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10. Description and Financial Analysis of the
Land-Use Models Developed By Project

10.1. Introduction

The Project has been establishing pilot plantations and shelterbelts with different techniques, under different modalities and in different circumstances, demonstrating the technical advances achieved. This, over time, has evolved into the idea to develop afforestation and land-use models that could be used as templates for land-use planners and investors.

The Models are based on experiences generated in and outside the Project, and composed of different elements, that as such exists in the field, but in isolated form. These scattered and isolated elements have been assembled to form coherent and mostly integrated (i.e. consisting of more than one kind of system of production or protection) units that can exist independently.

Their main characteristicis the integration and complementarity of forestry, anmal husbandry and agriculture, and the adjustment of the land-use according to the potential production capacity of the location as expressed by its site-class.

The Models consist of detailed information on composition, spacing, densities, structure, management and expected outputs over time of the different models. Costs and expected income have been estimated, based on information generated by the Project, or in lack thereof, recollected outside the Project. All this information has been consolidated and processed in order to be able to do a financial analysis of the different models, and testing of sensitivity to different factors.

The Land-use Models have been validated and improved by representatives of the various Forest Bureaus from the Region, and the process has been further enhanced next through validation sessions with rural households.

Interested financing agencies can use the models to compose large land-use projects, according to their needs and requirements, with participation of the local population.

Application of the Models should be done in a flexible way. During implementation they should be adjusted to the existing landscape, to the site classes and to areas already occupied by villages, permanent (sustainable) agriculture and infrastructure.

One of the problems that have to be addressed is the reluctance of the major investment banks, to invest in natural resources dvelopment in Northern China, where financial returns are supposedly lower compared to sub-tropical or tropical latitudes, with much faster growth. It is hoped that the financial analysis done by the Project on the models may help to convince them of the investment opportunities existing in Northern China. Not only are the financial returns interesting, the indirect economic and ecological benefits generated may well outweigh the ones generated by a similar sized investment elsewhere.

During the Mid Term Evaluation and the immediate following Tri-partite Project Review (October 2000), the outputs of the Project programmed in the Plan of Operations, were discussed. Regarding the preparation of the Large Scale Investment Proposal (one of the outputs planned), the general consent at the conclusion of the discussions was that a preparation of an Investment Proposal of this kind was out of the scope and the competence of the Project, as it had neither the required specialised staff nor the means to do this kind of work. Moreover, it was observed that most financing institutions have their proper specific procedures and requirements for investment proposal preparation, and that is would be a loss of time to try and prepare a document that would satisfy all of them.

Instead, the Project was judged to be in an excellent position to provide the technical inputs for the preparation of land-use investment proposals, and not for the investment proposal itself. Hence, the development of the land-ue Models should be considered as the reflection of the accumulated technical achievements and experience gathered by the Project, condensed into a series of applicable and relevant technical guidelines for the establishment of different land-use systems, in accordance with the environmental conditions and socio-economic reality of the Region.

10.2. Description and financial analysis of the Models

Sixteen afforestation models were developed, which were based on main technical results achieved by the project. These results include:

• Land-use and site classification, which is one main component in establishing afforestation models;

• Research for adapted species and poplar clones to the project intervention area conditions, base on which the promising species or provenance were selected in the afforestation models;

• Improved nursery techniques, which are unrooted cuttings, can be used with the mechanized planting techniques in poplar plantation and mechanized undercutting of one-year-old seedlings for Pine plantation.

• Improved afforestation techniques, which are the mechanized auger planter (MAP) and the medium depth planter (MDP) used in poplar planting.

• Revegetation techniques which include fencing off, broadcast sowing of shrubs etc.

According to the main objectives and benefits, the sixteen afforestation models were classified into three categories:

Each model contains different technical parameters. For detailed information and description of each of these models, please refer to the corresponding Project Publication.

The financial analyses have been conducted on the sixteen afforestation models developed by the project to evaluate the financial attractiveness of each model to farmers and investors. Since price and yield projections over a long period of analysis for the Financial Rate of Return calculation is subject to uncertainties, a sensitivity analysis using lower prices and/or yield levels was also undertaken to test financial viability of each model in an adverse scenario. Comparative analyses have been conducted for the alternative designs.

Operations, tradable resources and products are identified and quantified in appropriate units. They are scheduled over time as they are either used in the system or produced by the system. Current market prices were used for valuing inputs and outputs. For detailed description on identification and valuing costs and benefits, please refer to the specific report.

Major Assumptions for Financial Analysis

In the sixteen afforestation models, there are significant annual fluctuations in the yields of fruit, crop and wood production over the duration of the rotation. The average yields during the productive years were used for the financial analyses.

As the afforestation models were designed mainly for environmental protection and for application in sandy lands, exemption of taxes and fees was assumed, in accordance with a series of incentives on afforestations from the Chinese Government. Hence, taxes and fees were not taken into account in the financial analyses.

The areas for the establishment of the sixteen models were considered as new cropland, forest land or revegetation development, the full component costs and benefits are incremental, as there is no product produced in the "without" project situation and opportunity cost of land-use was assumed to be zero.

A discount rate of 12% was selected based on the rate used in other afforestation projects in China supported by the World Bank.

10.3. Agro-Forestry Models

AF 1 - Agro-forestry model for site classes 2 and 3: Mixed shelterbelts with alternating fodder and agriculture crops

AF 2 - Agro-forestry model for site class 2 and 3: Shelterbelts for fruit trees

AF 3 - Agro-forestry model for site class 3: Shelterbelts for seabuckthorn plantations

AF 4 - Agro-forestry model for site class 3: Shelterbelts for rainfed crop production

Main objectives and benefits

Environmental protection, in particular wind protection and providing shelter for agriculture crops and fruit trees resulting in improved crops and fruits production, as well as timber and fuel wood production and additional fodder production from the belts and the hedges.

Farmer's or investor's income

The financial attractiveness of each model under this category to farmers was evaluated with 1 ha model size. The model life was decided by the product that has the longest rotation among others in the model. In model AF1, the model life is 40 years while the poplar's rotation is 15 years. Hence there are 2.6 rotations of poplar in the whole model life, which means ten years old poplar will be left standing by the end of the model life. Output of poplar at the year ten of the last rotation in the model was taken into account based on the respective yield prediction, while no harvesting cost was taken into account in order to reflect the fact. Financial analysis criteria - Internal Rate of Return (IRR) and the Net Present Value (NPV) - were calculated and the results were summarized in Table 1.

Table 1: Financial efficiency of agro-forestry models

Model

Site Class

Model Rotation(years)

IRR (%)

NPV at 12% (yuan/ha)

AF1

2

40

21%

1129

AF2

2

30

26%

6470

AF3

3

15

21%

4916

AF4

3

15

19%

1782

In general, it can be said that all the agro-forestry models are financially acceptable since all the NPVs are above zero and IRRs are more than 12%. Specifically, NPV of 1129 indicate to the farmer or investor that the model AF1 will return a net surplus of 1129 yuan per ha of consumption benefits in present value terms taking into account the assumed consumption rate of interest (discount rate) of 12%. IRR of 21% shows the farmer or investor that he will receive an average of 21% rate of return per year on the invested funds during the project life (model AF1).

Comparative analysis

Assuming that model AF1 and AF2 are alternative designs since these two models are suitable for the same site class, it can be said that model AF2 are substantially more financially attractive than model AF1 as both NPV and IRR of AF2 are higher than AF1.

For the same reason, AF3 and AF4 can be assumed as alternative designs, then AF3 is a bit more attractive than AF4.

Basing on the four afforestation models and researching on their respective cash flow tables, it may be said that with tree shelterbelts, to produce fruits is more financially efficient than to produce fodder or beans mainly because of the higher prices or yields of the fruits.

Sensitivity analysis

With a 20% decline in products price or yield, the major sensitivity results are shown in Table 2.

Table 2 : Sensitivity analysis of the agro-forestry models assumming a decline of 20% in outputs (yields and/or prices)

Model

IRR with decline in outputs of 20% (%)

NPV with decline in outputs of 20% (in Yuan RMB)

AF1

4%

-1303

AF2

20%

3408

AF3

13%

595

AF4

14%

402

The above sensitive analysis results show that model AF2, AF3 and AF4 are financially viable and relatively robust, while the model AF1 is quite sensitive to the yields or prices decline and become unfeasible.

On the following pages a description is provided for each of the agro-forestry models.

AF 1 - Agro-forestry model for site classes 2 and 3: Mixed shelterbelts with alternating fodder and agriculture crops

1. Suitable site class: 2 and 3 - agro-forestry zone on lower sandy foot slopes of site class 2 or to convert cultivated land, at present without windbreaks, living fences, or soil fertility restoration methods (groundwater level at 1-2.5 m); lower parts of site class 3 with the ground water level at 2.5-3m.

2. Description: This model proposes a grid of shelterbelts composed of poplars, pines and shrubs, providing shelter to areas for agro-forestry with hedgerows separating belts of fodder and agriculture.

3. Objectives: Environmental protection, in particular wind protection for crops resulting in improved agricultural and fodder production, as well as timber and fuel wood production and additional fodder production from the belts and the hedges.

4. Design: Shelterbelts composed of different species enclosing areas of 150 x 250m, where hedgerows of fodder shrubs are separating alternating fodder and agricultural production belts of 24m large; maximum height of the shelterbelt will reach 15-17 m after 10 to 15 years according to the site conditions, hedgerows can reach 2-3 m after 2-3 years, but should be pruned annually to maintain a height of about 1.5m. The longest side (250m) of the shelterbelt grid will be directed NE-SW, perpendicular to the main NW wind direction. It will be composed of two rows of poplar (in a mosaic of mixed clones), 4 m apart, in the center of the belt, with at 4 m distance at the southern side two rows of pines distanced of 3m; two rows of shrubs (Salix, Amorpha, ...) 2 m apart will be established at the northern side at a distance of 3 m of the poplars. An access road of 2.5 to 3m wide can be planned in the middle of the belt, e.g. in between the pines and the poplars. A trench of 1m deep and 1.5 to 2 m wide should separate the crops at each side of the belt, avoiding tree roots from invading the crop area. Trenching could be replaced by bi-annual sub-soiling. Fodder and agriculture crops will be alternated with each other every 5 years.

5. Species to be used: different selected clones of Populus, Pinus selected provenances, Salix matsudana, Amorpha fruticosa, Lespedeza bicolor, ...

AF 2 - Agro-forestry model for site class 2 and 3: Shelterbelts for fruit trees

1. Suitable site class: 2 and 3 - agro-forestry zone on lower sandy foot slopes of site class 2 or to convert cultivated land, at present without windbreaks, living fences, or soil fertility restoration methods (groundwater level at 1-2.5m); lower parts of site class 3.

2. Description: This model proposes shelterbelts composed of poplars and shrubs, providing shelter to areas for fruit production with Prunus and other fruit species. At adapted sites (soils with lower pH), poplar could be replaced by pines, which have the advantage to give shelter in winter and early spring when the fruit trees are in blossom.

3. Objectives: Environmental protection, in particular wind protection for fruit trees improving fruit production, as well as providing timber and fuel wood production and some fodder.

4. Design: Shelterbelts composed of different selected clones of poplar (or pines) and shrub species with a total width of 15m, alternating with 50m wide belts of fruit trees; maximum height of the shelterbelt will reach 12-15m after 10 to 15 years (or after 25-30 years with pine).

The shelterbelt will be directed NE-SW, perpendicular to the main NW wind direction. It will be composed of two rows, 5 m apart, of poplar (poly-clonal) or pines (mixed provenances) in the center of the belt with at each side at 3 m distance, a row of shrubs (Amorpha, Lespedeza, ...). In the intervals, 8 rows of fruit trees (Prunus armeniaca or other native species like apple and wild grape) will be planted at a distance of 5m in the row. A road of 2.5 to 3m wide is planned in the center of the belt. A trench of 1m deep and 1.5 to 2 m wide can separate the belt and the fruit trees. Trenching may be replaced by bi-annual sub-soiling to cut the lateral penetrating roots of the belt.

5. Species to be used: different selected clones of Populus (or selected provenances of Pinus sp.), Amorpha fruticosa, Lespedeza bicolor, ..., Prunus armeniaca, and/or other native fruit species (wild grape, apple)

AF 3 - Agro-forestry model for site class 3: Shelterbelts for seabuckthorn plantations

1. Suitable site class: 3 - on upper sandy foot slopes (with groundwater level at 2.5-4 m)

2. Description: This model proposes belts of poplars with a seabuckthorn plantation, providing shelter to areas for fruit production.

3. Objectives: Environmental protection, in particular wind protection for fruit trees improving fruit production, as well as providing timber and fuel wood production.

4. Design: Shelterbelts composed of different selected clones of poplar with a total width of 15 m, alternating with belts of 50m wide planted with Hippophea; maximum height of the shelterbelt will reach 12-15 m after 10 to 15 years.

The shelterbelt will be directed NE-SW, perpendicular to the main NW wind direction. It will be composed of 3 rows of poplar (in a mosaic of mixed clones), 5 m apart. In the intervals, Hippophea will be planted at a 3 x 3m spacing. A trench of 1m deep and 1.5 to 2 m wide can separate the belt and the fruit trees. Trenching could be replaced also by bi-annual sub-soiling to cut the lateral roots of the belt.

5. Species to be used: different selected clones of Populus, selected provenances of Hippophea rhamnoides

AF 4 - Agro-forestry model for site class 3: Shelterbelts for rainfed crop production

1. Suitable site class: 3 - on upper sandy foot slopes (with groundwater level at 2.5-4 m)

2. Description: This model propose belts of poplars, providing shelter to belts for rainfed crop production.

3. Objectives: Environmental protection, in particular wind protection for crops improving production, as well as providing timber and fuel wood.

4. Design: Shelterbelts composed of different selected clones of poplar with a total width of 12 m, sheltering 20m wide belts with crops; maximum height of the shelterbelt will reach 12-15 m after 10 to 15 years.

The shelterbelt will be directed NE-SW, perpendicular to the main NW wind direction. It will be composed of 3 rows of poplar (in a mosaic of mixed clones), 4 m apart. In the intervals, rainfed cropping will be done (fodder, agriculture or herbal plants). A trench of 1m deep and 1.5 to 2 m wide can separate the belt and the crops. Trenching could also be replaced by bi-annual sub-soiling to cut the lateral roots of the belt.

5. Species to be used: different selected clones of Populus

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