China - Gansu Provincial Development Project

 Gansu Provincial Development Report No: ; Type: Report/Evaluation Memorandum ; Country: China; Region: East Asia And Pacific; Sector: Other Agriculture; Major Sector: Agriculture; ProjectID: P003489 The China Gansu Provincial Development Project, supported by Loan 2812-CHA for US$20 million and Credit 1793-CHA for SDR 119.1 million (US$150.5 million equivalent), was approved in FY87. The project had self-standing components devoted to agriculture, education, and industrial diversification. The full loan amount and US$500,000 equivalent of the credit were allocated to the industrial diversification component and were fully disbursed, with the final disbursement in October 1994. The loan and credit were closed on June 30, 1996, however, two extensions and two years after the original closing date, because of delays in the implementation of the agricultural component. The Implementation Completion Report (ICR) on the industrial component was prepared by the East Asia and Pacific Regional Office. The Borrower’s assessment of this component is attached as an annex. Separate ICRs were prepared for the agriculture and education components of the project. The main objective of the overall project was to reduce poverty and raise rural incomes in Gansu province. The industrial diversification component sought to create employment in non-agricultural activities, mainly in light and rural industries. The component was designed to: (i) diversify Gansu’s economy by providing long term finance to small-scale industries, particularly in rural areas; (ii) provide technical assistance and training to strengthen the Gansu Investment and Trust Company (GITC); and (iii) increase the use of economic criteria in sectoral planning by providing technical assistance and training for planning officials. The loan was fully used by GITC to finance 17 sub-projects, of which 16 are in operation. All but three of the sub-projects are in arrears in loan repayments, about 12 are operating at less than 50 percent capacity, most have serious financial problems, and at least three are creating serious environmental and health hazards. GITC’s financial condition has remained weak, with a large non-performing loan portfolio, further aggravated by the poor repayment record of the sub-projects financed under the loan. Most of the activities envisaged under the technical assistance and training portion were completed satisfactorily. These include a number of sub-sector studies and associated economic analyses which strengthened the basis of the subsectoral planning for the province’s Eighth Five Year Plan, and a variety of training courses and programs benefiting participants from project and non-project enterprises, and provincial staff implementing this project component as well as other Bank-financed projects. OED agrees with the ICR in rating outcome as unsatisfactory, institutional development as partial and sustainability as uncertain. The ICR gives a satisfactory rating to the Bank for identification, preparation, and appraisal, and an unsatisfactory rating for supervision, implying a satisfactory rating overall. OED disagrees, rating Bank performance as unsatisfactory. As the ICR points out, the Bank was over- optimistic about the ability of one Bank operation to improve the quality of the resource allocation process and of financial intermediation in one province without having in place a suitable nationwide institutional framework. Bank performance at preparation and appraisal of this component were inadequate, resulting in unsatisfactory quality at entry. This operation offers familiar lessons. It shows that attempting to create employment through targeted credit schemes, using non-autonomous and uncompetitive financial intermediaries is unlikely to be successful. And the process of strengthening financial intermediation in one geographical region within a larger context of government control over investment decisions is extremely difficult, if not futile.  The ICR is exemplary. It gives a balanced and detailed account of the sub-projects and the performance of key players involved in the industrial diversification’s outcome and assesses the component appropriately. In addition, during the ICR preparation, the Region reviewed with the Borrower, implementing agencies, and enterprises the future operation of the sub-projects and GITC and collaboratively developed action plans to address problems. No audit is planned.