Core Project for Caoyangwan Village: A Case Study
To study the economics of gully rehabilitation by means of the core project, let us examine the financing of a single key dam in detail. This will illustrate the multi-purpose aspect of the project. We have in mind a core project proposed for the
Caoyangwan village, Hengshan county, Yulin prefecture, Shaanxi province.
A key dam 35 m high controlling a gully, which drains a catchment basin of 3.1 sq km into the Wuding River, is to be constructed at a cost of Y500,000. The village composes of 127 households, or 604 persons, of whom 287 contribute to the labor force. Presently, the village possesses 1400 mu of terrace field, 150 mu of warping land (sediment plots), 110 mu of irrigated land, 790 mu of non-irrigated tableland, 13,000 mu of forest, and 4000 mu of grassland. Along the gully and its branches, 20 or so silt trappers have been constructed, which can create 600 mu of sediment plots. [15 mu equals a hectare, or 1500 mu to a sq km.]
The key dam creates a reservoir which is designed to accommodate the flood runoff from a 300-year storm after 20 years of sediment accumulation. The design storage volume is 806,000 cu m, of which 572,000 cu m is assigned for sediment and 234,000 cu m for flood. The dam will trap, on average, 28,600 cu m (or 37,200 tons) of sediment, and retain 155,000 cu m of runoff each year. 10 persons will be displaced from the reservoir site.
To study the cost effectiveness of the project, we examine if the dam can pay for itself when its construction is financed entirely by loan from a money-lending agency. For a loan of Y500,000 financed at an annual interest rate of 7%, maturing in 20 years, the annual loan payment is Y47,200, according to the usual mortgage payment formula. Adding to it a yearly maintenance expense of Y2,500, we are considering annual payments of Y50,000 for 20 years. The accumulated payment over 20 years will be Y100,000, which is two times the amount for a zero-interest case. We do this analysis to show that the government is not losing money by playing the role of the money-lending agency.
To finance the payment, funds can be attributed to the following sources:
(1) Coarse sediment reduction. Sediment is to be divided into coarse (-grained) and fine (-grained). The coarse sediment will be accumulated in the channel and must be cleared, while the fine sediment is being transported out to sea. Normally 1/4 of the sediment is of the coarse type, but since this region is a primary source of coarse-sediment production, we consider half of the sediment produced to be coarse, while the other half to be fine. (There are data to subtantiate this claim.) Coarse sediment must be cleared by displacing it over the levees, and the clearing cost ranges from Y1 per cu m in the middle segment of the river to Y5 per cu m in the lower segment of the main channel. Sediment deposited in the Wuding River will not be cleared, and we assume it constitutes about 20% of the total. Disregarding also whatever repair needed at the mouth of the river along the Gulf of Bohai, an average clearing cost of Y2 per cu m is conservatively assumed. By reducing 80% of 14,300 cu m of coarse sediment from entering the main channel annually, a saving of Y22,880 is achieved, which may be allocated to the payment of the loan, since this is a direct saving from existing expenditure. [Picture showing the beaches of Wuding River and its coarse sand accumulation.]
(2) The fine sediment is to be transported out to sea. Conservatively a minimum of 20 cu m of water is needed to transport 1 ton of sediment out to sea. (Long-term averages indicate that to transport 1 ton of sediment, out from Lijin to sea, 30 cu m of water is used during the flood season, and 90 cu m during the nonflood season; we use a minimal estimate above.) By reducing fine sediment by 14,300 cu m (or, 18,600 tons), 372,000 cu m of river water may be put to other uses. However, the dam will also reduce surface flow by 155,000 cu m. The net amount of water contributing to downstream use is the difference of the two, which is 217,000 cu m. [Picture showing sediment flushing downstream at Sanmenxia Dam during flood season.]
The value of this quantity of water may be appraised as follows. The World Bank estimates that the "marginal value" of Yellow River water for irrigation to be 111 fen per cu m (meaning that if a cu m of irrigation water is deprived from the field, the loss in productivity is 111 fen, 100 fen = Y1), and after subtracting from it water diversion loss as well as capital and labor investments in utilizing the water, the net productivity is 23.8 fen per cu m. Thus, the agricultural benefit that can be derived from this source of water, using the estimate of 23.8 fen per cu m, reaches a value of Y51,600. However, such an income will enrich the national economy as a whole, but is not realizable as monetary revenue to pay for the loan.
On the other hand, if a water charge of 5 fen per cu m (100 fen = Y1) is collected for river water, then a sum of Y10,900 is collected annually, which may be contributed to the loan payment of the project. Water charge for cities and industrial sites can be even higher.
(3) Of the 155,000 cu m of surface runoff retained by the reservoir annually, it can be used for irrigation to raise the productivity of the land. The World Bank estimates that full irrigation adds Y128 to every mu of non-irrigated land. By providing irrigation to 790 mu of the presently non-irrigated gully land, its net productivity increases Y101,000 annually. (See land distribution described in paragraph 2.) This land, benefited by irrigation, should bear the burden of an increase in rent of the order of Y20 per mu. The rent increase generates a total of Y15,900, which is to be contributed to the loan payment.
We assume here that the land is contracted out to individual households with an adequate contractual rent, a policy that has not yet been fully implemented but is expected to be implemented shortly. Just to show that the above rent increase is not excessive, we note that in Shanxi where I visited in the summer of 1995, the rent for sediment plots (with partial irrigation) is Y80 per mu, whereas the terrace plots (without irrigation) is only Y20 per mu, on a trial basis. The rental cost and policy may be adjusted in the future. [During my 1997 trip, I collected some up-dated
rental data.]
(4) Providing full irrigation to 110 mu of partially-irrigated land and 600 mu of sediment plots can also improve such land's productivity by about Y48 per mu. This will justify increasing such land's rental cost by Y7.5 per mu, creating Y6,000 to be contributed to the loan payment.
(5) With the productivity of the land improved and the farmer's income rising, more labor and investment will be devoted to new sources of production. Some of the presently unused waste land will be sought after by farmers, and will be rent out on a contractual basis. Assuming 250 mu of terrace land and 1000 mu of forest and grassland are being contracted to farmers as waste land, at rental fees of 10 yuan and 5 yuan per year, respectively, this will also generate Y7,500 to be contributed to the loan payment.
The loan payment is to be composed of contributions from the above sources with shares from: (1) Y22,880, (2) Y10,900, (3) Y15,900, (4) Y6,000, and (5) Y7,500, giving a total of Y63,180, which exceeds the amount of Y50,000 anticipated for actual annual loan payment. The reservoir itself may be rented out for developing fishery and other aquatic products, but is not being included here. From this analysis we see that the central government, who is responsible for the development of the basin as a whole, should contribute about half of the project cost, related to items (1) and (2), while the regional government which collects land rental from the farmers should contribute the other half, for items (3)-(5).
In anticipation for a sustained growth in the region due to the availability of irrigation, we may consider a "variable" loan payment, which increases at the rate of 3% per year. With this arrangement, the payment in the first year is only Y37,500 (instead of Y50,000) while the last payment, 20 years later, is Y65,800. With the central govern-ment's share of the payment holding fixed, the regional share is reduced substantially, which would add incentive to local farmers to accept the scheme.
Not included in the above discussion are some significant indirect savings for the government. At the present time, many of the northwestern provinces are not self-sufficient in grain and must rely on grain subsidy by the government to the tune of 2.5 billion kg per year, accounting for nearly a quarter of the total national grain import from aboard. Furthermore, the provincial governments have to shoulder the burden of transporting and distributing the grain to areas of shortage, at a yearly expenditure of Y750 million. The increase in grain output due to irrigation and development in this single project will exceed 80,000 kg, which can be used to reduce government grain subsidy. Being produced locally, the saving to the provincial government in distribution of grain subsidy alone amounts to Y24,000.
The above analysis demonstrates that the implementation of the key-dam project is cost effective. It not only pays for itself, but creates arable land and increases productivity, adding substantially to the national economy as a whole. With increased productivity, the farmers of the loess plateau, being one of poorest population subgroups in China, can possess for the first time a cash reserve in order to invest for even higher productivity. They should not ignored, while the rest of the nation is beginning to enjoy ever-increasing affluence.