China - Second Loess Plateau Watershed Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 34612 IMPLEMENTATION COMPLETION REPORT (SCL-44770 IDA-32220 TF-25677 TF-51385) ON A LOAN IN THE AMOUNT OF US$100 MILLION AND A CREDIT IN THE AMOUNT OF SDR 36.9 MILLION (US$50 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE SECOND LOESS PLATEAU WATERSHED REHABILITATION PROJECT December 22, 2005 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective November 30, 2005) Currency Unit = Renminbi (RMB) Yuan (Y) Y1.0 = US$ 0.125 US$ 1.0 = Y8.0 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CPMO Central Project Management Office DFID Department for International Development ERR Economic Rate of Return FRR Financial Rate of Return GIS Geographical Information System ha Hectare IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association LCB Local Competitive Bidding LP I (first) Loess Plateau Watershed Rehabilitation Project M&E Monitoring and Evaluation MIS Management Information System MOF Ministry of Finance MWR Ministry of Water Resources NCB National Competitive Bidding NPV Net Present Value PAD Project Appraisal Document PLG Project Leading Group PMO Project Management Office PRC People's Republic of China R&D Research and Development SARS Severe Acute Respiratory Syndrome TA Technical Assistance WTO World Trade Organization YRCC Yellow River Conservancy Commission Vice President: Jeffrey Gutman (acting) Country Manager/Director: David Dollar, EACCF Sector Manager/Director: Mark D. Wilson, EASRD Task Team Leader/Task Manager: Achim Fock, EASRD  CHINA SECOND LOESS PLATEAU WATERSHED REHABILITATION PROJECT IMPLEMENTATION COMPLETION REPORT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 9 6. Sustainability 12 7. Bank and Borrower Performance 13 8. Lessons Learned 15 9. Partner Comments 16 10. Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix 18 Annex 2. Project Costs and Financing 19 Annex 3. Economic Costs and Benefits 21 Annex 4. Bank Inputs 27 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 28 Annex 6. Ratings of Bank and Borrower Performance 29 Annex 7. List of Supporting Documents 30 Annex 8. Borrower's ICR Summary 31 Annex 9. Photographs 32  Project ID: P056216 Project Name: Second Loess Plateau Watershed Rehabilitation Project Team Leader: Achim Fock TL Unit: EASRD ICR Type: Core ICR Report Date: December 22, 2005 1. Project Data Name: Second Loess Plateau Watershed Rehabilitation L/C/TF Number: SCL-44770; IDA-32220; Project TF-25677; TF-51385 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Irrigation and drainage (60%); Forestry (16%); Crops (16%); Animal production (4%); Agricultural extension and research (4%) Theme: Water resource management (P); Land administration and management (P); Other rural development (S) KEY DATES Original Revised/Actual PCD: 09/10/1998 Effective: 09/17/1999 09/17/1999 Appraisal: 01/08/1999 MTR: 09/20/2002 09/20/2002 Approval: 05/25/1999 Closing: 12/31/2004 06/30/2005 Borrower/Implementing Agency: People's Republic of China/Ministry of Water Resources Other Partners: Gansu, Shaanxi and Shanxi Provinces, and Inner Mongolia Autonomous Region STAFF Current At Appraisal Vice President: Jeffrey Gutman (acting) Jean-Michael Severino Country Director: David R. Dollar Yukon Huang Sector Director: Mark D. Wilson Geoffrey B. Fox Team Leader at ICR: Achim Fock Juergen Voegele ICR Primary Author: Josef Ernstberger; Anis Wan 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HS Sustainability: HL Institutional Development Impact: H Bank Performance: HS Borrower Performance: HS QAG (if available) ICR Quality at Entry: S HS Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objective of the project was to help achieve sustainable development in the Loess Plateau by increasing agricultural production and incomes and improving ecological conditions in the tributary watersheds of the Yellow River through: (a) the introduction of more efficient and sustainable use of land and water resources; and (b) the reduction of erosion and sediment flows into the Yellow River. The project combined sustainable soil and water conservation with gains in farm incomes. Key elements of the project included: (a) the construction of terraces to create high-yielding leveled farmland for field crops and orchards on slopes of less than 20 degrees, thereby permitting the replacement of some of the areas devoted to crops on erodible slopelands; (b) the protection of slopelands from grazing and partial planting with a range of trees, shrubs and grasses to reduce soil loss and to produce fuel, timber and fodder; and (c) the provision of support to farmers in a range of income-generating farming activities, including livestock development in pens, dairy cattle, fruit and nut trees, and irrigated agricultural production, to provide sustainable income alternatives to destructive slopeland grazing. 3.2 Revised Objective: The original project objectives remained highly relevant and valid throughout project implementation, and were unchanged. 3.3 Original Components: The project had three components. The total project cost at appraisal was US$252.4 million. The component costs shown here include a contingency provision of about eight percent but exclude the costs of interest during construction, fees and an "unallocated fund" which were a total of US$24.54 million. 1. Crop-land Improvement (US$118.97 million), with three sub-components: (a) terracing; (b) sediment control structures; and (c) irrigation. The component was designed to create wide, level terraces from slopelands and old irregular terraces to enable sustainable agriculture with improved yields to be practiced. Sediment control structures were designed to control flooding, create usable land and store water for irrigation and village water supply. Irrigation works included the construction of small water cisterns to catch run-off (mainly from roads), small surface-water diversion structures and small-sized irrigation schemes. 2. Slopeland Protection (US$83.29 million), with three sub-components: (a) afforestation and vegetative cover; (b) grass and livestock development; and (c) horticulture. The main purpose of the component was to increase the vegetation cover and improve the erosion control capacity in the watershed areas covered by the project through the planting of trees, shrubs and grass, thereby allowing farmers simultaneously to reduce erosion and water loss and to diversify their production systems and increase their income. 3. Support Services and Training (US$25.61 million). The purpose of the component was to finance research and extension; training and study tours; monitoring and evaluation activities; survey and design work; vehicles, office equipment and building up-grades; and project operation and management costs. The three components were well selected and designed to achieve the objectives of the project and were well within the capacity of the institutions responsible for project implementation. The selection and design of - 2 -  the components were directly linked to the experience gained in the First Loess Plateau Watershed Rehabilitation Project and contained no untested activities. 