PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE
Report No.: 31754
Project Name CN - Heilongjiang Dairy Project
Region EAST ASIA AND PACIFIC
Sector Animal production (75%); Agricultural extension and research
(15%); Crops (10%)
Project ID P086629
Borrower(s) GOVERNEMENT OF CHINA
Implementing Agency
People's Republic of China - Ministry of Finance
San Li He Lu, Beijing, 100820
China
Tel: 86-10-68551124 Fax: 86-10-68551125
jl.yang@mof.gov.cn
Heilongjiang Province Agriculture World Bank Project
Management Office
No. 202 Zhongshan Rd. Nangang District
Heilongjiang
China
150001
Tel: 011-86-451- Fax: 011-86-451-8263-2146
Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Safeguard Classification [ ] S1 [X] S2 [ ] S3 [ ] SF [ ] TBD (to be determined)
Date PID Prepared December 7, 2004
Date of Appraisal January 22, 2005
Authorization
Date of Board Approval May 31, 2005

1. Country and Sector Background

In recent years, China’s annual GDP growth has averaged around 7 to 8 percent, allowing
the country to achieve considerable progress towards an ambitious and broad structural reform
agenda, as well as the Millennium Development Goals (MDGs). However, social indicators
show that inequality and income gaps appear to be widening between urban and rural
populations and between coastal and inland areas, with the poor being mostly located in the rural
areas of the lagging inland provinces. China’s accession to WTO implies a shift in the focus of
the country’s agricultural sector from grain self-sufficiency to market-driven diversified
agricultural production. With WTO membership and increasing integration with the global
economy, the agriculture and livestock sectors will have to undergo substantial structural
changes to enhance the livelihood of rural households. In China’s northeast provinces, the
economy has been negatively affected by the decline of the State Owned Enterprises (SOE)
system and consequent unemployment. Following the collapse of the SOE system, the
Heilongjiang government has identified the agriculture and livestock industries as key elements
of its future growth and poverty alleviation strategies.
 Heilongjiang is a major corn and soybean producer and China’s dominant milk-
producing province, accounting for about 20 percent of national milk production in 2002. The
dairy industry in China has been rapidly growing over the past 10 years, fueled by a 10% annual
growth in dairy consumption and supported by favorable government policies and programs. The
dairy industry is one of the priority development areas of China’s 10 th Five-Year Plan, and the
Ministry of Agriculture has formulated an “Advantageous Milk Production Area Development
Plan, 2003-2007” focusing on improved genetics, feeding management and processing.

Although Heilongjiang benefits from a domestic advantage for milk production due to
relatively lower costs of production and a conducive resource base, there are several challenges
to sustainable sector growth: (i) While on-farm milk production has increased in the last few
years, the insufficiency and relative low quality of milk supply remain the major impediment to
the growth of milk processing. With an average production of 4,300 liter per year per cow,
further gains on productivity will require significant investments in both improved herd
nutrition/management and genetics; (ii) The majority (70-80 percent) of milk is produced by
smallholder households with an average herd size of 3 to 5 cows. These and other potential dairy
households have little or no access to formal financing for investment in dairy production; (iii)
Farm size and dispersion of milk production are also considered by the Government of
Heilongjiang as serious constraints to improved production management, including improved
environmental management, herd management and feeding and milking practices; (iv) Farmer
associations and representation are only beginning to form in Heilongjiang, thus the protection of
farmer interests is an important factor to consider in a sector that has, so far, been driven by milk
processors; and (v) Finally, research and investments are needed to improve the environmental
sustainability of dairy development, including better management of the province’s pastureland,
improved feeding and usage of crop residues, as well as waste management to mitigate the local
and global adverse effects of the livestock sector on climate change and the environment.

2. Objectives

The first objective of the project would be to improve the financial viability of existing
and new dairy operations in selected areas of Heilongjiang province. Progress towards the
achievement of this objective would be measured by monitoring increases in the productivity of
the dairy farmers’ cattle and adoption of the system (DHI) to improve the genetic potential and
management of the Heilongjiang dairy herd. The second objective is to reduce greenhouse gas
(GHG) emissions and increase carbon sequestration. This would contribute to the global
objective of improving the sustainability and impact of livestock production on the local and
global environments. Progress towards the attainment of this outcome would be measured by
monitoring the manner with which animal manure and crop residues are stored and treated and
the area of improved permanent pastures ( carbon sequestration).

3. Rationale for Bank Involvement

Through the Heilongjiang Agriculture Development Project (HDP), the Bank has
acquired experience with the Heilongjiang livestock sector, including the dairy sector. The
Bank’s involvement will support the provincial objectives of fostering development activities
with a strong element of public goods such as capacity building and improving environmental
management. This would be very much in line with the Bank’s CAS goal of facilitating an
environmentally sustainable process. The Bank’s involvement has been instrumental in
highlighting the importance of improving dairy herd management and feeding along with genetic
improvement to achieve and sustain the high dairy production and productivity sought by the
Heilongjiang dairy development strategy.

