has incorporated lessons and experiences discussed below. For each of the lessons, some key references are provided in footnotes 3 and 4:

Importance of alignment with the country’s policies and programs (see references (2), (6),

and (7)): The project is fully aligned with China’s poverty alleviation and rural development strategies and programs. It responds directly to the LGOP poverty alleviation through industrialization strategy by building partnerships between cooperatives and local entrepreneurs, and leverages private-sector investment as an engine for rural growth, bringing innovation and market access to small farmers as well as employment opportunities.

The need to identify and build on specific comparative advantages in the project areas, rather than trying to change them (see references (2) and (8)): The proposed project investments will build on specific comparative advantages in the targeted project areas, which are characterized by their location, production conditions, infrastructure, agro- climate, labor force, and skills. The project areas are located in remote mountainous villages, which generally are not competitive with better-situated locations for ordinary agricultural commodities (mainly due to higher production costs and lower productivity). However, with the rapidly increasing demand and consumers’ willingness to pay for safe and nutritious food, special products with strong locational characteristics as well as social and environmental properties associated with such products, the project aims to capitalize on the ongoing rural transformation processes that could turn the perceived disadvantages of the remote mountain locations into specific market advantages, building on a strong and clear market differentiation.

Matching grant schemes can be highly effective, especially if the lessons learned from the WBG project portfolio are incorporated. The use of matching grants targeted at producer organizations/farmer cooperatives and agribusinesses has a long and largely successful record in the WBG. In the early 2000s, a raft of projects in Eastern Europe focused on supporting new technologies and marketing channels with about 40 percent funding being channeled through agribusinesses. These projects were successful. One of the first was in Rumania, which demonstrated with Net Present Value (NPVs) with weighted Financial Rate of Return (FRR) at 111 percent. In the LAC region, partnership programs called Productive Alliances now amount to more than 16 projects. By October 2013, nearly 3,000 partnerships benefited 110,000 families in the region. The best established is the Colombia program, which supported 775 partnerships, with more than 75 percent of the Productive

4 For some of the analytical work, see:

5. van der Meer, K., and Noordam. M. 2004. “The Use of Grants to Address Market Failures: A Review of World Bank Rural Development Projects.” Agriculture and Rural Development Paper No. 27. Washington, DC: World Bank.

6. World Bank. 2010. Designing and Implementing Agricultural Innovation Funds: Lessons from Competitive Research and Matching Grant Projects.” Report No. 54857-GLB. Washington, DC: World Bank.

7. World Bank. Agricultural Innovation Systems: An Investment Sourcebook. See specifically Module 5: Innovative Partnerships and Business Development, with Thematic Notes on Foundations for Public-Private Partnerships, Innovation Funds, and Agricultural Clusters; http://siteresources.worldbank.org/INTARD/Resources/335807-1330620492317/9780821386842_ch5.pdf,

8. Tyler, G., and Dixie, G. 2012. “Investment in Agribusiness: A Retrospective View of a Development Bank’s Investments in Agribusiness in Africa and East Asia. Washington, DC: World Bank.

9. World Bank/UNCTAD. Field Survey of the application of principles of responsible agricultural investment with investors and local communities. Hafiz Mirza, Will Speller, & Grahame Dixie. 2013. Joint UNCTAD/World Bank report (to be published).

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Alliances being assessed as sustainable businesses. The preliminary results of the Bolivia Productive Alliance of 159 projects has shown increases in productivity (+50 percent), prices, marketable surpluses (2 times), and sales income (2 times) for the smallholder producers linked with agribusiness. In Zambia, the Agricultural Development Support Project successfully provided 24 matching grants to agribusiness.

Importance of consultation and mutual benefits (see references (2), (3), and (7): Field interviews and experiences gained from similar projects in China (e.g., China Agricultural Technology Transfer Project) confirmed that successful partnerships are characterized by close and frequent interaction between agribusinesses and farmer partners, which are based on a fair benefit-sharing arrangement. The project would need to give special attention and support to ensure that enterprise investment proposals are proposed jointly (investor and farmer cooperatives), are financially sound, include community consultation, and offer sufficient benefits to both investors and farmers.

High sustainability of a project built on strong partners with demonstrated experience to link with farmers (see references (2), (7), (8), and (9)): Commercial risks are reduced by the project investing (i) in established and operationally skilled agribusinesses and (ii) in well-resolved business models.

Need for results to be agreed up front, which are then transparently pursued and monitored during implementation (see references (2) and (7)): The solicitation process needs to involve a set of clear objectives and results as part of a vetting system for the selection of investment decisions. These would include outreach to poor farmers (including subsets such as women, ethnic minority populations, etc.), an increase in farmer incomes, and improvements in the availability of agricultural inputs to smallholders. Applications for grant funding will have to specify the targeted gains for each agreed indicator, and the matching grant contracts would require transparent monitoring of accomplishments and results. In cases of non-compliance, funding would be stopped to the grantee, or even partially or fully repaid.

35. The operational experience with the implementation of the two ongoing Bank-supported rural poverty reduction projects in China (Poverty Alleviation and Agricultural Development Demonstration in Poor Areas Project and Guizhou Rural Development) shows that careful project preparation is important to avoid delays in the implementation and disbursements. A full understanding by the county-level project implementation units of the learning and demonstration nature of such projects is critical. The proposed project preparation has included a significant consultation with all project counties in both training workshops and field visits.

36. Finally, a number of lessons have been learned from gender issues from the previous poverty reduction projects in China. It should be noted that poverty reduction programs in China target households, not individuals, thus providing very limited visibility about gender-related issues and solutions in these programs. Previous Bank-supported poverty reduction projects have demonstrated the added value of a gender strategy to ensure that the projects benefit rural women both in economic and social empowerment terms. Such strategies are successful when they take into account the impact of migration on gender roles and on labor availability. Another lesson learned is to address differently women’s participation in management positions, in the creation of microenterprises, and in women’s access to unskilled jobs. Projects supported by the World Bank in China or from other donors, such as IFAD, have successfully invited Women’s federations,

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which run their own capacity-building and credit programs for women entrepreneurs and women cadres in each of the project counties, as project partners.

Text Box 1: Special Experience and Lessons from the World Bank-supported Agricultural Technology Transfer Project (Extracts from the ICR Report, 2012):

“The project showed through many subprojects that organizing farmers in company-farmer arrangements or farmers in farmer cooperatives allowed them to enter into higher-value production through product branding, product certification, and/or access to new markets, including export markets. Such innovations were undertaken by companies as the driving force or, in other cases, by farmer associations alone, which demonstrates that well- managed farmer associations can become drivers of innovation themselves.”

“Technology adoption constraints caused by fragmented production and small farm size can be overcome with innovative partnership arrangements. The project effectively demonstrated that technology barriers caused by fragmented production and small farm size can be overcome through partnership arrangements between companies and farmers or farmer associations. For example, it is challenging for individual (smallholder) farmers to adopt organic food production and/or IPM technology because the limited farm size does not allow them to effectively exploit the commercial opportunities of such technologies. Economies of scale in technology application can be realized through partnerships and significant commercial benefits can be generated for all partners involved.”

“Adding value in agricultural production with a fair distribution of benefits needs effective organizational arrangements. Organizing farmers in company-farmer arrangements or establishing farmer organizations allows stakeholders to enter more easily into higher-value production through product branding, certification, or access to new and export markets because of scale effects. Companies as well as farmer organizations can both serve as the driving force for such value addition through innovation. In both cases, support to farmer associations will allow for a fair sharing of the incremental value generated.”

“Successful public-private partnership needs clear selection procedures, outcome definition, and contractual arrangements. Transparent competitive selection mechanisms with a clear definition of eligibility criteria for public funding, well-defined public good outcomes, and sanctions are important success factors in public-private partnership models. Under the project, outcomes and public funding modalities were agreed in written contracts, which were monitored for compliance and, in cases of non-compliance, such contracts or subprojects were stopped or restructured.”

“Public goods can be successfully delivered through public-private partnerships. Private institutions can play an important role in delivering public goods and services in a cost-effective way and with high quality. Under the project, farmer associations and companies entered into contractual arrangements with the government to provide public animal health services, training of farmers, or other extension services. In addition, such contractual arrangements allowed the government to specifically target poor farmers and vulnerable groups such as women and ethnic minorities. Similarly, several subprojects involved innovative technologies and environmental services such as the treatment of manure, waste, or crop residues or the protection of valuable genetic resources, activities which have a clear public goods character.”

IV. IMPLEMENTATION A. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENT

37. Institutional and Implementation Arrangements Project implementation arrangements have been set up at the regional, municipality, and county levels. Institutional responsibilities are

15

summarized below. They are described in more detail in Annex 3 and will be detailed in the Project Operations Manual (POM).

38. Project Leading Groups. Project Leading Groups at the regional (provincial), municipal, and county levels, comprising representatives from the Reform and Development Commissions, Finance Bureaus, Poverty Reduction Offices, Auditor’s Offices, Civil Affairs Bureaus, Ethnic Affairs Commissions, Women’s Federation, and other departments, will provide leadership, policy guidance, and direction for project implementation within their respective jurisdictions.

39. Project Management Offices. A Regional Project Management Office (RPMO) has been established in the Guangxi Regional Poverty Alleviation Office. The RPMO will be responsible for the overall project coordination and management, including annual work and budget planning; coordination of municipalities’ and counties’ public outreach, work planning, procurement, and fund withdrawal and reimbursement management and financial reporting; technical and institutional aspects of implementation; general oversight, field supervision, and acceptance checks; and training and capacity building. The RPMO will be responsible for the (i) selection and negotiations with the agribusiness enterprises that receive support under the matching grant for the enterprises subcomponent (subcomponent 1b); (ii) preparation of the industry risk assessment and risk mitigation plans (part of subcomponent 2b); (iii) training, guidance, initial review, and appraisal of the cooperative investment proposals, which is expected to be delegated to municipalities or counties depending on their capacity; (iv) overall project M&E and reporting to the Bank; (v) updating of the POM (including the FMM) as necessary; and (v) preparation of the consolidated Annual Work Plans and consolidated semi-annual project progress and financial reports. Municipal-level PMOs will provide technical guidance to counties, supervise implementation, and assist the regional PMO in acceptance checks and M&E. County PMOs (CPMOs) will have primary responsibility for project management locally, including preparation of their Annual Work Plans and semi-annual project progress and financial reports; identification and formation of farmer cooperatives and providing them with necessary capacity building and implementation support services; identification and implementation of rural infrastructure investments (through relevant county-level line agencies) as well as coordination of the complementarity of such investments with those under the CDF; establishment and resourcing of BICs, which will be run by qualified entities; and arrangement of the data collection work for the credit-rating activities.

40. Administrative Village Committees. Village Committees will be responsible for public information dissemination in their localities, community/cooperative mobilization, planning and implementation of public infrastructure investments assigned to the administrative village level, and for the coordination of any land requisition for infrastructure construction, as needed.

41. Professional Farmer Cooperatives. Farmer cooperatives will be established as economic entities and registered under China’s Farmer Professional Cooperative Law. They will have implementation responsibility for all activities under the CDF. They will organize cooperative members, prepare the Cooperative Annual Investment Plans (CAIPs), and administer cooperative development funds in accordance with approved plans and project regulations.

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42. Farmer Cooperative Advisors will be recruited and trained by the county PMOs to assist in the establishment and operationalization of new cooperatives, provide guidance to cooperatives in the formulation and implementation of productive investments and CAIPs, and assist the CPMOs in monitoring and reporting of cooperative activities, and handling complaints.

43. Technical Advisory Groups (TAGs). Each county will set up a TAG comprising representatives from government, cooperatives, and relevant industries and private-sector entities to provide advisory services for the cooperative value chain investments.

B. RESULTS MONITORING AND EVALUATION

44. The Results Framework describes the PDO-level outcome indicators and the component- specific intermediate indicators, including core sector indicators and respective baselines and targets (Annex 1). Monitoring and evaluation (M&E) arrangements and responsibilities will be described in detail in the POM. Project M&E will be the responsibility of the regional and county PMOs. A designated M&E officer will be appointed at the RPMO and in each CPMO for compiling M&E data for consolidation into the semi-annual project progress reports. A simple computerized progress monitoring system will be set up at the county and regional PMO levels to help track and document physical, institutional, and financial project progress. Management effectiveness of farmer cooperatives supported by the project will be measured by the cooperative Management Effectiveness Tracking Tool (METT), a qualitative self-assessment tool. The RPMO will engage qualified institutions or experts to conduct independent process monitoring and impact assessments, including the METT, at the project mid-term and at the end of the project. An endline survey will be factored into the overall project’s M&E framework and budgeted to facilitate the impact evaluation of the project’s activities.

45. In addition to the general results monitoring, and in response to the specific learning and demonstration nature of this project, a knowledge management process based on cooperative – level indicators will be set up to understand farmer benefits and the suitability of different cooperative models. This will be done by categorizing cooperatives by their management and benefit-sharing arrangements. A set of indicators will be defined for each cooperative model/category. Indicators will include but are not limited to outreach to poor farmers, risk perception of members by gender and poverty status, incremental revenues generated, satisfaction of members by gender and poverty status, growth in membership, growth in cooperative assets, benefit sharing, financial sustainability, etc. The system is expected to provide specific recommendations of the suitability of different organizational arrangements under the industrialization agenda in terms of growth and income generation, and suitability of different models by industries and value chains for poverty reduction (in terms of inclusiveness, degree, sustainability, etc.). The collection of this information and analysis would be an integral part of the third-party monitoring contract.