3.4 Revised Components: The original components remained unchanged throughout the implementation of the project. However, the relative emphasis of components and activities shifted and were adjusted during the mid-term review (MTR): (a) as a result of the dynamic changes in the markets for livestock, this sub-component received more importance than planned at appraisal, while fruit and nut orchards were slightly reduced; (b) experience gained with closing and protecting degraded slopeland proved that regrowth of natural vegetation was more cost effective and, consequently, shrub planting under the project was reduced; and (c) a national program of check dam and key dam construction launched during project implementation allowed shifting some of the funds allocated for dam construction under the project to other activities. 3.5 Quality at Entry: The project's Quality at Entry is rated as having been satisfactory. The project objectives were consistent with the Bank's Country Assistance Strategy (CAS) for China and contributed to all three of its strategic outcomes which were: (a) to support China's transition to a market economy (providing international management and supervision support in the area of soil and water conservation); (b) to support the lagging regions and help to alleviate poverty; and (c) to support sustainable development and natural resources management. The design and preparation phase was short and cost effective, and was based on the very successful model developed under the (first) Loess Plateau Watershed Rehabilitation Project (LP I). Building on the experiences and the proven success of LP I, broadening and deepening its impact guided the concept and design. An environmental impact assessment was carried out. Additional safeguard studies were not considered to be necessary, since the expected social and environmental implications of the project were well known and effective mitigation measures had already been tested during LP I. The dual objectives of income generation and environmental improvements was complex and challenging. Finding the right balance between the two closely linked objectives was a continuous challenge for the project designers and implementers. With hindsight, the project can be seen to have significantly benefited from this dualism of objectives. For example, the frequent and continuing discussions about the appropriate combination of "bottom-up" participation with "top-down" planning of the appropriate soil and water conservation works has yielded valuable experience and lessons for similar projects. The decision not to include additional development activities, such as support for product marketing, promotion of producer associations, or research and extension, was a good one, in view of the need to keep the focus on project objectives while ensuring a manageable scope for the implementing agencies. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The outcome of the project in achieving the objectives is considered to have been highly satisfactory. The overall risk to the development outcome is rated as negligible. When the project was completed on June 30, 2005, most physical targets had been met or exceeded. The achievement of the interlinked project objectives of income generation and soil and water conservation - 3 -  exceeded the optimistic appraisal expectations. The project has substantially raised agricultural productivity, increased and diversified farm incomes, improved the environment and created conditions for sustainable soil and water conservation. Some 1.9 million people benefited from the project, of whom about 1.5 million (80 percent) were directly involved in project activities. From 1999 to 2004, the average annual per capita incomes of project households increased from RMB783 to RMB1,624 (134 percent of the appraisal target of RMB1,214). This compares to an income increase from RMB794 to RMB1,318 in the adjacent non-project areas (which themselves might have benefited from the project through spill-over effects). Notably, most of the income from trees and some other activities is still building up. Average annual per capita grain production increased from 365 kg to 591 kg (110 percent of the appraisal target of 537 kg) and compares to an increase from 397 kg to 504 kg in the non-project areas. The accumulated sediment retention caused by the project has reached an estimated total of 53.4 million tons (103 percent of the appraisal target of 51.7 million tons). Forest trees, grass and shrub planting, and fruit orchard development on about 357,000 ha have directly increased the vegetation cover in the project area from 17.3 percent to 33.5 percent. A grazing ban introduced through the project and implemented in most of the Loess Plateau has dramatically changed the landscape of a whole region in China. The project has significantly contributed to the restructuring of the agricultural sector and the adjustment to a market-oriented economic environment, and was thus well-placed within the context of China's macro-level economic adjustment. Terraces have significantly reduced labor inputs and, together with road access to the terraced fields, have allowed for mechanization. The resulting labor savings have permitted many farmers to pursue new income-earning activities, such as off-farm jobs, livestock production and high-value fruit and nut tree production. Increased income and the prospect of a sustainable natural resource base have allowed farmers to invest in a wide range of enterprises and social programs which have benefited the communities as a whole. Agricultural production has changed from generating a narrow range of food and low-value grain commodities to high-value products. The concurrent improvement in communications has reduced regional marketing constraints and provided farmers with country-wide marketing channels. New technology and management practices have further expanded production options and raised yields, and have allowed farmers to capture benefits by moving up on the product value-chain. Farmers learned to respond well to the opening of the markets and to new market opportunities. The project was instrumental in implementing a grazing ban. It was initially enforced in project areas, where it led to a spectacular increase in the vegetation cover. The spill-over effect of this grazing ban into a much larger area is unprecedented. Realizing the success achieved by the grazing ban under the project, political leadership at various levels has responded by adopting a grazing ban throughout most of the Loess Plateau area. This has dramatically changed the landscape in an area of over 500,000 km