The Bank’s involvement will also contribute to a greater focus on targeting relatively
poor dairy farmers. The Bank’s involvement in the project will ensure that smallholder farmers’
interests are fully integrated in the design of project activities, and will catalyze the emergence of
farmers’ associations that would play a key role in the future management of the industry support
services to be developed under the project. The design of the proposed project benefited from
the Bank’s expertise in the assessment of the environmental and social impacts of increasing
dairy livestock production. Bank’s involvement also allowed for the leveraging of additional
trust fund resources (Italian Trust fund) for climate change mitigation activities and
environmental sustainability.

4. Description

The proposed project would have four components: (i) dairy production, (ii) breed improvement,
(iii) climate change mitigation and (iv) project management, monitoring and evaluation.

(i) Component 1: Dairy production development (Estimated cost: US$143.9 million). The
purpose of this component is to increase smallholder dairy production in the project area through
investments in improved on-farm dairy production and management, the construction of milking
stations, dairy parks, dairy demonstration farms and by building the capacity of provincial and local
institutions to provide training to dairy farmers and to facilitate the development of dairy farmers
associations. The component will target over 10,000 existing small and medium size farmers willing
and financially able to increase their herd, as well as (generally poorer) new households interested in
engaging in dairy production. This component has six sub-components:
(a) Household dairy farms (US$ 53.8 million)
(b) Milking and collection stations (US$ 3.6 million)
(c) Dairy parks (US$ 64.7 million)
(d) Demonstration farms (US$ 18.0 million)
(e) Farmer associations (US$ 0.3 million)
(f) Training and technology transfer (US$ 3.5 million)

(ii) Component 2: Breed improvement (Estimated cost: US$ 7.3 million). The aim of this
component is to improve the genetic base of the Heilongjiang dairy stock, the efficiency of milk
production and milk quality. This would be achieved by establishing a comprehensive Dairy
Herd Improvement Program (DHIP), including the recording of milk and livestock management
data, bull breeding and progeny testing. By the end of the proposed project, it is anticipated that
the Heilongjiang DHIP would cover about 150,000 dairy cows.

(iii) Component 3: Climate change mitigation (Estimated cost: US$ 9.1 million). The aim of
this component is to demonstrate and pilot innovative technologies to increase carbon
sequestration and mitigate/reduce greenhouse gas emissions resulting from the expansion of
livestock production in Heilongjiang. This would include innovative technologies in (i) pasture
improvement for the purpose of increasing fodder production, carbon sequestration and
combating desertification; (ii) treatment of crop residues to improve their quality and usage in
animal feeding, decrease methane emissions and reduce on-field burning of residues; (iii)
treatment of animal manure to reduce methane emissions and convert it into a salable fertilizer;
and (iv) assessing climate change experimental technologies through the implementation of
research programs.

(iv) Component 4: Project management, monitoring and evaluation (Estimated cost: US$
0.9 million). The proposed Project will be managed by the existing World Bank provincial
project management office (PPMO) within the Heilongjiang Development and Reform
Commission (HDRC) and PMOs established at county level. The PPMO would be responsible
for all aspects of project administration, including program management, procurement, financial
management, and monitoring and evaluation. The PPMO would receive policy guidance from a
Project Leading Group (PLG), and from a Technical Working Group as regards technical issues
and coordination. The Project would also help build the capacity of the Heilongjiang
Environment Protection Bureau (HEPB) to monitor project environmental impacts.

5. Financing
Source: ($m.)
BORROWER 19.9
INTERNATIONAL BANK FOR RECONSTRUCTION AND 100
DEVELOPMENT
ITALY: DEV. COOP. DEPARTMENT (MOFA) 5.5
SUB-BORROWER(S) 22
LOCAL FARMER ORGANIZATIONS 29.3
Total 176.7