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C. SUSTAINABILITY

46. Specific sustainability considerations that have guided project design include the following:

a) Production scale-up. The project will not support the expansion of existing agricultural

production capacity without well-justified rationale. Production expansion would be supported only if (i) there is potential for improving competitiveness and marketability, as identified through industry, technology, and market analyses; (ii) such expansion is combined with structural adjustments in production arrangements, for example, new arrangements that involve enterprises and cooperatives as main actors and investors, with government acting as a service provider; and (iii) only targeted poverty households will receive project subsidies for additional production and/or expansion of production.

b) Farmer cooperatives. Detailed constitutional principles for farmer cooperatives will be formulated in the POM, for example, an elected board, a transparent accounting system, open membership, regular mandatory meetings and decision-making arrangements, a process for handling complaints, and regular audits. The selection and formation of farmer cooperatives supported under the project is expected to closely follow these principles, as well as the FPCL. The capacity of producer organizations to grow and respond to changes in market conditions will be improved by training for managerial strengthening and capacity building.

c) Private-sector partnerships. The project will promote partnerships between cooperatives and agro-enterprises through arrangements that seek to leverage private-sector investments through co-financing. Partnerships that reconcile the main interests of farmer cooperatives (higher income) and enterprises (volume and product quality) are likely to be sustainable. Investment commitments from the private sector are expected to provide an important indication for a business rationale and longer-term sustainability of the commodity value chain. The eligible enterprises will be selected during the investment proposal preparation based on clear criteria, such as strong business and financial track record, experience in the sector, strong management, and business planning track record. The RPMO and the Bank will assess the technical, financial, and institutional viability of enterprise matching-grant investment proposals. Different organizational arrangements with enterprises will be piloted for rural tourism.

d) Climate change. Interventions aimed at reducing agro-ecological vulnerabilities are designed to increase the resilience of production units in the face of climate variability and drought. These interventions will be designed to reduce the impact of occurrences and increase the adaptive capacity of producers. Long-term sustainability will depend on the availability of adequate technical assistance, particularly in the face of unexpected events.

e) Rural infrastructure. The identified rural infrastructure investments and public services are linked, to the extent feasible, to the proposed CDF investments. They will be implemented through relevant county government line agencies or administrative village committees in close coordination with the cooperatives to strengthen the overall sustainability of productive investments by cooperatives and agro-enterprises.

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V. KEY RISKS AND MITIGATION MEASURES

A. RISK RATINGS SUMMARY TABLE

Risk Category Rating 1. Political and Governance Low 2. Macroeconomic Moderate 3. Sector Strategies and Policies Moderate 4. Technical Design of Project or Program Substantial 5. Institutional Capacity for Implementation and Sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Moderate 8. Stakeholders Moderate 9. Other N/A Overall Moderate

B. OVERALL RISK RATING EXPLANATION

47. The overall risk rating for the project implementation is moderate. The main risks to the achievement of the PDO are: (1) the limited experience of the implementing agencies at the county level with the foreign capital-funded projects; and (2) possible implementation challenges associated with farmer cooperative development at the county level, which requires a change from top-down development mindset toward investment decisions based on sound business planning, dynamic market opportunities that respond to consumer needs, and capacity to conduct economic and financial analysis at the cooperative level to support long-term sound investments. The risk rating for Fiduciary is substantial because: (1) some CPMOs and their designated procurement staff have no prior procurement experience with Bank-financed projects; (2) CPMOs may unintentionally follow domestic procurement and FM practices, which may lead to non- compliance with the Bank procurement and FM guidelines; and (3) because of possible supervision challenges associated with the multiplicity of actors involved in the procurement activities, including farmer cooperatives that are scattered, some in remote locations. Risk management measures are reflected in the project design, including the establishment of clear operational guidelines, which draw on the implementation experiences of the ongoing rural poverty reduction projects in Guizhou, Sichuan, and Gansu provinces.

48. Commercialization and specialization of farmer cooperatives are expected to lead to specialization, which could increase their exposure to price and market risks. There is also a risk that the marketing potential of some specialized products could be overestimated. In addition, many project counties may see their local production in isolation from other places that may be promoting the same product and hence there is a risk of building overcapacity that could lower market prices. The project will seek to identify the various risks associated with production, markets, etc., by preparing agricultural risk management plans for the targeted value chains. These risk management plans would identify specific risk mitigation measures that will be incorporated into cooperative investment proposals, including market analysis, to be conducted prior to the

19

implementation of cooperative investments. The procedures for this detailed investment planning are described in the POM.

49. There is a risk of weak management capacity of farmer cooperatives. This is a common issue in China and internationally. The project addresses this risk by providing up-front training and capacity building for participating cooperatives (e.g., financial management, procurement, preparation of business plan) before they can access project funds. All cooperatives that receive project funds are required to recruit an auditor (funds must be budgeted in their investment proposals) who will carry out an annual audit review of the funds used. The investment proposals prepared by farmer cooperatives are expected to include budgets for hiring specialized technical expertise that would help them with production, processing, and marketing (including certification) of their products.

50. There is also a risk of concentration of ownership of assets in the farmer cooperatives, which stems from weak enforcement of existing cooperative laws at the local level, particularly in those provisions dealing with the democratic governance of cooperatives and the benefit-sharing arrangements. This risk is related to the broader issue of existing governance structures in rural China. The project will establish provisions for the protection and empowerment of small producers as subscribed in the FPCL, whose compliance will be monitored during implementation support missions. The progress and success in cooperative development will be monitored using the METT tool, as a part of the M&E system, which measures the institutional development dimensions of farmer cooperatives.

51. There is a risk of power imbalances between enterprises and farmers in the vertically integrated production and marketing structures that will be promoted under the project. Farmers are often the weaker stakeholders in such value chains. In the case of specialty agricultural products, market channels also tend to be narrow, with often only one processor or marketing company determining production conditions and price. The same company sometimes also provides inputs and technical services. In such arrangements, the benefits from added value or increased productivity can be captured primarily by the enterprise partner. The project seeks to reduce such potential power imbalances by formalizing and strengthening the farmer cooperative organizations as independent economic entities and by monitoring closely the fairness (and, if needed, facilitating) of the contractual arrangements between enterprises, cooperatives, and the local government.

52. There is a risk that women may benefit less from the project. Women’s decision-making in project-supported cooperatives might be limited unless membership and management board positions become more accessible to women. Women in poor households might be particularly disadvantaged since joining a cooperative might mean increasing their workload. The Social Assessment during the project preparation recommends that women have access to capacity- building opportunities and they are encouraged to take management positions in project-supported cooperatives.

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VI. APPRAISAL SUMMARY

A. ECONOMIC AND FINANCIAL ANALYSES

53. Development impact. Specific and direct benefits expected from the project include improved productivity and efficiency, value addition, and market opportunities. These benefits will primarily result from: (a) the adoption of new production standards and technologies; (b) reduced postharvest losses; (c) improved produce processing and/or packaging; (d) better access to services, markets, and information; (e) reduced transaction costs; (f) improved product quality and safety and producer (farm-gate) prices; (g) higher production values through market differentiation (e.g., product certification, branding); and (g) advantages from economies of scale. Indirect benefits expected from the promotion of cooperative models include: (a) strengthening of producers’ and marketing groups; (b) improving the quality and reducing the costs of forward and backward linkages of farmers to markets; (c) local cooperatives managing physical infrastructure investments in a sustainable manner; (d) public- and private-sector operators delivering quality services in more efficient and targeted ways; and (e) new models of cooperatives and enterprises working together.

54. Because most of the cooperative-level investment proposals will only be formulated once the cooperatives are established and participating enterprises are identified, financial and economic net returns have been calculated for the 10 typical investment proposals and were extrapolated for the expected number of 120 investment proposals. The analysis shows that there is sufficient scope for economically viable investments in agricultural value chains in the project area. Financial rates of return at the production level range from 13 percent for walnut production to 39 percent for kiwi fruits. The overall Economic Rate of Return (ERR), taking into account all overhead costs, is estimated at 14.9 percent, with a Net Present Value (NPV) of RMB 332 million using an Opportunity Cost of Capital (OCC) of 10 percent. The results are robust against cost increases or benefit decreases. Both indicators were estimated at 10 percent lower benefits and increased costs, which did not reduce the Internal Rate of Return (IRR) below 12 percent. Individual investments with an economic IRR below 12 percent or a financial IRR below 10 percent would not be supported under the project.

55. Justification of public financing and bank value-added. The project addresses a number of market failures related to barriers to entry, stakeholder diversity in combination with weak organizational structures, and imbalance in access to knowledge and information of poverty households. Many project counties have supported their key products (e.g., pillar industries) mostly in production but also in processing and marketing by injecting significant public funds. In many cases, this was done irrespective of the relative competitiveness and market demand and this has led to market distortions and a continuing dependency of the industry on public funds. The project directs its support toward creating sustainable overall organizational and institutional settings and toward addressing only genuine market failures (not issues of insufficient competitiveness). This will allow the private sector and markets to work more effectively and increase long-term competitiveness, with an exit strategy from long-term public subsidies. Bank support for the project will add value by (a) helping to understand the roles of stakeholders and the rationale for using public funds for value chain investments, (b) optimizing the use of funds

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without distorting markets, (c) ensuring sustainability, and (d) maximizing effectiveness by taking a macro view of the project.

B. TECHNICAL

56. The project counties have proposed a set of industries and commodity chains for project support, which are acceptable from an economic, technical feasibility, and institutional perspective. An initial technical review of these commodity chains has been carried out during preparation and a further detailed technical review will be carried out for each individual cooperative and enterprise investment proposal during the implementation, which will be subject to inputs from the TAG as well as reviews by the regional and municipal PMOs and the Bank, prior to final county government approval. Most of the proposed technologies and technical aspects proposed in agricultural value chain development under the project are already widely applied in the project counties or elsewhere and pose little technical risk.

57. Agricultural production will follow Good Agricultural Practice (GAP) standards where these are consistent with market demand, as well as the provisions set forth in the project’s Pest Management Plan (PMP). To reduce grazing pressure, the project will support only livestock productions systems that do not involve any free grazing of animals. Waste disposal systems and related technical options for waste treatment (biogas fermentation or composting) will be assessed and, if necessary, included on a mandatory basis for all animal production support under the project. The design of agro-processing facilities supported under the project will follow HACCP principles where this makes sense. Only trained staff will operate food testing and certification facilities.

58. Potential changes to the climate will need to be considered in the choice of agricultural production technologies. The potentially higher production risks caused by more extreme climatic events due to climate change are mitigated by the ongoing government-funded crop and livestock insurance schemes. Enterprises and/or cooperatives may propose improved plant varieties or livestock breeds that are not yet used in the project areas. In such cases, technical appraisal teams at the county level and the joint appraisal team at the regional level will consult with the relevant regional agricultural departments to ascertain the suitability of the proposed variety/breed for the project area.

59. The project takes into account nutrition in two ways. First, the project supports production, storage (including cold storage and packing facilities), processing, and marketing of pollution-free and safe food products, and certification of food products, which all contribute to increased access to quality food for urban consumers. Second, although there is no negative impact from the development of agricultural commodities on the availability of a balanced food diet for the producers themselves, there is a need to pay special attention to cooperatives that are developing plantation agriculture for tropical fruit production. Practical solutions to ensure secure livelihoods in such production modes will be identified and promoted. Participation of poorer households and women on cooperative management boards is expected to enhance attention to livelihoods.

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C. FINANCIAL MANAGEMENT

60. The IBRD loan proceeds, including overseeing the Designated Account (DA), will be managed by the Guangxi Autonomous Regional Finance Bureau (GFB). The PMOs housed in the Poverty Alleviation Office at the regional, municipality, and county levels are the responsible project implementation agencies. These entities are existing agencies that have previously managed poverty alleviation projects financed by domestic and foreign funds, including Bank- financed projects. The World Bank financial management (FM) capacity assessment identified the following risks: (1) limited experience with the implementation of World Bank-funded projects; (2) a large number of small expenditures by cooperatives, which could increase the complexity of the project management; and (3) the flow of funds of Bank loan proceeds from regional FB to beneficiaries through several layers could increase processing time and cause implementation delays. An action plan to strengthen FM capacity has been agreed with the implementing agencies. The FM assessment concluded that, with the implementation of the proposed actions, the project’s FM arrangements satisfy the Bank’s requirements under OP/BP 10.00. FM arrangements will be described in detail in Annex 3.

D. PROCUREMENT

61. The RPMO and CPMOs have designated full-time procurement staff. Community facilitators will be recruited by each CPMO to support project implementation at the cooperative/village level, including procurement. The key project procurement issues and risks identified by the procurement capacity assessment include (1) a multiplicity of actors involved in procurement; (2) cooperative subprojects are scattered, with some in remote locations, which increases supervision challenges; (3) some CPMOs and their designated procurement staff have no prior procurement experience in the Bank-financed projects; and (4) PMOs may unintentionally follow domestic procurement practices, which may lead to non-compliance with Bank procurement guidelines. To address these risks, designated procurement staff will be attending procurement training provided by the Bank and will attend additional procurement and contract management training during the project implementation. The RPMO will be responsible for providing support to and monitoring the implementation of project activities carried out by the CPMOs, who will support and monitor the implementation of project activities carried out by the cooperatives and village committees. A Project Operations Manual (POM) acceptable to the Bank has been prepared. The POM describes in sufficient detail the procurement arrangements, methods, and procedures, as well as roles, responsibilities, and oversight functions.

62. The Procurement Plan (PP) for the initial 18 months of project implementation has been agreed at the negotiations. The PP will be available in the project’s database and on the Bank’s external website. The PP will be updated annually (or as often as required) in agreement with the Bank, to reflect project implementation needs and improvements in institutional capacity. For procurement activities carried out by cooperatives under Component 1(a), a Cooperative Annual Investment Plan (CAIP) will be prepared after the cooperatives have been established and their investment proposals have been approved by the CPMOs. Annex 3 provides additional information on the project’s procurement arrangements.

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E. SOCIAL (INCLUDING SAFEGUARDS)

63. The project is expected to generate positive social benefits and sustainable poverty reduction opportunities for rural communities in project villages, including income-generation opportunities for rural households, individual and collective empowerment through membership in farmer cooperatives, for both men and women, improved access to rural infrastructure and trading facilities, as well as new technical and management skills. Key project safeguard documents, including the SA report, the RPF, the EMDF, and the ESMF, have been disclosed locally on May 12, 2016 and at InfoShop on June 2, 2016.

64. Involuntary resettlement (OP4.12). Bank Policy on Involuntary Resettlement (OP4.12) is triggered, however, no involuntary resettlement is expected under the project. The project areas are not located in areas of current ecological resettlement programs and will not be associated with such programs. If collective land is needed to build small production infrastructure (roads, irrigation) or agricultural facilities (e.g., storage or processing factories), proper procedures will have to be followed, guided by the Resettlement Policy Framework, which has been prepared.

65. Indigenous peoples (OP4.10). Bank Policy on Indigenous Peoples (OP4.10) applies. Ethnic minority people account for more than 87 percent of the total population in the 10 project counties and 85 percent of the population in the proposed project villages. Different minority ethnic groups are present in the project areas, including the Yao, Dong, Gelao, Maonan, and Zhuang. The latter makes up nearly 90 percent of all ethnic minorities in the project villages. To ensure that smaller ethnic minority groups benefit equally from the project investments, where feasible, an Ethnic Minority Development Framework (EMDF) has been prepared. Based on the EMDF, project activities benefiting smaller ethnic groups will be given preference when selecting investment proposals from cooperatives, and special attention will be paid to avoiding any impact on ethnic cultures in project-supported tourism development proposals.

66. Social assessment (SA). A full SA was undertaken prior to the pre-appraisal. The SA analyzed the livelihoods in the project villages, focusing on vulnerable groups including ethnic minority people and women. The SA confirmed local households’ interest in joining farmer cooperatives. Its main recommendations to maximize project poverty reduction impact were to (1) enhance attention to governance aspects in cooperatives, which will require outside facilitation and the use of a structured participatory process during the project implementation; (2) test various approaches that would support the inclusion of poor households in cooperatives, and move gradually toward a system in which cooperative members’ profit shares will be determined based on their patronage; (3) encourage active participation of enterprises and professional advisory services in the incubation centers in order to build management capacity for businesses; (4) construct rural infrastructure that both serves production areas and improves living environments; and (5) take a cautious approach to the development of agricultural commodities that have more risky markets.

67. Pro-poor aspects and gender development. A strong pro-poor approach is taken in the project design. Providing equal opportunities for women to take part in the development of farmer cooperatives is identified as a challenging task and appropriate measures have been taken. This approach will continue to be promoted throughout project implementation through broad

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consultation and participation of rural households, with special attention to vulnerable groups. The poor and women will be offered equal opportunity to join cooperatives and participate in technical training and other capacity-building activities. The SA has recommended that special consideration be given to the voices of women as a vulnerable group, both in cooperative decision- making and in preventing excessive workloads for women, and that County Women’s Federations be invited as facilitation and capacity-building providers.

68. Citizen engagement. The project’s framework approach means that the majority of participating project stakeholders, including existing and new farmer producer cooperatives, agribusinesses, and communities, will be identified only during the implementation. The Operations Manual provides guidance on citizen engagement, beneficiary consultation, gender inclusion, and stakeholder participation in the prospective subprojects/project activities under Components 1 and 2. All subprojects will undergo a social screening and assessment process to ensure adequate and voluntary participation in project interventions as well as outreach to women and poor households. The project will adopt the following as citizen engagement mechanisms: : (a) continuous community consultation in social preparation and screening of subprojects; (b) contact details of persons from project management offices receiving feedback and complaints has been made public during the disclosure process at all project townships and project counties as part of the grievance redress mechanism described in paragraph 72. Recommendations from local communities will be taken and addressed, and feedback to local communities will be communicated as guided in the Operations Manual; and (c) third-party monitoring of project implementation to ensure that project benefits are distributed equally and efficiently across different social groups. The outcome of the citizen engagement exercises will be documented and reviewed during implementation support missions. Citizen engagement indicators include customers satisfied with the rural infrastructure services provided by the project and customers satisfied with the services provided by BICs.

F. ENVIRONMENT (INCLUDING SAFEGUARDS)

69. Three environmental policies are triggered for the project: OP4.01 Environmental Assessment, OP4.04 Natural Habitats, and OP4.09 Pest Management. As per OP4.01, the project is assigned Category B for environmental purposes given the nature of the project and the limited scale of its activities, and associated environmental and social impacts. As designed, the project will adopt a framework approach because the specific location of investments under Components 1 and 2 will be identified during the implementation through a participatory approach. Therefore, an Environmental and Social Management Framework (ESMF), including a generic Environmental Management Plan (EMP) and Pest Management Plan (PMP), was developed during the project preparation. Several WBG Environmental, Health, and Safety Guidelines that are relevant to the agricultural sector were incorporated into the EMP where applicable.

70. The project will bring about environmental and social benefits in terms of improved agricultural practices and increased income-generation opportunities for poor communities in the project area. The agricultural production and infrastructure construction activities, if not well managed, could bring about negative environmental and social impacts, including (1) impacts on natural habitats such as soil erosion, vegetation clearance, and water pollution, particularly in the karst area; (2) construction impacts and social disturbance such as noise and dust associated with

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small civil works; (3) waste management in rural tourism facilities and livestock farms during operation; and (4) pesticide management associated with growing a number of agricultural products. The negative impacts are expected to be limited, localized, and temporary. The project ESMF includes a baseline survey, impact assessment, environmental management plans specific to each type of activity, and procedures to address environmental and social issues, which are expected to avoid and mitigate these impacts adequately. The ESMF has been reviewed by the Bank team and considered satisfactory for Bank safeguards policy and domestic requirements.

71. Public consultation and information disclosure were carried out during the project preparation. The project environmental and social consultants carried out ongoing consultation through a questionnaire survey, focus group meeting, and interviews. Public opinion has been incorporated into the project design and the ESMF/EMP. The draft full ESMF was disclosed locally and on the website of Guangxi Poverty Reduction on May 12, 2016, with a newspaper announcement of the disclosure in Guangxi Daily on May 13, 2016. It was disclosed at InfoShop on June 2, 2016.

G. WORLD BANK GRIEVANCE REDRESS

72. Communities and individuals who believe that they are adversely affected by a World Bank (WB)-supported project can submit complaints through existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project-affected communities and individuals can submit their complaint to the WB’s independent Inspection Panel, which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints can be submitted at any time after concerns have been brought directly to the World Bank’s attention and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

H. GREENHOUSE GAS EMISSIONS REDUCTION

73. In its 2012 Environment Strategy, the World Bank committed to conducting greenhouse gas (GHG) emissions accounting analyses for all World Bank-financed investment lending. The quantification of GHG emissions from a project is an important step in managing and ultimately reducing GHG emissions, and is becoming a common practice for many international financial institutions. To estimate the impact of the World Bank’s agricultural investment lending on GHG emissions and carbon sequestration, the Bank adopted the Ex-Ante Carbon-balance Tool (EX- ACT), which was developed by the Food and Agriculture Organization of the United Nations (FAO) in 2010. EX-ACT allows the assessment of a project’s net carbon-balance, defined as the net balance of CO2 equivalent GHGs that were emitted or sequestered as a result of project implementation compared with a without-project scenario.

74. The project will support interventions that help farmer cooperatives improve the sustainability of their agricultural practices, improve seed production, and provide some public goods investment such as small-scale water management, which are expected to bring about

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positive results in carbon sequestration. The planned project intervention will result in a net GHG sink of 8.2 million tons of CO2 equivalent. The improved practices will lead to a carbon sink and the planting of perennials will add to the sink. The sink results primarily from improvements in crop and soil management as a result of improved technologies, pest management, small-scale water management, and a more efficient use of production inputs.

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Annex 1: Results Framework and Monitoring Guangxi Rural Poverty Alleviation Pilot Project

Project Development Objective (PDO): The objective of the Project is to increase income generation opportunities through demonstration of value chain development models in the project counties5.

PDO Level Results Indicators*

Cor

e

Unit of Measure

Baseline

Cumulative Target Values

Frequency

Data Source/ Methodology

Responsibility for Data Collection

YR 1

YR 2

YR3

YR 4

YR5

YR6

Indicator 1: Number of project- supported cooperatives making profit

Number 0 0 0 10 20 30 40 Annual

Project reporting; annual audit report

Third-party process monitoring

Indicator 2: Number of certificates and brand names obtained under the project

Number of product certificates

0 0 0 10 20 30 40 Annual Project reporting Regional and County

PMOs

Number of registeredGeographical

Indication (GI) and brand names

0

0

0

1

2

3

5

Annual

Project reporting

Regional and County

PMOs

Indicator 3: Farmers reached with agricultural assets and services

Number 0 450 2,200 7,000 12,000 15,000 15,000

Annual

Project reporting and

survey

Regional and County

PMOs % female 0 10 15 20 30 40 40

% poor in the cooperatives

0 20 25 30 40 50 60

5 Value chain development models = industrialization = development of cooperatives + exploration of agri-product markets through partnerships with enterprises. For rural tourism, rural tourism models (with or without enterprise partnership) will be monitored.

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INTERMEDIATE RESULTS

Cor

e

Unit of Measure

Baseline

Cumulative Target Values

Frequency

Data Source/ Methodology

Responsibility for Data Collection

YR 1

YR 2

YR3

YR 4

YR5

YR6

Intermediate Result (Component 1): Improvement of Pro-Poor Value Chains

1.1: Number of cooperatives that have received Cooperative Development Fund (cumulative)

No.

0

15

40

100

100

100

100

Annual

Project Reporting

County and Regional PMOs

1.2: Average cooperative management effectiveness (METT) score6

Number

0

15

15

15

30

30

50

Mid-term and end of project

METT survey

Third-party process monitoring

1.3: Cooperative members who adopt innovative marketing practices

Percentage 0 0 0 0 30 30 80 Mid-term and end of project

Surveys Third-party process

monitoring Intermediate Result (Component 2): Public Infrastructure and Services

2.1: Customers satisfied with the rural infrastructure services provided by the project

Percentage of customers

0 50 70 MTR and end-

line survey

Survey

Third-party process

monitoring Of which female customers

0 50 70

2.2: Number of value chains for which risk management plans were developed

No.

0

0

3

8

8

8

8

Annual

Project report

Regional PMO

2.3:Project management improvement actions triggered by grievances/complaints

YES/NO

N

Y

Y

Y

Y

Y

One-off

Project report

Regional PMO

Intermediate Result (Component 3): Enhancing Investments in Poor Areas

3.1: Customers satisfied with the services provided by Business Incubation Center

Percentage of customers

0 50 70 MTR and end-

line survey

Survey

Third-party process

monitoring Of which female customers

0 50 70

3.2:Households in project areas covered by credit rating

Number

6,000

20,000

38,000

38,000

38,000

38,000

Annual

Project reporting County PMO,

financial institutions

6 Measured by multi-dimensional scoring system.

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Intermediate Result (Component 4): Project Management, M&E, and Learning

4.1: Learning Workshops and Conferences

Number

1

2 Mid-term and end of project

Project reporting

Regional PMO

4.2: Project-related publications produced

Number

0

5

10

20

30

50 Mid-term and end of project

Project reporting

Regional PMO

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Result Framework Definitions PROJECT DEVELOPMENT OBJECTIVE INDICATORS

Indicator Names Indicator Definitions Indicator 1: Number of project-supported cooperatives making profit

This indicator tracks the cooperatives that could make profit as evidence of being financially and managerially stable. Data will be collected from a cooperative’s annual audit report made by a third party.

Indicator 2: Number of certificates and brand names obtained under the project

This indicator measures both the number of product certificates and the number of geographical indication and brand name certificates. Product certification is defined as agri-products certified as organic, green, and pollution- free according to national standards. Geographical indication or branding certificates are done according to national standards.

Indicator 3: Farmers reached with agricultural assets and services

In the project preparation stage, benefiting farmers from incubation centers, linkages with enterprises, etc., are unknown. Hence, annual and final targets are estimated for the farmers defined as registered household members whose names appeared in the official list of cooperative membership.

% of females: against the cooperative membership.

List of cooperative members will record gender information for the active cooperative members within the member household.

% of poor: against the total number of poor people in the project villages.

INTERMEDIATE RESULT (COMPONENT 1): IMPROVEMENT OF PRO-POOR VALUE CHAINS

Indicator Names Indicator Definitions 1.1: Number of cooperatives that have received Cooperative Development Fund (cumulative)

Evidenced by approval decision for CDF by regional PMO. This is an important milestone for a cooperative to show its capacity in developing a business proposal that is bankable.

1.2: Average cooperative management effectiveness (METT) score

Measured by multi-dimensional scoring system (METT) by third-party process monitoring.

1.3: Cooperative members who adopt innovative marketing practices

Innovative marketing practices are defined as changing from existing traditional systems of selling through intermediaries to group selling (e.g., through cooperatives, e-commerce platforms, direct contract sales to enterprises of consumers, or sales through participating enterprises), with measuring by percentage.

INTERMEDIATE RESULT (COMPONENT 2): IMPROVING PUBLIC INFRASTRUCTURE AND SERVICES

Indicator Names Indicator Definitions 2.1: Customers satisfied with the rural infrastructure services provided by the project

Customers refer to end-users of the rural infrastructure services (rural road, irrigation/drainage, IT, market facilities, etc.). Data will be collected through surveys at MTR and end-line.

2.2: Number of value chains for which risk management plans were developed

Agricultural risk management plan refers to an action plan that accounts for key risks and their correspondent mitigation actions for a key value chain in the project areas. This is a milestone indicator to be achieved through approval by the regional PMO.

2.3:Project Management improvement actions triggered by grievances/complaints

Project Management actions will be recorded in the grievances/complaints records and would include such actions as additional staff training, adjustments of manuals and guidelines, corrective actions, mitigations, etc. In case of no grievances/complaints, N/A (not applicable) will be recorded.

INTERMEDIATE RESULT (COMPONENT 3): ENHANCING INVESTMENTS IN POOR AREAS

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Indicator Names Indicator Definitions

3.1: Customers satisfied with the services provided by Business Incubation Center

Customers refers to start-up investors who are defined as registered cooperatives, registered enterprises, and individual investor entities (formal or informal).

3.2:Households in project areas covered by credit rating

Measured by number of households whose credit rating is assessed by County PMOs and financial institutions.

INTERMEDIATE RESULT (COMPONENT 4): PROJECT MANAGEMENT, M&E, AND LEARNING

Indicator Names Indicator Definitions 4.1: Learning Workshops and Conferences Regional-level conferences with government and non-government stakeholder participation 4.2: Project-related publications produced Includes articles in newspapers, magazines, academic journals, online publications, documentary films, etc.

Annex 2: Detailed Project Description China: Guangxi Rural Poverty Alleviation Pilot Project

1. The PDO is to increase income generation opportunities through demonstration of value chain development models in the project counties. The project aims to demonstrate an approach to rural development, sustainable income generation, and poverty reduction in lagging rural areas that is based on a number of recently emerging megatrends in the Chinese economy, and a redefinition of the roles and responsibilities of government (public sector) and the private sector (enterprises and farmer cooperatives) in agricultural modernization. These megatrends, described below, and the distinction of the roles of various stakeholders are reflected in the project component design.

2. Changing growth strategy from production orientation to consumer orientation. Agricultural production in the remote mountain areas of the project is generally not competitive because of relatively low productivity and high transaction costs. This is the major reason why traditional growth strategies, primarily based on a local government (often subsidized) expansion of agricultural products that has sometimes led to building substantial overcapacity, are facing serious limitations. Their suitability for long-term and sustainable poverty alleviation is questionable. The project builds on ongoing changes from production-oriented approaches to end- market consumer-oriented approaches. This end-market consumer orientation of the project builds on three macro-trends, which offer significant growth and development opportunities for the project areas:

Growing demand and consumer preferences for clean and safe food: China’s food sector

is overshadowed by significant consumer uncertainty and mistrust in the quality and safety of food. A large and growing segment of consumers is interested in paying significantly higher prices for food products when they can trust in quality and safety. Consumers are also increasingly willing to pay for environmental and social features in the production process.

Information technology (IT): China’s IT development has penetrated most aspects of people’s life, probably more than in most other countries in the world. Internet shopping, including ordering food, fresh food products, and ready meals, has become a common feature for many urban residents. Modern information technology offers new opportunities for directly linking producers from remote areas to consumers, while a modern food distribution system, which includes tagging and tracing of products using web-based applications, brings consumers and producers closer. This permits the development of more efficient forward and backward linkages and facilitates faster responses to consumer preferences, as well as increasing consumer control over production standards.

Increasing mobility and the fast-growing tourism industry: As urbanization continues rapidly, people have increasingly more time and income available for leisure. This makes the local tourism industry in China one of the fastest growing sectors. In addition, mobility has increased and more people use the increasingly developed transportation infrastructure to visit remoter areas. Although tourism includes a wide range of choices, rural and agricultural tourism is one of the fastest growing segments. Tourists discover their interest in unique and authentic sites, which include cultural and ethnic minority features, including local food. Urban families and in particular elderly people based in urban areas increasingly spend their vacations in rural areas. The targeted project areas provide a significant

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potential to cater to rural, agricultural, and cultural tourism. Opportunities also exist for combining rural tourism with direct marketing of local food and agricultural products.

3. The above megatrends provide the project areas in Guangxi with considerable development opportunities, allowing them to turn their historic disadvantages into advantages, with a range of sustainable and viable economic growth options. The project design thereby takes a holistic development approach, addresses entire value chains, and tries to shorten those value chains and keep them transparent by facilitating forward and backward linkages and encouraging market responsiveness. The project accentuates the roles and responsibilities of different stakeholders in this process and focuses on sustainable, long-term growth opportunities rather than short-term interventions. To address these opportunities, the following bottlenecks were identified, which will be addressed by the proposed project design:

Organizing producers. Strengthening the role and capacity of producer organizations is a

critical intervention for smallholders, and the ongoing development of farmer cooperatives in lagging regions is an important opportunity in this regard. Cooperatives can help farmers respond to consumer demand and preferences, and apply improved production and post- production techniques so that higher and more consistent product quality standards and volumes can be achieved. Well-defined standards, consistency of supply, and product quality combined with quality assurance can make such production more attractive to processing enterprises and consumers.

Value addition. The project will support new value-added activities, not simply a focus on expanding (low-quality) raw material production capacity, as is currently practiced in many rural areas. The project will therefore seek to support the development of value chains for key commodities through including value-addition investments, such as quality improvements, standard setting, branding of products, and product marketing, and through new organizational arrangements, which may include farmer cooperative–agro-enterprises cooperation agreements.

Differentiating products. Competing with bulk agricultural commodities and food products requires a clear and strong strategy to identify and distinguish (special) products coming from remote mountain areas. The project focuses on brand naming, geographical specification, food quality certification (e.g., green, organic, pollution-free, etc.), highlighting of ethnic minority features, etc., while targeting consumer groups that are ready and willing to pay higher prices. Protection and control of these features and building trust of consumers will be part of the project activities.

Responsiveness to end-consumer preferences. The proposed project will give consideration to strengthening market linkages, for example, through direct farm selling, advance and contract farming, joint marketing through cooperatives, direct supply to supermarkets, traceability systems, etc. This requires strengthening of cooperatives, coupled with strengthening of relevant supporting public services, such as food safety testing to guarantee quality, certification standards, etc., and involvement of food enterprise partners.

Higher technology levels. Project investments are expected to facilitate the introduction of new technologies, including rational and efficient use of farm inputs that increase productivity and in particular product quality and consumer attractiveness. As individual farmers cannot overcome low technology diffusion by themselves, cooperatives and

34

enterprises can play a significant role in introducing and extending innovation, for example, through improved breeds, varieties, innovative processing, packaging, and other means.

Partnering with reliable enterprises. Successful value chain approaches may require partnerships with strong agro-enterprises, which are building the bridge between consumers and producer organizations. To create consumer trust, it will be important to keep the value chains transparent. This can be achieved by reducing the number of actors between producers and consumers. A growing number of agro-enterprises have a commercial interest in directly sourcing produce in the project areas and selling through various e-commerce platforms or direct food outlets to end-consumers. In addition, such enterprises have a commercial interest in establishing transparent value chains in which they can build and maintain product safety and quality reputation. This mutually benefits both producers and enterprises. In rural tourism development, the role of enterprises differs markedly from the role of food industry companies. The project is inviting innovative subprojects that could lead to a new model for tourism development, thus enhancing positive impact on local communities.

Risk management. Focusing on specific value chains and specialization of farm households on special products increase risk. Traditional mixed farms benefit from an inherent risk mitigation strategy (e.g., failure in one crop can be mitigated by other crops or livestock production and vice versa). This traditional risk mitigation is not possible when farms specialize in a limited number of products. Such arrangements, while being part of commercialization trends, could expose the farmers to a higher risk, on both the production and marketing side. The project therefore involves a specific risk assessment and risk mitigation planning and provides resources for implementing risk mitigation activities.

Access to financial services. Business-oriented production and value chain development require access to commercial finance. In particular, small farmers, new cooperatives, and small enterprises have difficulties in obtaining loans from existing financial institutions because they lack collateral and lack records as reliable borrowers. Various government pilot programs have been introduced to facilitate their access to loans. The project would build on the experiences gained in such programs and work together with the designated financial institutions to support a credit rating system for producers and cooperatives, thus improving accessibility to commercial financing.

Roles and responsibilities of the government, enterprises, cooperatives, and households. Many project counties lack clarity on the respective roles of food enterprises, cooperatives, households, and government in modern value chain development. The proposed project seeks to improve the understanding of the respective roles of these actors and sharpen the focus on the different characteristics of public and private goods.

4. Based on these considerations, the project is designed along four main components with a project implementation period of six years:

5. Component 1: Improvement of Pro-Poor Value Chains (USD 90.22 million, of which IBRD USD 61.26 million). This component aims to address market failures in the development of agricultural and non-agricultural rural value chains and key industries with a particular focus on increasing the value of economic activities of targeted farmer cooperatives. Component 1 has the following two subcomponents:

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The Cooperative Development Fund (CDF) (USD 57.91 million, of which IBRD USD 28.96 million) would provide grant financing for new or existing cooperatives (about 10 per county and some 120 over the project implementation). The CDF would be managed by the selected farmer and non-farmer cooperatives that will implement their investment plans for value chain development. These investment plans would be initiated by cooperatives and formulated with the help of technical experts and county governments. Partnerships with agro-enterprises will be encouraged where relevant. The cooperatives would need to provide a beneficiary contribution at levels reflecting the financial capacity of the individual cooperatives. Investment proposals would be subject to appraisal and approval by the County and Regional PMOs. Funds could be used by the cooperatives to invest primarily in fixed value-adding production and processing equipment and facilities, nurseries, advanced breeding stations, equipment for improved seed production, storage facilities for agricultural produce, and other small-scale cooperative-level infrastructure, goods, and related capacity-building and technical assistance services. Depending on the actual needs of cooperatives, these investments could be associated with agricultural production (such as herbs, dragon fruit, kiwi, oil tea, etc.), livestock (goats, pigs, chickens, etc.), rural tourism, and related processing and marketing equipment and equipment, infrastructure, and services. The component would also pay attention to strengthening the institutional and management structures of the cooperatives by allocating a proportion of the CDF fund for capacity building and training of cooperatives, which would be mandatory before investments for economic activities would be made available. The cooperative training activities supported through the project would cover management and technical topics. Specific measures would be taken to ensure participation of women in cooperatives both as individual members and on management boards. The governance structures of the beneficiary cooperatives must be aligned with the provisions of the cooperative law, and the CDF review and approval process will pay close attention to the proposed ownership structures to ensure equitable sharing of benefits. The project will monitor the institutional development aspects of farmer cooperatives by using the Management Effectiveness Tracking Tool (METT).

Matching Grant for Enterprises (MG) (USD 32.31 million, of which IBRD USD 32.31 million) would provide matching grants to finance enterprise investments, which demonstrate innovative linkages and benefit-sharing arrangements with cooperatives of poor farmers. It is expected that 20‒30 grants could be awarded to eligible enterprises individually or in partnership with farmer cooperatives. These grants will be identified during the project implementation. The numbers of poor farmers and their cooperatives participating in value-adding income-generation activities with fair benefit-sharing arrangements would be key selection criteria for such matching grants. The grants would be provided based on the application process, which includes a transparent evaluation and selection process (details will be defined in the Operations Manual). To ensure ownership and to demonstrate commitment, the selected enterprises would need to match the grant amount with their own funds at a negotiated level of cost-sharing requirement, which would need to come from the enterprises’ own resources and/or from commercial lending. The project will provide matching grants up to 30 percent from the total investment cost. The matching grants aim to leverage private investments with strong public goods characteristics, such as income-generating activities for poor farmers, and would focus on

36

investment in the following key areas: storage and logistics systems, processing, marketing (branding, certification, etc.), and product quality (including food safety improvement). The management and implementation of this subcomponent would be done at the regional level.

6. Component 2: Public Infrastructure and Services (USD 62.79 million, of which IBRD USD 9.21 million). This component would support the establishment and strengthening of public infrastructure and service systems in support of value chain/key industry development under Component 1 and would include two subcomponents:

Rural infrastructure (USD 53.58 million), which would be identified, to the extent possible,

to complement the CDF investments under Component 1. The component would support (i) rehabilitation and construction of production road infrastructure, such as off-grade access roads to village/cooperative production areas or processing and marketing facilities, and rehabilitation and construction of tractor roads, field tracks, and foot paths; (ii) rehabilitation and construction of small-scale water storage facilities and related irrigation systems; (iii) establishment of IT and telecommunication infrastructure and procurement of related equipment; and (iv) rehabilitation or construction of public market facilities, electricity supply, and other infrastructure, and procurement of related equipment.

Risk management (USD 9.21 million, of which IBRD USD 9.21 million), which would support the development of value chain or industry-level comprehensive risk assessment and risk mitigation plans for clusters of counties. The plans would consider (i) production risks (e.g., natural disaster, outbreaks of diseases, etc.); (ii) marketing risks, including potential risk of food safety and food quality violation and the impact on consumer trust by the project beneficiaries or outside fellow producers/suppliers; and (iii) financial risk such as cash flow constraints and working capital requirements. The risk management and mitigation plans would identify the responsibilities of public and private stakeholders (the main audience of these plans) such as producers, processors, food safety testing and quality institutions, insurance companies, etc., and identify gaps and bottlenecks, which will be addressed under the project. Project investment would follow priority investments identified in the risk mitigation plans and could include, inter alia, investments in food safety testing and control (tests according to a testing regime or, if necessary, additional training and equipment for the related public-sector testing/controlling institutions, such as FDA offices), etc., as part of the risk management plan implementation. Marketing risk mitigation support could include the development and registration and protection of local/regional brands, geographical indication, as well as strategic product marketing and promotion. The component would finance mainly TA and consultant services, and equipment.

7. Component 3: Enhancing Investments in Poor Areas (USD 10.41million, of which IBRD USD 10.41vmillion). This component would improve and facilitate investments in poor areas by existing and new micro-entrepreneurs and business entities such as small and medium enterprises (SMEs), migrant returnees, or cooperatives, and would include two activities:

Business incubation (USD 8.55 million, of which IBRD USD 8.55 million), which would

support the setting up and operation of Business Incubation Centers (BICs) in each county. The BICs would support existing and start-up businesses in the development of marketing

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skills and enable market linkages by reducing information asymmetries, building trust, and creating shared value between value chain actors. They would also provide training for financial management skills and help enterprises with access to finance by facilitating linkages with partnering financial institutions. In addition, BICs will offer business development services such as training (business management, business planning) and provide assistance with navigating regulatory requirements, standards, and compliance. Other services could include the promotion of business networks and fairs and media events to promote the products of participating enterprises. Finally, the BICs would offer their clients office facilities and meeting rooms with a reliable internet connection to enable sales, procurement, and management functions to operate in a professional environment. The component would provide seed funding in the form of grants but the BICs are expected to become financially sustainable over time by generating their own revenue to reach a point where they can cover their ongoing operating expenses through service fees. The component will finance equipment, TA and related consultancy services, necessary office equipment, and operating costs associated with running BICs (e.g., 100% during years 1‒ 2 and 50% from year 3 onward).

Improved access to financing (USD 1.86 million, of which IBRD USD 1.86 million) will support, in cooperation with local financial institutions, the scaling-up of the government program of a comprehensive household credit rating piloted in Tiandong County of Guangxi. It will carry out validation of rural assets, which can be used as collateral required for individual households and cooperatives to access loans from designated financial institutions. The project would recruit professional service providers such as asset validation firms or accounting companies. Credit rating will be done on a biannual basis (twice under the project) for all households in the project villages by three accepted representatives each from the township, administrative village and natural village. The rating teams would follow a pre-defined scoring sheet and would be guided and supervised by a representative office from local commercial banks. The CPMOs would confirm the rating team composition and commercial bank supervising officer. The CPMOs would collect and verify the household rating records, which would be the basis for the compensation of the rating teams for their overhead expenses, and also for disbursements. The team would receive a compensation of RMB 20 per household. The amount will be verified from time to time and could be adjusted by mutual agreement between the Regional PMO and the World Bank.

8. Component 4: Project Management, M&E, and Learning (USD 10.83 million, of which IBRD USD 10.83 million). This component would strengthen the administrative and technical capacity of the staff of the Project Management Offices at the county, prefecture, and regional level. The component would establish a rigorous monitoring and evaluation and impact evaluation system in order to enable learning from its pilot activities, with an external professional monitoring agency to be engaged under the project. The component would also support regular supervision, progress monitoring, acceptance checks, and safeguards implementation supervision and monitoring.

9. Role of cooperatives and capacity-building needs. Farmer cooperatives will be a critical organizational form for the coordination of input supply, product delivery to agribusinesses and consumers, and the provision of technical services. The cooperatives that already exist in the

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project areas have varying capability to perform these services. During project implementation, the Regional and County PMOs would carry out the following tasks:

Determine the basic requirements of each cooperative in order to become eligible to participate in the project and receive project funds. These requirements should include clear statements on membership and poor farmer participation, operating principles, formal registration, governance structure, and supervision, and other aspects. In particular, clear principles for the targeting and inclusion of poor farmers into cooperative arrangements need to be formulated for each cooperative.

Assess capacity-building needs of existing and new cooperatives in relation to their roles in the project. Develop training plans (such as training in business and financial management, marketing, technical capacity) for cooperatives and households.

Include the costs of capacity building in cooperative investment budgets. During implementation, first carry out cooperative capacity-building and training activities and identify the needs for technical assistance before providing cooperatives with project funds for physical investments.

Advise the cooperatives on the phased implementation of arrangements of the CAIP investments (over a 3-year period) while leaving a share of budgeted resources unallocated (20‒30 percent) to allow flexibility for the cooperatives to adjust to market changes and consumer demand.

10. CDF operating principles. The CDF will provide conditional grants to project cooperatives that have been established in accordance with the provisions of the POM and cooperative law. Grants will support self-organization of cooperative members, improve production organization and engagement in added-value activities, promote technical service outreach and technology diffusion, and market position, and strengthen linkages and coordination in the value chain. The detailed operating mechanisms are described in the POM.

11. It is expected that the project will provide about 100 conditional grants to cooperative investments. The average size of the grant is expected to be about USD 500,000 per cooperative, which will be phased over the 2‒3-year implementation period, depending on the value chain and nature of the activity. CDF funds can be used for (a) cooperative-level start-up investments in new production systems, including production systems for advanced breeding stock and improved seeds; (b) input supply (seedlings, fertilizer, breeding stock); (c) pre-processing and processing technologies for agriculture and related products; (d) storage and marketing facilities; (e) market exploration and market development to provide access to new and higher-value markets; (f) upgrading of quality standards, labeling and certification, branding, product tracing, logistics, food safety, etc.; (g) professional training and capacity building; and (h) annual audit of funds used.

12. There are no fixed allocations for capacity-building activities, but cooperatives are expected to identify up-front their capacity-building and technical advisory needs and incorporate them in the investment proposal. Using project funds for seasonal inputs is discouraged (e.g., fertilizer, seeds, etc.) and cooperatives are expected to finance such expenditures from their own contributions. Cooperatives are also required to contribute their own labor for production activities or find funding sources to hire additional labor if needed. The project would encourage leaving 20‒30 percent of the grant amount unallocated in order to meet investment needs that might not be foreseen during the preparation of the CDF investment proposal.

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Annex 3: Implementation Arrangements China: Guangxi Rural Poverty Alleviation Pilot Project

Institutional and Implementation Arrangements

Institutional arrangements for project implementation have been established at the regional level and in the two project municipalities and 10 project counties.

1. Project Leading Groups. Project Leading Groups, comprising representatives from the reform and development commissions, finance bureaus, poverty reduction offices, auditors’ offices, civil affairs bureaus, ethnic affairs commissions, women’s federations, and other departments, have been set up at the regional, municipal, and county levels. These will provide leadership, policy guidance, and strategic direction to the PMOs within their respective jurisdiction.

2. Project Management Offices (PMOs). A Regional Project Management Office (RPMO) has been established in the Guangxi Regional Poverty Alleviation Office. The RPMO will be responsible for overall project coordination and management, including annual work and budget planning; coordination of municipalities and counties, public outreach, work planning, procurement, fund withdrawal and reimbursement management and financial reporting; technical and institutional aspects of implementation; general oversight, field supervision, and acceptance checks; and training and capacity building. The RPMO will be responsible for the (i) selection and negotiations with the agribusiness enterprises that receive support under the matching grant for the enterprises subcomponent (subcomponent 1b); (ii) preparation of the industry risk assessment and risk mitigation plans (part of subcomponent 2b), (iii) training, guidance, initial review, and appraisal of the cooperative investment proposals, which are expected to be delegated to municipalities or counties depending on their capacity; (iv) overall project M&E and reporting to the Bank; (v) updating the POM (including the FMM) as necessary; and (v) preparation of the consolidated Annual Work Plans and consolidated semi-annual project progress and financial reports. Municipal-level PMOs will provide technical guidance to counties, supervise implementation, and assist the regional PMO in acceptance checks and M&E.

3. County PMOs (CPMOs) are responsible for project management locally. They will prepare county work plans and review cooperative investment and annual work plans, approve and oversee cooperatives’ use of project funds, coordinate line departments in technical aspects of the project, and coordinate enterprise participation. They will be responsible for the procurement and management of public production infrastructure and services, including incubation centers. They will set up county expert groups involving participating enterprises. They will report on the use of project funds to the RPMO, prepare their Annual Work Plans and semi-annual project progress and financial reports, and recruit and train cooperative professional advisors. They will also be responsible for identifying and addressing implementation issues, implementing safeguard document measures and preparing county safeguard documents, and managing the mechanism for handling local complaints.

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4. All PMO staff have experience (or will be trained) in project management, financial management, procurement, and monitoring and evaluation. They will be assisted by officers from the finance bureaus, development and reform commissions, auditors’ offices, and the poverty alleviation offices as well as technical line bureaus.

5. Administrative Village Committees. Village Committees will be responsible for local public information dissemination, community mobilization, planning and implementation of public infrastructure investments assigned to the administrative village level, and coordination of any land acquisition for infrastructure construction.

6. Professional Farmer Cooperatives. Farmer cooperatives will be established as economic entities and registered under China’s Farmer Professional Cooperative Law. They will have implementation responsibility for all project activities under the CDF of Component 1a. They will organize cooperative members, prepare cooperative industry investment and Cooperative Annual Implementation Plans (CAIP), and administer cooperative development funds in accordance with approved plans and project regulations. They will provide training and technical support to their members, facilitate linkages between cooperatives and enterprises, manage cooperative-level production facilities and related services, support the introduction of new technologies, and provide technical training, technical exchanges, and advisory services to their members. Cooperatives will operate and manage industry-related infrastructure under their ownership and enter into partnership arrangements with relevant private-sector enterprises. It is expected that it will take about 1 year for the cooperatives to prepare their investment proposals, obtain necessary technical feedback, and obtain approvals and participate in the required cooperative management, FM, and procurement-related training activities before they would be ready to start implementing their investment projects. The implementation period of CDF investment plans is expected to take 2‒3 years depending on the value chain and nature of the activity.

7. Farmer Cooperative Advisors. Cooperative advisors will be recruited and trained by County PMOs to assist in village mobilization and in the establishment and operationalization of new cooperatives; provide guidance to cooperatives in the formulation and implementation of productive investment plans and CAIPs; and assist CPMOs in monitoring and reporting of cooperative activities, and handling complaints. Cooperative advisors should have a background in community development or agribusiness skills with a strong motivation to work in rural areas. Advisors will need to receive training, which will also include peer-to-peer training.

8. Technical Advisory Groups. The Guangxi Region and each county will set up a professional Technical Advisory Group (TAG) comprising representatives from government, cooperatives, industry-related enterprises, and experts to provide advisory services for cooperative value chain investments. Advisory groups will participate in and guide value-chain development investment planning of cooperatives. They will provide inputs to investment costing, technology innovation and dissemination, production organization and processing, and marketing research to strengthen the overall business orientation and operation of cooperatives. They will also assist the counties in soliciting interest from qualified agro-enterprise investors for investment in the project.

9. Other technical support. Technical support will be sought from the Chinese Academy of Social Sciences, Chinese Academy of Agricultural Sciences, universities, and technical staff from

the agriculture, forestry, animal husbandry, and other functional departments at the county and town levels. This will include support in the development of technical standards and specifications for crops and other products, standardization of livestock breeding, as well as the development of production with low rates of fertilizer and pesticide application.

10. Grievance mechanisms: The success of the project depends on the establishment and maintenance of a good working partnership between agribusinesses and smallholders. The safeguards instruments—Resettlement Policy Framework (RPF), Ethnic Minority Development Framework (EMDF), and Environmental and Social Management Framework (ESMF)—all include procedures to address related grievances. The RPF sets up an inclusive mechanism to address all the grievances related to resettlement and land acquisition. The ESMF defines these procedures and highlights the need to confirm that agribusinesses involved in subprojects have grievance mechanisms to mitigate partnership conflicts with smallholder communities.

11. In complement, the Matching Grants (MG) will operate a grievance mechanism for responding to complaints about the allocation of matching grant funding or the underlying partnerships between agribusinesses and smallholders that receive grants. This procedure will be laid out in the POM.

Financial Management, Disbursements, and Procurement

Financial Management

12. Capacity assessment. The FM capacity assessment conducted for all PMOs and Finance Bureaus (FB) at regional, city, and county levels identified the following risks: (1) limited experience with the implementation of World Bank-funded projects; (2) a large number of small expenditures by cooperatives, which could increase the complexity of the project management; and (3) the flow of funds of Bank loan proceeds from regional FB to beneficiaries through several layers could increase processing times and cause implementation delays.

13. Mitigation measures to address this risk are as follows: (1) preparation of a designated FM manual (FMM) as part of the Project Operations Manual, which would provide guidance for the standardization of the project FM procedures; (2) workshops and hands-on guidance to be provided to the regional FB and PMO, in addition to FM training provided by the Bank; (3) the RPMO will closely guide and monitor the implementation status of CPMOs with assistance from external consultants; (4) transparent disclosure and public monitoring mechanisms will be established in villages and communities; (5) the flow of counterpart funds will follow domestic regulations and advance funds to cooperatives to support start-up operations; and (6) a management information system integrating contract management, procurement, accounting, financial reporting, and disbursement will be procured and adopted to standardize project financial management and M&E work. Overall, the residual financial management risk after taking into account mitigation measures is rated as Substantial.

14. Funds flow. The World Bank loan agreement will be signed between the World Bank and MOF and the on-lending agreement will be signed by MOF and Guangxi Autonomous Regional Government, which will be the final debtor and responsible for repayment. Following the on-

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lending arrangement and existing fiscal management, a project designated account (DA) in USD with a fixed ceiling of USD 10 million will be opened and managed by Guangxi FB. To request Bank loan proceeds, each CPMO will prepare a Bank loan request with supporting documents and submit it to the respective County Finance Bureau (CFB) for review. The requests will then be processed by the RPMO and consolidated before submission to the Guangxi FB. The latter will review the requests and transfer funds from the DA to the respective CFBs, which will then transfer the funds to cooperatives or contractors. The Bank and Guangxi FB may also make direct payments to contractors. To support the start-up of cooperatives, counterpart funds are required to be advanced to cooperatives against a signed investment agreement and approved annual work plan. According to the Management Regulation of Fiscal Earmarked Poverty Alleviation Funds of Guangxi Autonomous Region (Guicainong [2014] 272) jointly issued by Guangxi FB, regional PADO, and regional DRC, the advance could be no more than 30%. Municipal PADO and CFBs have confirmed that they have experience in applying an advance mechanism in civil works contracts. The advance to cooperatives and related fund management will be stipulated in the project FMM. The detailed disbursement application/request and funds-flow arrangements will be described in the project’s FMM.

15. Counterpart funds. Counterpart funds will comprise the earmarked poverty alleviation funds and work relief subsidies. These budgeted funds will be approved by Guangxi FB and DRC, respectively, and appropriated to the project counties. The annual project implementation plan, including the budgeted expenditures and resources, will be prepared by CPMOs based on the annual work program implemented by CPMOs and cooperatives. Budget variance analysis will be conducted regularly, thus enabling timely corrective actions. Measures will be taken by the project where both counterpart funds and Bank funds will be properly budgeted during the project implementation so that counterpart funds are provided to fully finance rural infrastructure activities and corresponding works contracts under Component 2 of the project.

16. Accounting and financial reporting. All PMOs will use unified information systems that integrate project management, procurement, accounting, and financial reporting. This system has been successfully used for other Bank-financed projects. The Guangxi PMO will complete system implementation and training by the time of project effectiveness. The administration, accounting, and reporting for the project will be set up in accordance with Circular 13: “Accounting Regulations for World Bank-financed Projects” issued by the Ministry of Finance in January 2000. The CPMOs will manage, monitor, and maintain project accounting records in accordance with Circular 13 for both CPMOs and project cooperatives. The RPMO will consolidate the project financial statements of each CPMO and incorporate DA information maintained by Guangxi FB to prepare the consolidated project financial statements. The unaudited semi-annual project financial statements will be prepared and furnished to the Bank by the RPMO as part of the semi- annual progress report by no later than 60 days following each semester (August 31 and February 28 of each year).

17. Internal control. Accounting policy, procedures, and regulations for Bank projects have been issued by the MOF. The FMM aligns the financial management and disbursement requirements among various implementing agencies. To mitigate the FM risk and to strengthen the project FM arrangements in general, the following specific financial controls will be incorporated into the FMM, which is an integrated part of the Project Operations Manual:

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a) The RPMO shall enhance their guidance and FM supervision of the CPMOs by establishing the FM supervision policy to ensure compliance with the FMM. It has been agreed that a CPA firm will be hired to assist Guangxi FB and RPMO in carrying out semi-annual FM supervision of CPMOs during the first year of implementation. Such supervision should cover, but not be limited to, the following: (1) review of semi-annual project financial reports, (2) review of project accounts, (3) examination of the project expenditure eligibility and related supporting documents, (4) review of cooperatives’ project accounts and supporting documents on a sample basis, and (5) variance analysis between the approved annual work plan and actual expenditures. The supervision results should be documented in a written report and filed. Supervision frequency can be reduced to an annual basis starting from the second year if no significant FM issues are noted.

b) Cooperatives receiving project funds should comply with the National Accounting Regulation for Rural Cooperatives, and maintain their financial records and accounts, which will be subject to RPMO and the Bank’s review. Additionally, the receipt and use of Bank loan proceeds should be included in the cooperative’s annual audit, and such report should be publicly disclosed in the related village/community annually.

18. Audit. The Guangxi Autonomous Regional Audit Office (GAO) will be assigned by the China National Audit Office (CNAO) as the auditor for the project. The annual audit reports on the project financial statements will be due at the Bank within 6 months after the end of each calendar year. According to the agreement between the MOF and the CNAO, the audit reports and audited financial statements will be made publicly available on the official websites of both the World Bank and the project auditor (either CNAO or the regional auditor).

Disbursements

19. Four disbursement methods are available for the project: advance, reimbursement, direct payment, and special commitment. The primary Bank disbursement method will be advances to the DA. The supporting documents required for Bank disbursement under different disbursement methods are documented in the Disbursement Letter issued by the Bank. The Bank loan will be disbursed against eligible expenditures (taxes inclusive) as described in Table 1 below:

Table 1: Disbursement Categories and Percentages

Disbursement Category

Amount (USD)

Percent of expenditure

financed

(1) Grants under Component 1 (a) (Cooperative Development Fund) 29,000,000

100% of amount disbursed

(2) Grants under Component 1 (b) (Matching Grants for Enterprises) 32,300,000

100% of amount disbursed

(3) Goods, works, non-consulting services, consultants’ services, Subsidies, Training and Incremental Operating Costs under Parts 2, 3, and 4 of Project

30,450,000 100%

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(4) Front-end fee 250,000 100%

(5) Interest and other charges on the Loan accrued on or before the last Payment Date immediately preceding the Closing Date

8,000,000 Amount payable pursuant to

Sections 2.05 and 2.04 of the Loan

Agreement, respectively, in accordance with

Section 2.07 (c) of the General Conditions

Interest rate cap or interest rate collar premium 0 100%

TOTAL 100,000,000

20. Retroactive financing. Retroactive financing will be available for eligible expenditures under all project components up to an aggregate amount not to exceed USD 10 million for payments on or after July 1, 2016, and is specified in the Loan Agreement.

21. For the Matching Grants for Enterprises, Bank loan proceeds will finance 100% of selected items in the investment proposal following the Bank’s procurement guidelines, and the disbursment will be made against signed contracts and other supporting documents, including but not limited to invoices.

22. Household credit rating. This activity will be carried out by qualified individuals as described in the component description and output-based subsidies will be paid at the rate of RMB 20 per household as stipulated in the Project Operations Manual. The amount will be verified from time to time and could be adjusted by mutual agreement between the Regional PMO and the World Bank. The disbursements will be made against overhead expenses of the credit rating team which are recorded in the household credit rating records and verified by the CPMOs.

23. Ten counties will be involved in the implementation of subcomponent 1(a) Cooperative Developmnt Fund (CDF). The disbursement procedures for these activities will be the following: (1) Project cooperatives will open cooperative-level accounts, but no advances of Bank loan proceeds will be made from the CFB into such cooperative accounts; (2) CPMOs and each participating cooperative will enter into an implementation agreement, including an approved overall investment plan and annual work plan; (3) cooperatives will claim actual expenditures incurred in accordance with the annual work plan and submit their application to the CPMOs; (4) payments will be made by the DA managed by Guangxi FB to the cooperatives through the CFB if the expenditures were pre-financed by the cooperatives, or to third parties directly upon payments due; and (5) supporting documents for payments to cooperatives include signed procurement contracts, copies of invoices, verification reports, etc. No advances of the Bank loan proceeds will be made from the CFB into cooperative accounts.

Procurement

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24. Capacity assessment. The procurement capacity assessment identified that procurement personnel of the RPMO and those in some CPMOs will have some experience with former Bank- financed projects, and will generally be familiar with Bank procurement procedures. Newly appointed procurement staff in some counties, however, lack experience with Bank-financed projects. This risk will be addressed through (1) preparation and implementation of a procurement training plan to train all procurement staff at the regional and county levels during the project preparation and implementation; (2) participation of the procurement staff in the regular procurement training program offered by Tsinghua University (or equivalent) in cooperation with the Bank procurement team in the Beijing office; (3) preparation of a procurement section in the POM to standardize project procurement procedures and provide guidance to procurement staff, with particular focus on community participation in procurement; and (4) community facilitators will be recruited by the CPMOs to support the project implementation at the cooperative level, including procurement. The overall procurement risk is rated as Substantial.

25. Applicable guidelines. Procurement for the proposed project will be carried out in accordance with World Bank “Guidelines: Procurement of Goods, Works and Non-consulting service under the IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011, revised July 2014; “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011, revised July 2014; and the provisions stipulated in the Loan agreement. The Bank standard procurement methods and procedures would apply to all procurement activities carried out by the RPMO and CPMOs, except Component 1 (a). Community Participation in Procurement would apply to all procurement activities under Component 1 (a) “Cooperative Development Fund,” which would be carried out by cooperatives. The detailed procedures for Community Participation in Procurement are defined in the procurement section of the POM.

26. Procurement responsibilities. Procurement for investment activities at the regional and prefecture/municipal levels will be implemented by the RPMO. Procurement for investments at the county level will be under the responsibility of the respective CPMOs, except for those activities to be implemented by farmer cooperatives under Community Participation in Procurement. The detailed procurement arrangements and responsibilities are summarized in Table 2.

27. Procurement of works, goods, non-consulting services, and consulting services under Component 1 (a) “Cooperative Development Fund.” The nature of community participation in procurement requires more flexible procurement procedures and arrangements for implementation by the cooperatives. Within the principle of community participation in procurement under the Bank’s Procurement Guidelines (paragraph 3.19), simplified procurement procedures are described in the procurement section of the POM.

28. Procurement of goods, works, non-consulting services, and consulting services under Component 1 (b) “Matching Grants for Enterprises,” 2, 3, and 4 would be procured by the RPMO and CPMOs, as shown in Table 2. Procurement will be done using the Bank’s standard bidding documents (SBD) for all international competitive bidding (ICB) contracts and National Model Bidding Documents (MBD), agreed with or satisfactory to the Bank for all national competitive bidding.

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29. Selection of consultants. The Bank’s Standard Request for Proposal shall be used for all competitive selection of firms. Universities and research institutes can be included in shortlists as a source of consultants, provided they possess the relevant qualifications and they are not in a conflict of interest situation. In such cases, QBS or CQS (for small assignments) would be used, if the shortlist also includes consulting firms.

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Table 2: Detailed Procurement Arrangements and Responsibilities

Component and Subcomponent

Activities Procurement Arrangement Responsible Agency Standard

ProceduresCommunity

ParticipationComponent 1: Improvement of Pro-Poor Value Chains

a) Cooperative Development Fund

Grants would be provided to finance cooperatives to invest primarily in fixed value-adding production and processing equipment and facilities, nurseries, advanced breeding stations, equipment for improved seed production, storage facilities for agricultural produce, and other small-scale cooperative-level infrastructure, goods, and related capacity-building and technical assistance services.

Yes Implementation would be carried out through the

agreement signed between CPMO

and the cooperative.

Cooperatives

b) Matching Grant for Enterprises

The matching grants would focus on investment in the key areas of storage and logistics systems, processing, marketing (branding, certification, etc.), and product quality (including food safety improvement).

Yes RPMO in participation of selected enterprises.

Component 2. Public Infrastructure and Services

a. Rural infrastructure

Rehabilitation and construction of (i) production road infrastructure, such as off-grade access roads to village/cooperative production areas or processing and marketing facilities, and rehabilitation and construction of tractor roads, field tracks, and foot paths; (ii) small-scale irrigation and drainage infrastructure and construction of small water storage facilities; (iii) establishment of IT and telecommunication infrastructure and procurement of information infrastructure and equipment; and (iv) rehabilitation or construction of public market facilities, electricity supply, and other infrastructure, and procurement of related equipment.

Yes CPMOs

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b. Industrialization risk management

TA and related consultancy services and related risk management equipment. The project will finance mainly TA and consultant services.

Yes, Development and registration of brands, GI, and product marketing may be disbursed through IOC.

RPMO, CPMOs

Component 3. Enhancing Investments in Poor Areas

a) Business Incubation Center

Establishment (building, facilities, etc.); operation; TA

Yes CPMOs

b) Improved access to financing

Will support, in cooperation with local financial institutions, the scaling-up of the government program of a comprehensive household credit rating piloted in Tiandong County and the validation of rural assets.

CPMOs This activity will be carried out by qualified individuals and subsidies will be paid at the agreed rate stipulated in the Project Operations Manual. Disbursement will be made against the verification report issued by CPMOs.

Component D. Project Management, M&E, and Learning

Project management Office equipment, consultants, and TA Yes RPMO, CPMOs Training, workshop, & study tour

SOE N/A N/A RPMO, CPMOs

30. Prior-review thresholds. Prior-review thresholds are shown in Table 3 below:

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Table 3: Thresholds for Procurement Methods and Prior Review

Expenditure Category Contract Value

Threshold (USD) Procurement Method

Prior-Review Threshold (USD)

1. Goods and Non- ≥10,000,000 ICB AllConsulting Services <10,000,000 NCB ≥2,000,000

Not applicable <500,000 Shopping

≥2,000,000 None Direct contracting

2. Works and Supply and ≥40,000,000 ICB All Installation of Plant and Equipment <40,000,000 NCB ≥10,000,000

Not applicable <500,000 Shopping

3. Consulting Services ≥300,000 QCBS/QBS >1,000,000

<300,000 CQS Not applicable

Individual consultant Only in exceptional cases (e.g., long-term TA) and≥ 300,000

Single-source selection(firm) ≥1,000,000

Single source selection

(individual) ≥300,000

Cooperative Development Fund

Community participation in procurement <100,000 for goods <200,000 for civil works

Procedures are to be described in Project Operations Manual and finalized before negotiation.

Not applicable

31. Training and workshops. Plans for training and workshops will be developed by the PMOs and included in the annual project work plan. Expenditures incurred in accordance with the approved plans for training and workshops will be the basis for reimbursement.

32. Procurement Plan. The Procurement Plan will be prepared by the RPMO for the initial 18 months of project implementation. The plan will be made available in the project’s database and on the Bank’s external website. The Procurement Plan will be updated annually or as required to reflect implementation needs. For the procurement activities carried out by cooperatives under Component 1 (a), Cooperative Development Fund, no Procurement Plans will be prepared. Instead, for Component 1 (a), the cooperatives will prepare Cooperative Annual Implementation

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Plans (CAIPs) after the cooperatives have been established and their investment proposals have been approved by the County PMOs and county governments.

33. Frequency of procurement supervision. Prior-review supervision will be carried out through the World Bank office in Beijing. Procurement post-reviews will be carried out every 12 months by the Bank and/or by external auditors in accordance with terms, conditions, and reporting procedures acceptable to the Bank. The initial procurement post-review sampling ratio will be one out of 25 contracts for procurement activities carried out by cooperatives and one out of 15 contracts for procurement activities carried out by the Regional and County PMOs. Given the large number of parties and transactions involved, the small value and multiplicity of contracts, and the scattered locations of the subprojects, which present a challenge to verifying all individual subprojects, various accountability mechanisms, including community participation and public announcement of community activities and funds received and spent, have been built into the local governance system and included in the POM.

34. Advance contracting and retroactive financing. Contracts expected to be procured in advance (before Loan signing) are included in the Procurement Plan. Retroactive financing will be allowed under the project for eligible expenditures under all project components. Withdrawals for eligible expenditures up to an aggregate amount not to exceed USD 10 million can be made for payments within 12 months prior to the date of the Loan signing, but on or after July 1, 2016.

Environment

35. OP4.01 Environmental Assessment. Three environmental policies are triggered for the project: OP4.01 Environmental Assessment, OP4.04 Natural Habitats, and OP4.09 Pest Management. As per OP4.01, the project is assigned Category B for environmental purposes given the nature of the project and the limited scale of its activities, and associated environmental and social impacts. As designed, the project will adopt a framework approach because the specific location of investments under Components 1 and 2 will be identified during the implementation through a participatory approach. Therefore, an Environmental and Social Management Framework (ESMF), including a generic Environmental Management Plan (EMP) and Pest Management Plan (PMP), was developed during the project preparation. Several WBG Environmental, Health, and Safety Guidelines relevant to the agricultural sector were incorporated into the EMP where applicable. The ESMF has been reviewed by the Bank team and considered satisfactory to Bank safeguards policy requirements.

36. Component 1 (a) Cooperative Development Fund (CDF) and 2 (a) Rural Infrastructure will involve physical activities. Under the CDF, the project will support the establishment and capacity building of more than 100 new or existing village-level cooperatives. The project will finance their production and market-related equipment and facilities, nurseries, breeding and seed production, and cooperative-level infrastructure. These cooperatives may engage in agricultural production of more than 10 types of plants (such as dragon fruit, kiwi, and oil tea) and four types of livestock (such as pigs, chickens) and rural tourism. These plants are all perennial and existing local species. The project doesn’t involve massive plantation or large-scale livestock farms, but aims to help farmers improve their product yield and quality and remove the bottlenecks in production or marketing.

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37. Component 2 (a) will support rehabilitation or construction of public infrastructure in rural areas, including off-grade access roads, small-scale irrigation and drainage facilities, small water storage tanks, market facilities, and household power supply and information facilities. This infrastructure will be managed by local governments. The project will not involve any dams. Water tanks to be supported by the project are small storage facilities that will store rainwater. Channels will be built to direct the water for household and/or irrigation use.

38. Location and baselines. The proposed project area covers rural areas located in northwestern Guangxi. The project area extends from the edge of the Yunnan-Guangxi-Guizhou karst region to the earth hilly region (northwest to southeast). Within this area, more than 100 administrative villages in 10 project counties under the two prefecture-level cities of Baise and Hechi are proposed. These are Tiandong, Tianlin, Leye, Donglan, Bama, Fengshan, Dahua, Du- an, and Pingguo County, and Yizhou City (a county-level city). About 30 percent of the potential project villages present a mild to severe level of rock desertification as a result of soil erosion in karst areas. All of the selected counties/city are characterized by a high level of poverty combined with poor natural resource conditions, difficulties in water management, limited availability of farm land, and a majority population of ethnic minorities.

39. The proposed project area is subject to tropical or subtropical weather. Hechi City has an area of 33,508 km2 and a population of 4.5 million (2014). The annual average temperature is 16.9‒21.5 degrees Celsius. Annual average precipitation is 1,200‒1,600 mm. Baise City has an area of 32,652 km2 and a population of 3.8 million. The annual average temperature is 19‒22.1 degrees Celsius. Annual average precipitation is 1,113‒1,713 mm. These preliminary natural and social data indicate that (a) light, heat, and rainfall conditions are favorable for vegetation growth; (b) rainfall is relatively abundant, but, because of the porous rocky geology in karst areas, surface water goes underground easily, which causes difficulty in retaining water for household and agricultural use; (c) in karst areas, soil coverage is thin and vulnerable to natural or human activity- induced erosion, whereas the landscape is beautiful; and (d) the relatively large population in the project area poses pressure on natural resources, albeit such pressure has been gradually declining because of rural-urban migration.

40. Environmental and social impacts. The project will bring about positive environmental and social benefits in terms of improved agricultural practices and increased income-generation opportunities for poor communities in the project areas. Through the promotion of improved agricultural production practices and improvement of rural infrastructure, the project is expected to help local poor communities to better carry out agricultural production and to reduce reliance on their natural resources, which will in the long term bring about environmental and social benefits in terms of protection of farmland, conservation of natural habitats, and control of soil erosion in karst areas (i.e., the process of “rocky desertification”).

41. Agricultural production and infrastructure construction activities, if not well managed, may bring about negative environmental and social impacts, including (1) impacts on natural habitats such as soil erosion, vegetation clearance, and water pollution, particularly in the karst areas; (2) construction impacts and social disturbance such as noise and dust associated with small civil works; (3) waste management in rural tourism facilities and livestock farms during operation; and (4) pesticide misuse associated with growing a number of agricultural products.

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42. These environmental and social impacts are found to be limited, localized, and temporary. Cumulative impacts are minimal because the project activities will be of small scale and scattered. The project ESMF included baseline survey, impact assessment, environmental management plans specific to each type of activities, and procedures to address environmental and social issues, which are expected to avoid and mitigate these impacts adequately.

43. OP 4.04 Natural Habitats. During the development of the ESMF, surveys on ecological and social baselines were carried out through desk review, consultation, and field visits. A number of ecologically sensitive areas, including nature reserves, scenery areas, geological parks, and drinking water source protection areas, were identified in the project region. Given the location of the candidate project villages and these sensitive areas, the project activities are unlikely to affect them. The project design and the ESMF have incorporated procedures and measures to avoid involving the identified sensitive areas and to mitigate effectively the potential impacts on the common natural habitats in the project area.

44. The agricultural products involved in the project are expected to be largely perennial plants. These plants are diverse: 12 types of plants are proposed under the project during the preparation. These could include fruit trees (e.g., mango and orange), shrubs (e.g., oil tea), and vines (e.g., dragon fruit, kiwi, and grape). The project will not support production scale-up through large-scale plantation development. The focus is on improving yield and product quality by promoting advanced agricultural technologies and organic food. There may be limited vegetation clearance and soil erosion associated with the growing activities, which have been assessed, and mitigation measures have been included in the EMP.

45. Particular attention was given to the karstic part of the project area as the karst topography is prone to soil erosion because of thin soil coverage. A set of measures and good practices in the karst areas were incorporated into the EMP.

46. OP 4.09 Pest Management. The project does not directly finance pesticides and agrochemicals. However, increased agricultural production activities under the project Component 1 (a), if justified, could lead farmers to use pesticides to control agricultural pests using their own funds. A survey of the pest management practices in the project area was conducted and plant- specific pesticide practices were studied. The pesticides used for this project would be limited given the following considerations: (1) A significant share of agricultural products supported in the project are all perennial plants that are diverse and are relatively adapted to the local ecological environment and thus do not require significant use of agrochemicals. Compared to annual crop production, pesticide use is anticipated to be limited. (2) The main thrust of the project is to support the production of safe and pollution-free food products from mountain areas (organic and green food) for which currently a strong demand exists among increasingly quality conscious urban consumers. To this end, the PMP includes a set of physical, mechanical, and biological pest control measures that are specific to each type of plant, and a concrete plan to promote IPM to reduce chemical pesticides. Capacity-building, monitoring, and reporting requirements are included as well. Further, during the project implementation, the proposals prepared by farmer cooperatives are expected to present pest management measures (including training aspects) specific to plant types. A clear rationale and justification are required for any pesticide use, given that the purpose of the project is to produce safe, high-quality food.

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47. ESMF/EMP/PMP. The RPMO engaged an accredited EIA consultant to prepare the ESMF, which addresses the project-related environmental and social issues, and sets out principles and procedures to address the environmental and social impacts of subprojects. The RPMO will take overall responsibility for the implementation of the ESMF and EMP.

48. The ESMF includes a study of environmental and social baselines, which include specific descriptions of each project county and an inventory of potential project villages and their key environmental issues, which will help screen and assess subproject impacts during the project implementation. The ESMF includes an assessment of potential environmental and social impacts, for which the karstic part of the project area was given particular attention. The ESMF also covers procedures for subproject screening, environmental document preparation, information disclosure and public consultation, and review and approval, which follow the Bank safeguards policy and domestic environmental regulatory requirements.

49. The ESMF includes a grievance redress mechanism and PMO/PIU capacity-building plan, a generic Environmental Management Plan (EMP), and a Pest Management Plan (PMP). The EMP contains activity-specific mitigation plans for agriculture-related growing activities, rural infrastructure rehabilitation and construction, and storage and market facilities. In addition to general mitigation measures, the EMP has mitigation measures specific to subproject activities in karst areas. The PMP addresses the selection and use of pesticides building on the IPM approach. The ESMF also has a set of physical, mechanical, and biological pest control measures that are specific to each type of plant and a concrete plan to promote IPM to reduce chemical pesticides. Monitoring and budget requirements are included in the ESMF as well.

Consultation and information disclosure. Public consultation and information disclosure were carried out during the project preparation. The project environmental and social consultants carried out consultation through questionnaire surveys, focus group meetings, and interviews. Public opinion has been incorporated into the project design and the ESMF/EMP. The draft full ESMF was disclosed locally and on the website of Guangxi Poverty Reduction on May 12, 2016, with a newspaper announcement of the disclosure in Guangxi Daily on May 13, 2016. It was disclosed at InfoShop on June 2, 2016.

Social

50. Social assessment process. A qualified consultant team from Yunnan and Guangxi Universities undertook a full social assessment for the Borrower during the October 2015-March 2016 period. The field survey took place in three villages in each of the 10 project counties, combining focus group discussions using Participatory Rural Appraisal (PRA) techniques and a household survey. A total of 560 households responded to the survey, of which 37 percent were women. The social assessment process paid special attention to women during consultations, interviews, and discussions, and the recorded data were gender disaggregated whenever possible. In addition, close to 150 cooperatives/enterprises and government officials took part in key informant interviews. Special attention was paid to the participation of various ethnic minority communities in focus group discussions and in the survey. The social assessment report is available in Chinese and English versions.

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51. Project interventions, especially in cooperative investments, are expected to foster the development of value chains, which will strengthen cooperation among poor farmers, leading to improved production and management skills. By investing in basic rural infrastructure, the project will improve living and production conditions in targeted villages, which will improve accessibility and contribute to increased income of poor farmers.

52. Poverty profile and basic characteristics of the project villages. According to the data from the national poverty database, the poverty incidence rate in the project villages was 26.5 percent in 2014 vis-à-vis 12.6 percent in Guangxi. A lack of funds was identified as the primary cause of poverty (42 percent), followed by a lack of skills (25 percent). More than 80 percent of the proposed 117 project villages are designated poor villages. Ethnic minorities make up about 85 percent of the population in the project villages. Common features among these villages are remoteness, a poor state of basic infrastructure, and very limited and unreliable market access. The project villages are typically more than 10 kilometers away from the township seat. Some 16 percent of the villages have no road access and 19 percent have difficulties in obtaining safe drinking water. More than 25 percent of the local farmers rely on borrowing to meet their consumption needs at certain times. Credit dependency is even higher for poor households. Poor households combine off-farm work, their main income source, with traditional crop production and animal raising. Grain crops are nowadays mostly grown as a source of animal feed. Most villages selected as project villages have some productive land although there are also a number of karst villages with limited land and water resources. The average land area per household is 3.5 hectares, out of which cropland is only 0.3 hectare, the rest being forestland, orchards, and grasslands.

53. Farmer Cooperative Development. The establishment of cooperatives was an ongoing process in the project villages. It started in early 2016, often as part of the project preparation process. Among the interviewed households, close to 90 percent believed that rural cooperatives were useful, 85 percent saw them as an income-generation opportunity, and one-third said they were ready to invest their own money in cooperatives. Poor households also expressed similarly strong support, although with slightly lower numbers. They saw cooperatives as a means for better marketing of farm products, for improving agricultural production, for strengthening bargaining power, and for solving problems that cannot be solved by individuals. How to organize and formalize cooperative management was described as an area of uncertainty and concern, as well as the weakness of existing linkages with outside market operators. Households’ views on cooperative types were balanced, with around half of them interested in pooling their land resources (e.g., land share cooperatives), while the other half viewed cooperatives as a means to improve market access for smallholders (e.g., service cooperatives). This reflects the opportunity to develop diverse models among existing cooperatives in the project counties.

54. Positive social impact. Project inverventions, especially in cooperative investments, are expected to foster the development of value chains, with strengthened cooperation among poor farmers, bringing opportunities for improved production and management skills. By investing in basic rural infrastructure, the project will improve living and production conditions in targeted villages, which will improve the accessibility of more remote villages and contribute to increased income of poor farmers.

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55. Ethnic Minority Development Framework (EMDF). Guangxi is an ethnic minority autonomous region. In the 10 project counties, the Zhuang account for 75 percent of the total population, followed by the Han, who account for 13 percent. Other smaller ethnic minority groups in the project villages are the Yao (12 percent, 14 administrative villages), Dong, Gelao, Shui, and Maonan.

56. The Zhuang are the predominant ethnic group in the project area, with development features similar to the Han, the main Chinese population. The project will pay particular attention to the smaller ethnic minority groups, such as the Yao, Miao, Dong, and Maonan, to ensure equal access to project benefits. An Ethnic Minority Development Framework (EMDF) has been prepared to promote the active participation of smaller ethnic minority communities in project activities, as feasible.

57. Resettlement Policy Framework (RPF). Screening was done to assess potential land acquisition and resettlement issues caused by the project. No significant land acquistion and resettlement are expected under the project. Some cooperatives will need to construct storage and processing facilities and agricultural product markets. Detailed plans will be finalized through proper operating procedures of the cooperatives later during implementation. To ensure that OP 4.12 is complied with, a Resettlement Policy Framework has been prepared and disclosed.

58. Gender. Nearly 90 percent of the interviewed women expressed willingness to join cooperatives, a proportion that was similar among both men and women. The SA report makes recommendations to ensure active participation of women in the project-supported cooperatives, both as individual members and on management boards, in the project’s capacity-building and economic activities. Providing new economic opportunities while avoiding an excessive increase in women’s workload would be a cross-cutting priority. The POM will set up targets in terms of percentages of participing women, and related monitoring indicators will be disaggregated by gender.

59. The County All-China Women’s Federation (ACWF) offices, which are undertaking their own projects targeting women, would be appropriate facilitation and capacity-building providers for the project. The CPMOs will coordinate with county-level ACWF offices and identify with them how they can best play their facilitation role to ensure that cooperative membership is in the name of women when they wish to become a member, and that cooperative management boards include women. ACWF would also be invited to be a service provider for management training courses and in the proposed BICs. The Federation would specifically provide capacity building for women micro-entrepreneurs and women cooperative managers.

60. Consultation and information disclosure. The SA process has served as an alternative public consultation process, as it engaged with a large percentage of poor households through answering questionnaires and participating in discussions. Project information was also disseminated by the poverty alleviation offices at county, township, and village levels. Key project documents, including the SA report, the RPF, the EMDF, and the ESMF, have been disclosed locally and at InfoShop on June 2, 2016. A major proportion of the project investment will be made through the operation of rural cooperatives, where project activities will be decided at the individual cooperative level with wide participation from poor households. Access of households

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to project information and participation in local-level decisions will continue to be a key factor for success during the project implementation.

Monitoring & Evaluation

61. The Results Framework describes the PDO-level outcome indicators, the component- specific intermediate indicators, and the respective baselines and targets (Annex 1). The M&E arrangements and responsibilities are described in the POM. M&E of the project progress, outputs, and outcomes will be under the responsibility of the Regional and County PMOs. Designated M&E officers will be appointed at the RPMO and in each CPMO who will be responsible for compiling relevant M&E information in a timely manner for consolidation into the semi-annual project progress reports. A computerized progress monitoring system will be set up at the regional and CPMO levels to help track and document physical, institutional, and financial project progress.

62. In addition to performance indicators, the management effectiveness of farmer cooperatives supported by the project will be measured by a qualitative self-assessment, using the Cooperative Management Effectiveness Tracking Tool (METT). The METT is described in the POM and will be applied at mid-term and at the end of the project. The METT will allow the qualitative assessment of various elements of cooperative performance, for example, the availability of the management objectives, analysis of challenges of the farmer cooperative, appropriate planning and resource allocation (inputs), application of management actions, provision of products and services (outputs), and results in terms of impacts.

63. In addition to the general results monitoring, and in response to the specific learning and demonstration nature of this project, a systematic M&E system will be set up to understand farmer benefits and poor farmer suitability of different cooperative models. This will be done by categorizing cooperatives by their major management and benefit-sharing arrangements. These categories will include but are not limited to (i) shareholding cooperatives using members’ land as shares without enterprise shares (type 1); (ii) with enterprise shares (type 2); (iii) service provision cooperatives (providing marketing and/or input supply services) without enterprise contracts (type 3); and (iv) with enterprise contracts (contract farming) (type 4); or other models. For each of the models, a set of indicators will be defined for which the project will systematically collect and analyze relevant information. Indicators will include but are not limited to outreach to poor farmers, risk perception of members by gender and poverty status, incremental revenue generated, satisfaction of members by gender and poverty status, growth in membership, growth in cooperative assets, benefit sharing, financial sustainability, etc. The system is expected to provide specific recommendations of the suitability of different organizational arrangements under the industrialization agenda in terms of growth and income generation, and the suitability of different models by industries and value chains for poverty reduction (in terms of inclusiveness, degree, sustainability, etc.). The collection of this information and analysis would be an integral part of the third-party monitoring contract.

64. The regional PMO will engage qualified institutions or experts to conduct independent impact assessments, including the METT, at project mid-term and at the end of the project. During project implementation, terms of reference for these impact assessments will be prepared and shared with the Bank for technical review and comment.

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Annex 4: Implementation Support Plan China: Guangxi Rural Poverty Alleviation Pilot Project

1. The project will require intensive Implementation Support (IS) and a continuous dialogue with the client at the regional, county, and cooperative levels. It is expected that the early implementation phase, in particular, could face implementation challenges, which will be addressed through the following actions:

a. Achieving the project’s learning objective. Achievement of the project’s learning

objective will depend on an IS strategy built on dialogue and partnership. The IS team will have continuous interaction with all stakeholders of the project. This will require consistency in the composition of the core IS team, technical expertise, and familiarity with country and local situations.

b. Changing perceptions of local government offices. The process of preparing business-oriented investment proposals and defining their content poses significant challenges to stakeholders at the local level. Local governments are inclined to continue using the project to pursue government-driven strategies with limited business and market orientation and neglecting issues of private-sector participation and competitiveness. The IS team will allocate significant time and resources to interact with county governments and leaders to help change such perceptions.

c. Technical review of investment proposals. The World Bank team will provide technical review of the first set of cooperative investment plans and all enterprise matching grant investment proposals, including a review of their business aspects and financial viability, as per Operational Manual. For the subsequent proposals (in the range of 80‒100 proposals over the life of the project), a post-review of technical and economic aspects would be necessary. Sufficient staff time for an experienced agricultural economist and/or agri-business expert will be provided.

d. Capacity building of the implementation agencies. Significant training and hands- on support will be required on a technical level and in terms of fiduciary and safeguards management.

e. Monitoring, evaluation, and learning. Coordination of M&E and the capturing of project outcomes and results will need professional guidance from an M&E expert on the IS team.

f. Fiduciary safeguards support. The proposed funds flow brings challenges for project financial management. IS will provide hands-on guidance related to review and audit, and reporting procedures. Similarly, procurement activities will be spread widely among entities, types of procurement, and size of contracts. This will require intensive IS.

g. Social and environmental safeguards. M&E and mitigation of social risks require experienced expertise on the IS team with a good understanding of the rural transformation process in China. In addition, sufficient staff time and resources will be provided to review site-specific environmental management measures during the investment planning process for cooperatives and agri-businesses.

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Implementation Support Plan 2. The IS plan below describes Bank support for the implementation of risk mitigation measures and provides the technical advice necessary to facilitate achieving the PDO (linked to results/outcomes identified in the results framework). The IS plan also takes into account the requirements to meet the Bank’s fiduciary obligations.

Time Focus Skills Needed Resource

Estimate Partner

RoleFirst 12 months

General. Assure that all PMOs are familiar with the project approach and that the POM is being followed.

Familiarize the PMOs with all relevant administrative and operational aspects of project implementation.

Provide consistent and ongoing support on operational and technical implementation issues.

Technical. Review and comment the first set of cooperative investment proposals and all enterprise matching grant proposals as per Operational Manual.

Procurement. Provide training to PMO staff; review procurement documents and provide timely feedback; provide detailed guidance on Bank Procurement Guidelines; monitor procurement progress against the detailed Procurement Plan; and conduct procurement post-review assessments once a year.

Financial Management. Provide training to PMO staff; assess the project’s FM system, including but not limited to accounting, reporting, and internal controls; review the project’s FM reports on a regular basis; and review annual audit reports.

Environmental and Social Safeguards. Ensure that the related safeguard documents are well understood and that the provisions are implemented.

TTL

Agricultural economist

Agri-business specialist

Procurement

FMS

Environmental safeguards

Social safeguards

USD 100,000 per year

12‒48 months

General. Review and understand all implementation processes and remove implementation obstacles.

Refine and revise the POM as needed. Move focus toward dialogue and capturing lessons. Prepare for mid-term review.

Technical. Visit ongoing project investments and provide feedback; review and comment the first set of cooperative investment proposals and all enterprise matching grant proposals as per Operational Manual and/or post-review of cooperative investment oroposals and provide comments.

Procurement. Review procurement documents and provide timely feedback; monitor procurement progress against Procurement Plan; conduct procurement post-reviews at least once a year.

Financial Management. Implementation support will include (a) reviewing the implementation of the project’s financial management system, including but not limited to accounting, reporting, and internal controls; (b) reviewing the project’s financial management reports on a regular basis; and (c) reviewing the annual audit reports.

TTL



Procurement

FMS


Social safeguards

USD 90,000 per year

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Environmental and Social Safeguards. Review environmental and social impact.

48‒60 months

General. Understand failure and success parameters in close dialogue with the implementing agencies. Facilitate exchange among counties and cooperatives to learn from each other. Prepare detailed learning and analysis framework and prepare for end-of-project evaluation.

Technical. Visit ongoing project investments and provide feedback. Support technical and financial analysis of project investments. Do post-review of Investment Proposals and provide comments.

Procurement. Review procurement documents and provide timely feedback; monitor procurement progress against Procurement Plan; conduct procurement post-review at least once a year.

Financial Management. Review implementation of the project’s FM system, including but not limited to accounting, reporting, and internal controls; review the project’s FM reports on a regular basis; review annual audit reports.

Environmental and Social Safeguards. Review environmental and social impact and extract lessons. Provide guidance to the social and environmental impact assessment.

TTL



Procurement

FMS


Social safeguards

USD 90,000 per year

I. Skill Mix `

Skills Needed Number of Staff Weeks Number of Trips Comments Task Team Leader 12 annually Two per year, three in first

year Country office or headquarters based

Social Specialist 3 annually Field trips as required Country office based

Environmental Specialist

3 annually Field trips as required Country office based

Procurement Specialist 3 annually Two per year Country office based

Financial Management Specialist

3 annually Two per year Country office based

Monitoring and Evaluation Specialist

3 annually Two per year, three in first year

Consultant

Agricultural Economist,


Consultant

Agri-Business Specialist


Consultant (national, if available)

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Annex 5. Project Economic and Financial Analysis Guangxi Rural Poverty Alleviation Pilot Project

I. Introduction and Overview of the Analysis

1. An economic and financial analysis of the project was undertaken to assess and answer the following three questions related to the project design and expected outcomes:

What is the project’s expected economic development impact? A standard cost-benefit

analysis of various value chain production systems in the project areas is used to assess this impact.

Is public funding needed and what levels of financing are appropriate? This part of the analysis identifies market failures that prevent private farms and businesses from investing in the destitute poverty areas in Guangxi. It analyzes how these market failures would be addressed by the project and what level of public interventions is needed.

What is the World Bank’s value added in the project? This part of the analysis discusses the value added derived from Bank experience and the commitment of Bank staff time and implementation support.

II. Expected Development Impact

Project Benefits

2. Direct benefits expected from the project include improved productivity, value addition, and new market opportunities, resulting in increased income. These benefits will result from (a) the adoption of new production standards and technology packages, leading to increased output and increased factor productivity; (b) reduced postharvest losses; (c) improved produce processing and/or packaging; (d) better access to services, markets, and information; (e) reduced transaction costs; (f) improved product quality and producer (farm-gate) prices; (g) higher production values through market differentiation (e.g., product certification, brand naming, etc.); and (h) advantages from economies of scale.

3. Indirect benefits expected from the establishment and support to farmer cooperatives under the project include (a) strengthening of capacity and the organizational level of producers and marketing groups, (b) improving quality and reducing the costs of forward and backward linkages of farmers to markets and higher-up value chain operators, (c) local cooperatives managing their physical infrastructure investments in a sustainable way, (d) public- and private-sector operators delivering quality services in a more efficient and targeted way, and (e) new models of cooperatives and enterprises working together. In addition, the project is expected to contribute to improving the “rules of the game” with respect to improved outreach and inclusiveness of agri- investment. It is expected that the indirect benefits from re-organizing value chains and value chain operators would be significant.

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Quantification of Project Benefits 4. Cash flow for pilot investment proposals. A detailed cash flow analysis with the projected costs and benefits over a period of 20 years has been prepared for 10 typical investments with the summary results as follows:

Investment Proposal FRR

(percent) NPV (OCC 10%)

(RMB 000)

Dragon Fruit 25 42.87

Fruit Mulberry 26 37.10

Bamboo 27 66.53

Mango 23 58.92

Oil Tea 34 101.75

Kiwi Fruit 39 149.63

Walnut 13 19.50

Wild Grape 20 35.26

Yao Chicken N/A 158.76

Goat 25 42.87

5. This analysis showed that sufficient scope exists for financially viable investments in agricultural value chains in the project area. Financial rates of return at the production level range from 13 percent for walnut production to 39 percent for kiwi production.

6. Overall project cash flow. Because most of the cooperative-level investment proposals will only be formulated once the cooperatives are established and participating enterprises are identified, financial and economic net returns for 10 models were extrapolated for the expected number of 120 investment proposals. No separate benefits are assumed from the investments under Components 2 and 3 since these investments are supposed to generate benefits primarily at the cooperative level. All overhead costs under Components 2 and 3 were therefore added in an overall cash flow for the project without assuming additional benefits (see Attachment Table 1). Investments under the enterprise investments were assumed to increase the benefits by 20 percent. The overall Economic Rate of Return (ERR), taking into account all overhead costs, is estimated at 14.9 percent, with a Net Present Value (NPV) of RMB 332 million using an Opportunity Cost of Capital (OCC) of 10 percent.

7. Sensitivity analysis. The result is robust against cost increases or benefit decreases. Both were tested at a 10 percent level and did not reduce the IRR below 12 percent. Individual investments with an economic Internal Rate of Return (IRR) below 12 percent or a financial IRR below 10 percent would not be supported under the project.

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III. Justification of Public Funding and Levels of Financial Support Public Funding to Overcome Market Failures

8. The proposed project provides public funds to help correct market failures faced by small and poor farmers in destitute areas, including the following:

a. Temporary barriers to entry, such as high transaction costs that prevent the aggregation

of product or demanding quality standards for high-value markets. An example of such market failure is when smallholders can produce products (e.g., fruits for high-value markets) but need certification and a guarantee that each individual producer is following the required production standard. Public funding support is used to invest in product certification, product quality assurance, brand naming, and the protection of product standards and quality.

b. Stakeholder diversity and obstacles to interacting in agricultural value chains with weak organizational structures. To access markets, it is often necessary to provide scale production, which smallholders cannot provide individually. Cooperative grant support will be used to allow farmers to aggregate production and make themselves attractive partners in value chains.

c. Time lags in agricultural production with different stakeholders needed to invest at different times. Start-up public grants provided to cooperatives and matching grants provided to enterprises will be used as tools to link producers and investors when both parties need to invest in a phased manner (e.g., providing initial subsidy for tree crops, which need several years to grow, before processors are required to invest).

d. Limited access to knowledge about new technologies and institutional structures. One of the most prominent features of partnering farmers with investors and enterprises is the injection of knowledge and innovation, which private partners bring to the table. Private- sector enterprises become key drivers of technology change and market innovation. Unlike in public extension systems, this innovation is much more relevant as it is directly market and business related.

9. Avoid creating market distortions through public investment. A difficult aspect of managing public investment in private production is to determine how much public funding is required and in what areas to overcome particular market failures. If funds are too small, market failure may not be overcome and the objective of the public funding would not be met. If too much funding is provided or used in a wrong way, this would create new distortions. Over the past decades, many project counties have supported their pillar commodity-based industries both on the production side and in processing and marketing through public funds. This was often done irrespective of the relative competitiveness and market demand and often led to overcapacity and related market distortions and a continuing dependency of producers on public funds. A more careful approach to public funding is needed, moving away from subsidizing non-competitive industry toward public funding aimed at achieving competiveness. The project therefore directs support toward creating sustainable organizational and institutional settings and toward addressing genuine market failures. This will allow the private sector and markets to work more effectively and increase long-term competitiveness with an exit strategy from the provision of public subsidies.

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10. Applying the additionality principle under the project. With regard to the allocation of public funding to private entities under Component 1 (b), the use of public funds to support private-sector investment is justified if additional positive net economic returns are generated through these funds. To approach this problem, the project distinguishes among four types of investments as illustrated in Figure 1.7

Investments that fall into quadrants A and C would be “undesirable” under the project as the expected net benefits to society are negative. Private investors may invest in activities in Quadrant A because these investments can generate profits. However, because social and environmental costs are externalized, such investment proposals are not suitable for project support. Investments in quadrant C are not profitable for private investors and have negative net returns for society. These will also not be funded by the project. Investments in quadrant B are profitable and receive investments from the private sector and there is no need for public financial support. Investments in quadrant D, however, will not be funded by the private sector because they are not profitable. Public investment may be justified as these have positive net benefits for society.

11. However, it would not be appropriate for the project to pay for the full value of all public goods generated by the proposed subproject investment. The level of public funding should only be high enough to change investment decisions by the potential investor. In Figure 2, this is shown by the gap represented by b and not the positive economic returns shown by a. In other words, the project will not pay for the public good itself, but for the incentive needed to trigger an investment, which has an economic net return above an agreed benchmark of 12 percent.

12. This approach will require that cooperative investment plans and agri- enterprise investment proposals have an economic and a financial analysis in the form of a realistic cash flow forecast. These analyses have to be done as part of a business plan for each value chain investment and will be reviewed by a joint appraisal team (for agri-enterprise investment

7 The coordinates refer to positive or negative NPVs, which could relate to different opportunity costs of capital under financial or economic considerations.

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proposals) and the county-level appraisal teams (for cooperative investment plans). Economic analysis will help determine whether an investment falls into categories B and D. The financial analysis will show whether public funds are required and help determine the level of public funds needed. Both types of analysis will be demanding for local-level stakeholders and will need support from skilled agricultural economists and/or agri-business experts who should be selected from the regional PMO.

III.World Bank Value Added in the Project

13. The Bank’s value added in this project will be in four main areas: (a) helping to understand the roles of stakeholders and the rationale for using public funds in value chain investments, (b) optimizing the use of funds without distorting markets, (c) ensuring sustainability, and (d) maximizing effectiveness by taking a macro view under the project.

14. Understanding the role of stakeholders. Bank involvement will be instrumental in helping to define the role of stakeholders in promoting the integration of larger numbers of small and poor farmers into competitive agricultural supply chains in destitute areas. The private sector is expected to be more efficient and effective in bringing about market-driven innovation (technical and institutional), application of new technologies, developing new products and production opportunities, and accessing new national and international markets. The government’s role remains important for providing (a) a conducive business environment, essential public services, and a regulatory system and enforcement capacity, and (b) the necessary public infrastructure. Innovative institutional and organizational models are required to allow stakeholders to interact more effectively and market incentives and linkages are required to generate investment opportunities with prospects to generate growth for the poor. The Bank has conducted a large amount of analytical work to understand the role of private businesses in partnerships with the private sector becoming a key partner in development and accumulated significant expertise in agricultural value chain support. This expertise will be critical during project implementation.

15. Optimizing the use of funds and long-term sustainability. Making the best use of public finance has two major dimensions: (a) understanding what to finance and at what levels (see above justification of public financing) and (b) making sure that funds are fully used for the purpose intended. In both dimensions, the Bank will provide expertise and implementation support, especially analytical expertise and in fiduciary matters. For long-term sustainability, the project needs to ensure that the investments (a) achieve sufficient outreach and coverage of the poor, including ethnic minorities and women; (b) involve fair benefit sharing between larger investors and small farmers; and (c) are based on sound business planning that ensures that the financial returns are sufficient and sustainable. The project design gives due consideration to all of these aspects. The World Bank is expected to have sufficient leverage to address all of the above sustainability dimensions. The project not only provides support at the micro-investment level but also provides a platform for investment environment analysis and a policy dialogue with the Poverty Alleviation Leading Group of Guangxi Region.

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