6. Implementation

The Project will be managed by the existing World Bank Provincial Project Management
Office (PPMO) within the HDRC. The PPMO will be responsible for the Project’s day-to-day
management, including work programming and financial management, project procurement,
progress and financial reporting, staff appointment and management and project monitoring and
evaluation. At county level, County Project Management Offices (CPMOs) will coordinate
activities, working in collaboration with county level Bureau of Finance (BOF) and AHB
counterparts. Under the guidance of the PPMO, CPMOs will be responsible for consultations
with farmers and the identification of participating farmers, coordinating investment planning,
monitoring in collaboration with HEPB and HAPB staff the environment impact assessments,
organizing supporting services and capacity building programs and monitoring project outcomes
at the local level. County BOF will be responsible for loan disbursement and recovery at county
level. At township level, CPMOs will work with township veterinary, animal production and AI
technicians who will be provided with training and equipment. At village level, the local village
leaders and Village Management committees (VMCs) will assist the PPMO to advise farmers on
project investment options and policies, identify project beneficiaries, and monitor project
implementation. The project will also collaborate with the All China Women’s Federation
(ACWF) and China Communist Youth Party (CCYP) in training and other village-level project
activities.
 The Dairy Herd Improvement Program (DHIP) described under component 2 of the
Project will be managed by the Heilongjiang Dairy Industry Association (HDIA), whose
mandate includes coordination of public and private stakeholders for the sustainable
development of the dairy industry. A DHIP Working Group, established under the HDIA, will be
responsible to the PPMO for planning, monitoring and reviewing the implementation of the
DHIP. The Working Group will include the HDIA, Heilongjiang Animal Breeding Center and
Heilongjiang Livestock Information Center. The capacity of these agencies to implement the
DHIP will be strengthened through training, technical assistance, and the provision of
equipment.

The climate change component will be implemented by the PPMO and relevant CPMOs.
The PPMO would implement this activity in close collaboration with the institutions in charge of
pasture renovation and management, animal waste disposal and entities that will conduct the
special research activities. These research activities would be funded through a competitive
grants process on the basis of recommendations by a research committee to be created within the
PPMO. The project would require the Project entities involved in the climate change component
to monitor and document the environmental impacts and economic performance of the activities
supported by the Italian grant at mid-term review and at project completion.

Project policy will be set by a Project Leading Group (PLG), chaired by the Vice
Governor of Heilongjiang Province and include the Directors of the HBOF, HDRC, HABC,
HEPB, the Audit Bureau and the Heilongjiang Agriculture Commission.

A Technical Advisory Group (TAG) will provide guidance to the PPMO on technical
issues and ensure the inter-agency coordination required for successful project implementation.
The TAG will include representatives of the HAHB, HLIC, HABC, North-East Agricultural
University, HDIA, (HEPB) and the All China Women Federation (ACWF). The Director of the
HAHB would chair the TAC.

Monitoring of the Project’s outcomes will be measured through regular progress reports,
which would include key indicators such as the number of farmers participating in the project
and the increase of individual household and aggregate milk sales to processors. Through
periodic socio-economic and production surveys, the efficiency and social distribution of dairy
production investments under the project will be monitored.

7. Sustainability

Sustainability of the project activities and outcome beyond the implementation period is
considered likely, because the project is specifically designed to support and improve the
competitiveness and profitability of an already profitable and rapidly expanding industry.
However, given the high income elasticity of dairy product sales, a declining business
environment in China would be a negative factor for the long-term development of the dairy
industry. The development of farmers’ associations, eventually integrated into dairy sector
management through the HDIA, would be central to the sustainability of smallholder production,
both on household farms and in dairy parks.
 Once established, the DHIP could be easily expanded to directly involve the majority of
the dairy sector in Heilongjiang. Significant benefits would flow not only to producers, but also
to the processors and consumers and, as public good, to the community. Provision has been made
to include the Heilongjiang DHIP within the national dairy herd improvement program to be
implemented by the China’s National Dairy Association with technical assistance support from a
Dutch specialized company.

Chinese environmental regulations together with an improved enforcement capacity,

combined with project managed environmental check lists should ensure a sustainable
environmental outcome. The new Chinese Grassland Law (2003), which the project would
support, has a strong focus on reducing grassland degradation. Project proposals to transfer
effluent to pastureland would reverse the negative fertility balance presently experienced in most
pasture management systems. Strict application of regulations governing dairy farm waste
disposal combined with the required EIA would ensure the integrity of streams and groundwater
resources. The Italian Grant would help address the serious problems relating to degraded
grasslands and salinity.

8. Lessons Learned from Past Operations in the Country/Sector

A key lesson from Bank financed projects is that commitment by Government and the
active participation of beneficiaries and other stakeholders (village, township and country
governments, and line agencies) is critical to ensure the smooth implementation, success and
sustainability of the project. The Social Assessment conducted during project preparation
allowed for extensive consultations with farmers and other stakeholders to determine site
selection for milking station, parks and demonstration farms. Concerns for gender issues and
equity among beneficiaries were also addressed in the project design.

In recognition of China’s move towards a market economy, the proposed project gave a
determinant role to private sector enterprises and individuals who would participate in the
project. Modeling on the recently completed Heilongjiang Agricultural Development Project,
the proposed HDP would maintain a focus on helping smallholder dairy farmers at both the farm
household and in the proposed dairy parks. Many investment activities under the project will be
owned and operated by private entities or individuals. Where local administrations choose to
invest in dairy farming infrastructure in support of local farmers, those assets will be leased to
and managed by the beneficiaries or professional managers without government interference.

To ensure its success, the Project would invest extensively in building the technical and
managerial capacity of farmers, staff of technical departments and their managers.

China has little experience in the development of farmer’s associations outside of the
collective farm model. One emerging example of successful farmer association in China lies with
the Bank financed Self-Financing Irrigation and Drainage Districts (SIDD) supporting farmer
participation in local irrigation management. Key lessons learned from the SIDD program to date
include: local government must fully support the development of farmer’s associations; farmers
must be fully engaged in the setting of the association goals and charter; associations must
directly manage the resources under their control (milking stations, Dairy Parks, field
demonstrations, etc); the ways of management may vary with local circumstances; farmers’
associations should be represented in higher level industry organizations (e.g. the HDIA); and
farmers’ associations will require strong government support (not control) and capacity building
to succeed.

9. Safeguard Policies (including public consultation)

The safeguards screening category of the project is S2. The set of proposed project activities
involves no critical environmental issues and therefore the project has been categorized as an
Environmental Risk Category B project. The project is unlikely to have major negative social
and environmental impacts. Applicable safeguard policies for the project are: (a) Environmental
assessment; (b) Cultural Property; (c) Involuntary Resettlement; (d) Indigenous Peoples. An
Environmental Impact Assessment has been prepared. The result of the assessment of social
safeguard issues is summarized below:

(i) Involuntary Resettlement (OP 4.12). The project will not involve any significant
involuntary land or productive assets acquisition. However, in the event that small land
parcels are affected by project acquisition or rental, a Resettlement Policy Framework (RPF)
for the various project sub-components will be implemented.

(ii) Cultural Property (OP 4.11). Although unlikely, some civil construction works might
conceivably affect cultural property sites. Should any culturally or historically significant
finds be encountered during project implementation China’s laws on protection of cultural
relics and the World Bank’s OP 4.11 will be invoked, leading to the immediate cessation of
work, followed by an initial survey of the site, its later excavation, and comprehensive
protection of the site.

(iii) Indigenous Peoples (OD 4.20). Indigenous Peoples (Koreans, Manchus, Mongols, and
Daur, among others) live in the project areas, overall comprising about 5% of the project’s
potentially affected people. The assessment conducted by an Indigenous People specialist
indicated that no special cultural tailoring of the project was necessary to ensure that minority
nationalities participate fully and appropriately in the project, no negative effects were
foreseen affecting any minority nationality, and the province’s most numerous minorities
were adequately included in the project with the sole exception of the Daur nationality. To
rectify this omission, the project added two Daur villages (villages in which the majority of
inhabitants are Daur nationality) to host project sub-components. With this inclusion, no
Indigenous Peoples Development Plan was deemed necessary or useful.

The environmental and social assessment reports and safeguard studies were made available at
the Infoshop on (date) 2004. The Borrower has advertised the reports in xxx (papers) in (date)
2004.

10. List of Factual Technical Documents

Technical Reports

 Heilongjiang Dairy Project: Project Preparation Report;

  Dairy Industry Rejuvenation Plan of Heilongjiang Province;
 Charter of the Dairy Association of Heilongjiang Province;
 Brief Introduction to Dairy Industry development in the Reclaimed Area of
Heilongjiang Province, November 2003;
 The Emerging Dairy Economy in China: Production, Consumption and Trade
Prospects (Agribusiness Review);
 Presentation on Dairy Production in Jiamusi Municipality;
 Italian Environment Grant: Project Proposal Report
 Tetra Pack Notes for Heilongjiang Dairy Project –01-03-2004
 Heilongjinag – Milk Marketing/Processing Industry Notes

Project Preparation Documents

 Heilongjiang Dairy Development Project: Social Assessment

 Heilongjiang Dairy Project Resettlement Review Report
 Heilongjiang Dairy Project Resettlement Policy Framework
 Heilongjiang Dairy Project Minority Review Report
 Heilongjiang Dairy Development Environment Impact Assessment
 Heilongjiang Dairy Development Step-wise Dairy Herd Improvement Strategy
 Feeding Dairy Cows for Milk Production: Options and Integration with Heilongjiang
Grassland Resource
 Project Costs
 Financial and Economic Analysis.
 Project Implementation Plan

11. Contact point

Contact: Mohamed N. Benali
Title: Lead Operations Officer
Tel: (202) 473-7357
Fax: (202) 522-1675
Email: Mbenali@worldbank.org

12. For more information contact:

The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop