China - Second Rural Credit Project

Document of The World Bank FOR OMCIAL USE ONLY Rept No. 11779 PROJECT COMPLETION REPORT CHINA RURAL CREDIT PROJECT II (CREDIT 1642-CHA) APRIL 7, 1993 Agriculture Operations Division Country Department II East Asia and Pacific Regional Office This document bas a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Name of Currency Yuan (Renminbi) Rate of Exchange Appraisal US$1.00 - Y 2.8 1985 US$1.00 - Y 2.9 1986 US$1.00 - Y 3.2 1987 US$1.00 - Y 3.7 1988 US$1.00 - Y 3.7 1989 US$1.00 - Y 4.7 1990 US$1.00 - Y 5.2 1991 US$1.00 - Y 5.3 Fiscal Year of Borrower : January 1 - December 31 Weights and Measures : 1 Meter (m) - 3.28 Feet (ft) 1 Kilometer - 0.62 Mile 1 Hectare (ha) - 2.47 Acres - 15 Mu 1 Kilogram (kg) - 2.2 Pounds (lb) - 2 Chinese Jin 1 Ton (t) - 1,000 Kg - 2,205 lb GLOSSARY AND ABBREVIATIONS ABC - Agricultural Bank of China BOC - Bank of China PBC - People's Bank of China CIB - China Investment Bank EDI - Economic Development Institute ERR - Economic Rate of Return FERR - Financial Rate of Return IDA - International Development Agency IFAD - International Fund for Agricultural Development LIB - Limited International Bidding MOF - Ministry of Finance MOA - Ministry of Agriculture PMC - Project Management Committee PMO - Project Management Office PO - Project Office PU - Project Unit RC I - Rural Credit I Project (CR 1462-CHA) RC II - Rural Credit II Project (CR 1642-CHA) RC III - Rural Credit III Project (CR 1871-CHA) RC IV - Rural Credit IV Project (CR 2182-CHA; LN 3265-CHA) SDR - Special Drawing Rights SOE - Statement of Expenditures SMCs - Supply and Marketing Cooperatives TA - Technical Assistance RCCs - Rural Credit Cooperatives  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation April 7, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China Rural Credit Project II (Credit 1642-CHA) Attached is a copy of the report entitled "Project Completion Report on China Rural Credit Project II (Credit 1642-CHA)" prepared by the East Asia and Pacific Regional Office. The Borrower contributed Part II, which includes comments on Part I. This second credit project repeated the Agricultural Bank of China's success in disbursing credit funds ahead of schedule to support farm and agro-industrial investments. Borrowers included individual households as well as cooperatives and public agencies at several levels of local government in Fujian and Hunan provinces. The project was limited to aquaculture, orchards, livestock and agro- industry. This is the first China project with a major credit component where the PCR reports substantial overdues and lax administration by the executing credit authority. However economic rates of return average around 20 percent. The project is rated as satisfactory, its sustainability as likely, and its institutional development as partial. The Project Completion Report is comprehensive and informative, though Part I does not deal explicitly with Agricultural Bank of China's dissenting views in Part II. The emergence of arrears as a problem in the China rural credit portfolio bears close scrutiny. The project will be audited. Attachment 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.  I  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT CHINA RURAL CREDIT PROJECT II (CREDIT 1642-CHA) TABLE OF CONTENTS Page No. Preface ...................(1) Evaluation Summary ...................(ii) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identity .......................................... 1 B. Background ................................................ 1 C. Project Objectives and Description ........................ 2 D. Project Design and Organization ........................... 3 E. Project Implementation .................................... 4 F. Project Results ........................................... 5 G. Project Sustainability .................................... 7 H. Project Impact .............................................. 8 I. IDA Performance ........................................... 8 J. Borrower Performance ...................................... 9 K. Experience and Lessons Learned .11 L. Project Documentation and Data .13 M. Recommendations .13 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. General .......... ............................ 16 PART III: STATISTICAL INFORMATION 1. Related Bank Loans and Credits .18 2. Project Timetable .19 3. Loan/Credit Disbursements .20 4. Project Implementation .21 5. Project Costs .22 6. Project Financing .23 7. Direct Benefits .24 B. Economic and Financial Rates of Return .25 9. Status of Covenants .26 10. Staff Inputs . ...................................... 27 11. Bank Missions ....................................... 28 APPENDICES 1. Hunan Agricultural Sector ................................... 29 2. Fujian Agricultural Sector .................................. 30 3. Project Income and Expenditure .............................. 31 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.   i PROJECT COMPLETION REPORT CHIN RURAL CREDIT PROJECT II (CREDIT 1642-CHA) PREFACE This is the Project Completion Report (PCR) for the Second Rural Credit Project (RC II) in China, for which Credit 1642-CHA in the amount of SDR 84.0 million (US$ 90 million) was approved on December 17, 1985. The credit was fully disbursed and closed on September 16, 1991. The PCR was jointly prepared by the Agricultural Division of the China and Mongolia Department of the East Asia and Pacific Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). The PCR is based, inter alia, on the Staff Appraisal Report; the Credit and the Project Agreements; supervision reports; correspondence between the Bank and the Borrower; internal IDA memoranda; and a field completion mission conducted in November, 1991.   ii PROJECT COMPLETION REPORT CHINA RURAL CREDIT PROJECT II (CREDIT 1642-CHA) EVALUATION SUMMARY Obiectives 1. The objective of the Second Rural Credit project (RCII) was to expand IDA's support of ABC's lending for investments to increase farm and rural output and incomes through the diversification and modernization of agricul- tural production and processing. It provided funds to ABC for medium- and long-term loans to individual farmers and households, collective units and enterprises owned by collectives and local government entities in the two provinces of Fujian and Hunan. The objective of the technical assistance (TA) component was to ensure effective and efficient project implementation and to strengthen the operational capacity of ABC. 2. The project was prepared by IDA with the assistance of ABC officials in November 1984 and appraised in April 1985. Five proiect components were identified and estimates made of the likely size of each component; these were stated as guidelines only and subject to change: (a) The aquaculture component was to expand production of freshwater fish, mainly grass, common and bighead carp and tilapia; and marine species, such as shrimp, mullet, oysters, clams and other shellfish. It was to comprise the construction and improvement of some 12,300 ha of ponds including supporting infrastructure and equipment. (b) The orchard component was to provide for the establishment and improvement of some 14,000 ha of orchards of mainly orange, litchi and longan. Plantations were to be established mainly on sloped lands previously uncultivated and intercropped with a range of vegetables during the initial unproductive years. (c) The agroprocessing component included the construction and equipment for plants for freezing and cold storage; processing fish and poultry feeds, fish, poultry and fruits; fruit storage, including facilities for sorting, waxing and grading fruit; orange and other fruit juice extraction and concentration. (d) The livestock component was to support investments in the production of poultry, goats, pigs and cattle. (e) The Technical Assistance (TA) component entailed training of ABC staff and provision of supporting equipment, machinery and consultant services. Staff training was provided in project preparation, appraisal and implementation methodologies based on ABC's project appraisal manual, as well as in auditing, statistics, finance, management and data information systems.  iii Proiect Implementation 3. Implementation of most project components far exceeded the appraisal estimate in terms of physical scales. A total of 3,503 subprojects were approved in both provinces. With the exception of a few minor cases all civil works and plantation works were satisfactorily carried out. No major delays were experienced. In fact, many of the subprojects were implemented ahead of schedule resulting in a rapid disbursement and completion of the project three months ahead of the expected closing date. 4. During project implementation the Yuan was devalued several times from an exchange rate of Y2.8 to US$1 at appraisal to Y5.3 to US$1 at the time of completion. This increased the IDA contribution from Y252 million to Y407 million. The total project investment size went up from Y719 million at appraisal to Y1203 million at completion, leading to a substantial expansion of physical scale of major components. 5. At appraisal. the mission estimated the establishment or improvement of 10,500 ha of orange orchards which at completion had expanded to 23,400 ha. The area planted with other fruit trees increased from 3,500 ha to 9,000 ha. Freshwater fish ponds, estimated at 9,000 ha at appraisal, increased to 17,500 ha while the area of salt water ponds more than doubled from 3,300 ha to 7,600 ha. The investment for agroprocessing increased from an estimated Y130 million to about Y454 million, resulting in a more than doubling of capacity. A relatively small amount of Y56 million was estimated for livestock with actual investment of only Y31 million. An unsatisfactory decline occurred in technical assistance from an estimated Y13 million at appraisal to Y8 million actual. Results 6. The orchar component, accounting for about 26% of total investment costs, was implemented well, showing promising initial production levels. Many fruit subprojects are not yet in full production but income was generally satisfactory for 1991. Concerns remain on future prices. Within the current price structure11 FRR's and ERR's are between 19% and 21%, respectively. At present, a 30% decrease of farm gate prices can be tolerated, before the FRR drops below 12%. 7. The aguaculture shrimp subcomponent in Fujian has had a number of major setbacks due to disease, storms and a sharp fall in foreign market prices. Income was well below expectations in 1990 and early 1991 but reasonable returns for end-1991 and future years are expected. The reestimated FRR of this component is between 18% and 22%. The intensive fish pond component in Hunan has been very successful. High yields and reasonable market prices have resulted in a FRR of about 30% to 33%. 8. The livestock component mainly supported the establishment of several medium- to large-scale poultry units. The two hatcheries visited showed FRR's between 14% and 18%. Due to the existing overcapacity in pig production and l/ FRR's and ERR's were reestimated applying constant 1991 prices  iv poor returns to cattle and goat production, little enthusiasm was encountered with regard to this component. 9. The agroprocessing component, which increased from 18% to 38% of project investment demonstrated more mixed results. A large feed mill investigated in Fuzhou showed very robust FRR's (base calculation >40%) based on high capacity utilization and a superior quality product with very little marketing prob- lems. Small feed mills, however, faced serious problems. Although the base calculation showed a FRR of 19%, at 75% utilization or with a 20% increase in costs, the rate of return was negative. This is an accurate reflection of conditions currently being experienced by project mills. The FRR of fish freezing and cold storage was 20% for the base case with 82% capacity utiliza- tion (the highest encountered during the visit). At lower rates of capacity utilization (60%) the FRR is negative. In fact, many project facilities operated at these lower levels experiencing poor results. Sustainability 10. The investments in fruit orchards and aquaculture appear to be self- sustaining. The subprojects have been carried out well and most subborrowers are capable operators. There are concerns, however, about the marketing of both products. There has been large-scale orange planting in many areas of China. Orange output increased by 20% in 1990 alone, resulting in a 30% decrease in prices. This trend is likely to continue since most of the recent plantings have yet to reach full production. However, project subborrowers generally have special varieties and good stands, and most are expected to remain competitive in the future. In the case of shrimp production, world market prices currently seem to have stabilized at a moderate level. Moreover, Chinese shrimp growers are, in the future, likely to be able to produce shrimp at a reasonable profit, albeit less than anticipated at appraisal. Some of the agroprocessing plants should ultimately be self- sustaining but others need to introduce managerial and technical changes or should be closed. Long-term lending has not become a major component of ABC's portfolio. Most of the recycled funds are used for working capital loans, and it is therefore unlikely that the subprojects will be a sustainable source of long-term investment credit. 11. With the expanded physical scope of the project, the potential impact on production, income and employment generation and poverty alleviation would be greater than originally estimated. An estimated 54,200 and 75,600 full time jobs were created in Fujian and Hunan, respectively. This compares to appraisal estimates of 16,000 direct employees and 61,000 full time jobs. The project has had a significant impact in those areas where it has been most active e.g., along the Fujian coast and near Dongting Lake in Hunan. Experience and Lessons Learned 12. The project completion reporting exercise provides useful experience and lessons for similar projects. These include: 13. The size of the original project may be materially changed by exchange rate adjustments. In this case, it resulted in a large increase of investment, with mixed benefits. The increase caused pressure on local counterpart funds and the additional portfolio was weaker than the originally appraised one.  v 14. Drastic changes in input and output prices indicate the need for more rigorous sensitivity analysis during financial and economic appraisal. The assumptions of a maximum of 20% potential increase in input cost or a maximum of 20X decrease in output value were unrealistic. No switching values were calculated. In addition, a number of feed mills and cold stores operated well below capacity, showing negative IRR's. 15. When a series of similar proiects are launched within a short period of time (4 Rural Credit projects within 7 years), there is a risk that second generation problems in subprojects are not adequately addressed, because the focus is directed to the preparation of the next project. Particularly in agroprocessing subprojects, problems tend to appear shortly after the facility goes into operation. At the least at this critical stage, issues such as design flaws, poor working capital management, inadequate quality and hygiene standards and poor marketing strategies need to be addressed and improvements implemented. On the positive side, lessons learned during the early implemen- tation stages of RCI were incorporated without delay into the other projects. 16. Staff of ABC Guangxi provincial branch (RCI) were seconded to train the other provinces' Rrolect staff. While this was convenient, other provinces avoided to bring in foreign consultants for training seminars. 17. ABC and its subborrowers have been very reluctant to incur any cost for consulting services. It appears that ABC and its clients only think of technical assistance in terms of hard sciences such as engineering. However, the major shortcomings are related to marketing and financial management. The training system in China is quite strong technically, but has significant weaknesses in fields such as marketing. China's biggest successes have come from joint ventures, where both technical and marketing expertise have been provided by foreign owners. Internally, many officials from ABC and government planning committees responsible for investments have yet to move from a production-oriented focus to a marketing focus. 18. ABC's role remains somewhere between being the rural financing arm of government and an independent banking agency. IDA needs to recognize that, at present, ABC - despite significant improvements in its appraisal capacity - has only a limited voice and control over subproject selection and that ABC headquarters has limited control of its lower levels. 19. Without improved raining and closer monitoring, lower ABC levels and/or planning committees at these levels will not always know or follow procurement and approval rules. 20. ABC headquarters project staff of eleven is inadequate in number and skill composition to supervise the implementation of the projects. 21. ABC has little control over the management of unsound borrowers. While it has identified weak management in a number of the subprojects reviewed, little was done to change such management. ABC seemed in fact prepared to support such borrowers by providing additional funds. 22. With changing economic conditions in China, ongoing credit projects probably face more uncertainty than those already completed. It is, there- fore, necessary that ABC performance be improved. Otherwise excessive volumes of credit could be used for unproductive purposes.  1 PART 1 PROJECT REVIEW FROM BANK'S PERSPECTIVE Proiect Completion Report 21 A. Proiect Identity 1. Project Name Second Rural Credit Project (RCII) Credit No. 1642-CHA RVP Unit East Asia and Pacific Country China Sector . Agriculture Subsector Rural Credit B. Background 2. At the time of project formulation, China's agricultural sector had been the focus of substantial policy reforms. These reforms had contributed to the sector's exceptionally good performance since 1979. In addition to improved incentives to producers such as price increases and widespread introduction of free markets for agricultural commodities, a major policy component was to expand the flow of credit to rural areas, principally through the Agricultural Bank of China (ABC). Priority in commercial lending was given to the expansion of livestock, fisheries, horticultural and other high-value goods to meet the rapidly rising demand resulting from increasing per capita incomes. In land-scarce China, effective development of the agricultural sector required higher yields from existing cropped areas, efficient development of the few areas of underutilized land, diversification into higher value non- foodgrain crops, livestock and fisheries, increased facilities for agricultural processing and marketing, fuller use of the rural labor force, and the use of improved technology. 3. The rural financial sector had undergone reforms of similar signifi- cance. The Government had actively encouraged expansion and diversification of the rural financial system, organized specialized banks to initiate genuine financial intermediation, promoted competition among banks to broaden the range and efficiency of services offered, provided greater autonomy to banks in lending decisions and allowed increased use of interest rates to encourage financial savings and more efficient resource allocation. 4. Since 1980 China has received extensive support from the Bank in both agricultural and financial sector development. The agricultural sector has been strengthened mainly through activities in irrigation and drainage, higher education and research, land reclamation and introduction of modern farming technology and inputs, planting and replanting of major tree crops, support of 21 This report is based on findings of a PCR mission which visited China in November 1991. Members of the mission were Mrs Naomi K. Hill and Messrs Juergen M. Voegele (EA2AG), Kheng Hoe Yeow (ASTAG), D. Brian Argyle, James G. Brown, Andrew Kaelin and Shil Kwan Lee (consultants).  2 seed production and establishment and management of forest plantations. Rural financial sector issues were among the intended areas of focus of an FY88 rural sector adjustment project (see PCR dated 8/91). The China Investment Bank (CIB) has received five loans for industrial subprojects and a number of projects have channeled funds through local financial intermediaries. 5. ABC is the leading bank in agricultural sector lending and, along with the Rural Credit Cooperatives (RCCs), handles most of the banking activities in China's rural areas. It has a network throughout China with offices in almost every township and in most larger state farms and rural industrial complexes. Prior to changes in financial policies in the 1980's, though, ABC had been little more than a channeling agency transferring funds as directed by the planning authorities. ABC's main borrowers are marketing cooperatives (60% of loan portfolio), township enterprises (12%), industry (7%), state farms (5%), collectives and farmer groups (7%). Its funds come mainly from individual savings in rural towns and cities, the People's Bank of China and the RCCs. By its orientation, ABC is primarily an intermediary for reaching larger rural enterprises, state farms and collectives. The RCCs, which are local entities, provide short-term loans to farmers and township and village enterprises. Their funds are mainly derived from farmer deposits. 6. The project is the second of four Rural Credit projects (RC I to RC IV) financed by the Bank Group and implemented by ABC. The main objectives of RC I (Credit 1462-CHA) were to a) support a three-year lending program of ABC in Guangxi Autonomous Region as part of a high priority government effort to increase agricultural and rural production and incomes through the diversifi- cation and modernization of agricultural production and agroprocessing and b) assist ABC in developing and implementing procedures and methodologies in appraising development projects. The project was successfully implemented without major problems. RC III (Credit 1871-CHA) and RC IV (Loan/Credit 3265/2182-CHA) were approved in FY88 and FY91, respectively. 7. Under China's policy to decentralize economic decision making, allocation of credit by sector and subsector is still largely determined by government representatives at the various levels. Within this context, ABC and other banks rapidly expanded their lending programs through most of the 1980's and at the same time became somewhat more autonomous in their lending decisions at the lower levels. The two to three years of the stabilization program (1989-91), however, saw increasing financial difficulties of many state farms and other enterprises. The financial pressures generated, as well as the overall tightening of government control of the economy, resulted in increasing input by local governmental institutions into decisions on individual loans. Thus, factors outside of financial viability came to play an increasingly important role in decision making. C. Project Obiectives and Description 8. The objective of the Second Rural Credit project (RCII) was to expand IDA's support of ABC's lending for investments to increase farm and rural output and incomes through the diversification and modernization of agricul- tural production and processing. It provided funds to ABC for medium- and long-term loans to individual farmers and households, collective units and enterprises owned by collectives and local government entities in the two provinces of Fujian and Hunan. The objective of the technical assistance (TA)  3 component was to ensure effective and efficient project implementation and to strengthen the operational capacity of ABC. 9. The project was prepared by IDA with the assistance of ABC officials in November 1984 and appraised in April 1985. Five project components were identified and estimates made of the likely size of each component: (a) The aquaculture component was to expand production of freshwater fish, mainly grass, common and bighead carp and tilapia, and marine species, such as shrimp, mullet, oysters, clams and other shellfish. It was to comprise the construction and improvement of some 12,300 ha of ponds including supporting infrastructure and equipment. (b) The orchard component was to provide for the establishment and improvement of some 14,000 ha of orchards of mainly orange, litchi and longan. Plantations were to be established mainly on previously uncultivated sloped lands and to be intercropped with a range of vegetables during the initial unproductive years. (c) The agroprocessing component included the construction and equip- ment for plants for freezing and cold storage; processing fish and poultry feeds, fish, poultry and fruits; fruit storage, including facilities for sorting, waxing and grading fruit; orange and other fruit juice extraction and concentration. (d) The livestock component was to support investments in the production of poultry, goats, pigs and cattle. (e) The Technical Assistance (TA) component entailed training of ABC staff and provision of supporting equipment, machinery and consul- tant services. Staff training was to be provided in project preparation, appraisal and implementation methodologies based on ABC's project appraisal manual, as well as in auditing, statistics, finance, management and data information systems. D. Proiect Design and Organization 10. The project was designed within the context of a still largely planned economy in which all entities, including banks, supported the overall plan. Coordination at each level was organized in committees or 'leading groups' comprising representatives of key government bureaus. As part of this system broad credit allocation was also carried out by committees. In the Second Rural Credit project a Project Management Committee (PMC) was established in each province. It was essentially comprised of representatives of the bureaus responsible for implementing the provincial development plan. Although not specified in the appraisal report, similar groups at lower levels were formed to give guidance to individual subprojects. Committees also assisted with arranging funding, provision of inputs in short supply, technical extension support and training. Due to the decentralized structure of ABC, substantial decision making power over subprojects is located at the county level. At this level the influence of the ABC manager appears to vary substantially depending on his standing in the committee.  4 11. The project design was basically adopted from the first rural credit project (RCI). Primary responsibilities for project implementation and management were given to ABC provincial branches under the supervision of ABC headquarters. Various technical bureaus at the regional, prefecture and county levels provided assistance to ABC concerning project identification, preparation, appraisal and supervision. An International Department dealing with foreign funds was created in ABC provincial branches, within which the World Bank Project Management Offices (PMO's) were established. Based on the information available at appraisal the project concept was clear and appropri- ate. Overall, the project was well prepared, timing and scope were adequate. 12. Agreement was reached at negotiations whereby the foreign exchange risk of the IDA credit was the responsibility of the Ministry of Finance (MOF). The IDA credit was lent in foreign currencies to MOF which in turn disbursed to ABC in local currency, except for a few loans made for direct import of equipment, where the risk would be borne by the subborrower. E. Proiect Implementation 13. Implementation of most project components far exceeded the appraisal estimate in terms of physical scales. A total of 3,503 subprojects was approNed in both provinces. With the exception of a few minor cases, all civil works and plantation works were satisfactorily carried out. No major delays were experienced. In fact, many of the subprojects were implemented ahead of schedule resulting in a rapid disbursement and completion of the project three months ahead of the expected closing date. 14. During project implementation the Yuan was devalued several times from an exchange rate of Y2.8 to US$1 at appraisal to Y5.3 to US$1 at the time of completion. The average exchange rate was Y3.7 to US$1. During the same period, the ratio of the US$ to SDR varied but averaged approximately 1.30 against 1.07 at appraisal - a decline of 18%. Thus, the Yuan/SDR exchange rate increased by about 60% from 3.0 to 4.85. This increased the IDA contri- bution from Y252 million to Y407 million. The original IDA contribution of SDR 84 million and a slightly reduced IDA disbursement ratio of 33.8% (SAR 35%) were maintained, increasing local financing from Y467 million at apprais- al to Y797 million. The total project investment size went up from Y719 million at appraisal to Y1203 million at completion, leading to a substantial expansion of physical scale of major components. 15. At appraisal, the mission estimated the establishment or improvement of 10,500 ha of orange orchards which at completion had expanded to 23,400 ha. The area planted with other fruit trees increased from 3,500 ha to 9,000 ha. Freshwater fish ponds, estimated at 9,000 ha at appraisal, increased to 17,500 ha, while the area of salt water ponds more than doubled from 3,300 ha to 7,600 ha. The investment for agroprocessing increased from an estimated Y130 million to about Y454 million, resulting in a more than doubling of capacity. A relatively small amount of Y56 million was estimated for livestock with actual investment of only Y31 million. An unsatisfactory decline occurred in technical assistance from an estimated Y13 million at appraisal to Y8 million actual. 16. During implementation substantial changes occurred in the distribution of investment among components. The most significant changes were the sharp increase of agroprocessing in Hunan, the reduction in livestock where the beef  5 and goats sub-components had to be dropped due to a lack of investors, and the sharp decline in the use of funds for technical assistance (Table 1). Table 1: Distribution of Investments Appraisal Actual Disbursement Forecast Fujian Hunan Total (%) (%) (%) (%) Aquaculture 38 50 15 33 Orchards 35 26 27 26 Agroprocessing 18 21 55 38 Livestock 8 2 3 3 Technical Assistance 1.9 0.7 0.6 0.7 17. Initially fruit and aquaculture subprojects were given high priority and the first Y620 million were disbursed mainly for these components. With increasing funds available, the project made a drastic switch to agroproces- sing, reflecting the opinion of both ABC and IDA that this component required further expansion and improvement. F. Proiect Results 18. In general, the orchard component, accounting for about 26% of total investment costs, was implemented well, showing promising initial production levels. Many fruit subprojects are not yet in full production but income was generally satisfactory for 1991. Concerns remain on future prices. Within the current price structure31 FRR's and ERR's are between 19% and 21%, respectively4/. At present, a 30% decrease of farm gate prices can be tolerated, before the FRR drops below 12%. 19. The aguaculture shrimp subcomponent in Fujian has had a number of major setbacks due to disease, storms and a sharp fall in foreign market prices. Income was well below expectations in 1990 and early 1991, but reasonable returns for end-1991 and future years are expected. The reestimated FRR of this component is between 18% and 22%. The intensive fish pond component in Hunan has been very successful. High yields and reasonable market prices have resulted in a FRR of about 30% to 33%. 20. The livestock component mainly supported the establishment of several medium- to large-scale poultry units. The two hatcheries visited showed FRR's between 14% and 18%. Due to the existing overcapacity in pig production and poor returns to cattle and goat production, little enthusiasm was encountered with regard to this component. 31 FRR's and ERR's were reestimated applying constant 1991 prices 41 In Table 8 in Part III of this report appraisal and updated estimates of the financial and economic rates of return of all project components are summarized  6 21. The agroprocessing component, which increased from 18% to 38% of project investment demonstrated more mixed results. A large feed mill investigated in Fuzhou showed very robust FRR's (base calculation >40%) based on high capacity utilization and a superior quality product with very little marketing prob- lems. Small feed mills, however, faced serious problems. Although the base calculation showed a FRR of 19%, at 75% utilization or with a 20% increase in costs, the rate of return was negative. This is an accurate reflection of conditions currently being experienced by project mills. The FRR of fish freezing and cold storage was 20% for the base case with 82% capacity utiliza- tion (the highest encountered during the visit). At lower rates of capacity utilization (60%) the FRR is negative. In fact, many project facilities operated at these lower levels experiencing poor results. 22. Investment planning showed three characteristics which are reflected in the strength and weaknesses of the present portfolio: a) The emphasis on physical rather than financial performance, b) Local plans are developed without consideration of the investment plans of other jurisdictions, many of which may adopt similar targets and c) Ignorance of the market element: markets simply have been assumed, either because of growing domestic purchasing power or because the state marketing agency is expected to take care of the output. Another reason may have been the overly rapid approval of agroprocessing subprojects when disbursements changed course. Some of these appear not to have been well prepared or carefully reviewed. Full details of the results of processing plants (about 400 subloans to a diverse range of enterprises) were not available to the mission: thus, the overall performance of the component cannot be assessed and an overall FRR and ERR cannot be estimated reliably. 23. Part B of the project provided for improving ABC's operational capabili- ty in such areas as project preparation, appraisal and implementation, finance and management, by including a program of staff training in China and overseas, with provision of overseas fellowships, consultants' services and equipment. Credit funds of SDR400,000 were allocated for overseas fellowships and consultants' services (Category 2) and SDR1,810,000 for equipment for Part B (Category 3). Disbursements of SDR124,932.70 and SDRI,959,080.65 represent 31% and 108%, respectively, of the allocations. 24. All disbursements for Category 2 were made for overseas tours and none for consultants. Hoping to persuade ABC to use available funds to hire consultants, IDA indicated that it would be difficult to reallocate the unused technical assistance funds to the credit program (Part A - subloans). However, as ABC drew down funds in mid 1991, the credit was closed and SDR583,386 was charged to the account for the exchange rate fluctuations between the SDR and US$ between the time of initial deposit to the Special Account and the time of documentation of the Account. Thus, ABC avoided further expenditures on training. 25. Provincial and prefectural ABC branches and central subbranches provided details of loan recoveries based on reports from county subbranches. However, data recorded payments made by the county level branches to higher level branches, and not actual recoveries from subprojects which may have been much lower. Provincial level ABC branches recorded recoveries at December 1990 as follows:  7 Table 2: Recoveries of Principal and Interest by end of 1990 Principal Interest Past Recov Past Recov Disb. Due Pd. Due Rate % a/ Due Pd Due Rate % - (Yuan million) - - (Yuan million) - Fujian 409 162 148 14 91.6 86 74 13 84.8 Hunan 400 34 39 2 113 89 73 16 82 a/ The recovery rate of principal (as compared to the recovery rate of interest) is fairly high because subloans with overdue principal are resched- uled fairly rapidly. 26. Some loans at the end of 1990 were not yet due for repayment of principal. ABC normally applies terms of about a two-year grace period with interest only, followed by payment of approximately 10% principal in year 3, 20% in year 4 and 30% p.a. in subsequent years. Repayments appear satisfactory from the above data but, as noted above, the actual recoveries are lower. More detailed data indicate for Fujian that Y64 million or about 16% of total loans are overdue. In Hunan, the audit report prepared by the State Audit Administration for 1990 indicates overdue loans of Y42 million or 65% of total repayments due. In some cases, repayment is made possible by granting of working capital loans from recycled project funds or from domestic funds. Overall recovery without this factor seems below 50%. ABC provincial offices do not have a full picture of actual recoveries or projects in difficulty. 27. Of the funds recovered (i.e. repaid from lower level), ABC has withdrawn the 50% it contributed to the original investments (most of which is in fact overdue) and is recycling the funds originating from IDA. More than 80% of these funds have been utilized as working capital for projects financed under stage I. Already half of these second stage funds have been repaid and have been reused for short-term lending. G. Proiect Sustainability 28. The investments in fruit orchards and aquaculture appear to be self- sustaining. The subprojects have been carried out well and most subborrowers are capable operators. There are concerns, however, about the marketing of both products. There has been large-scale orange planting in many areas of China. Orange output increased by 20% in 1990 alone, resulting in a 30% decrease in prices. This trend is likely to continue since most of the recent plantings have yet to reach full production. However, project subborrowers generally have special varieties and good stands, apply improved management practices and most are expected to remain competitive in the future. In the case of shrimp production, world market prices currently seem to have stabilized at a moderate level. Moreover, Chinese shrimp growers are, in the future, likely to be able to produce shrimp at a reasonable profit, albeit less than anticipated at appraisal.  8 29. Some of the agroprocessing plants should ultimately be self sustaining but others need to introduce managerial and technical changes or should be closed. Of particular concern is the situation in ramie processing in Hunan province. In 1987, a considerable share of project funds was invested in primary and secondary ramie processing facilities, after the government had increased the price for ramie fourfold. Producers responded immediately and ramie production increased severalfold during the next growing season. In 1988, prices dropped by about 50% and have not recovered since. As a result the ramie processing industry now has to cope with overcapacity and a sluggish international market. The provincial government has asked for funds under RCIV to reactivate the industry, but market conditions need to be examined in greater detail before the sustainability of this component can be assessed. The international market for ramie is very narrow and prices will most likely remain low in the forseeable future. 30. The livestock component was designed mainly to supply urban communities and the Hong Kong market. Generally, capacity exceeds demand but as most producers are state enterprises, the price of inputs is modified as necessary by the authorities to ensure such operations make a small surplus. As the Chinese economy moves toward broader application of market principles, state- owned enterprises will be less protected from input price adjustments and the problem of below-standard financial performance may become more frequent in the short-term. 31. Long-term lending has not become a major component of ABC's portfolio. Most of the recycled funds are used for working capital loans, and it is therefore unlikely that the project will be a sustainable source of long-term investment credit. H. Proiect Impact 32. With the expanded physical scope of the project, the estimated impact on production, income and employment generation and poverty alleviation will be greater than originally forecast. An estimated 54,200 and 75,600 full time jobs were created in Fujian and Hunan, respectively. This compares to appraisal forecasts of 16,000 direct employees and 61,000 full time jobs. The project has had a significant impact in those areas where it has been most active, e.g. along the Fujian coast and near Dongting Lake in Hunan. 33. The project contributed a significant share of total investment carried out in some of the subsectors in both provinces during the period of project implementation - 58% of incremental shrimp ponds and 4% of citrus, 10% of litchi and 9% of longan orchards in Fujian and 17% of the intensive fish ponds in Hunan. In many cases individual incomes have been increased several-fold. 34. The project has to date had a positive impact on ABC's financial position (Annex 3). However, the longer term results will depend mainly on the development of recovery rates. Many subprojects are in arrears and some will have long-term difficulties in repaying. While ABC has guarantees for nearly all its loans from state farms, townships and other sources, these may be difficult to collect, particularly if the guarantor has either financial constraints or competing demands for other priority funding. Bad debts of 1.5% per annum have been assumed for future years, a figure well above ABC's normal allowances but considered realistic. If this level of bad debt is not exceeded, ABC will make a small profit on the project.  9 I. IDA Performance 35. The project became effective in April 86 and was supervised in September '86, October '87, October '88, November '90, and April '91. In addition, detailed discussions were held with ABC on general matters relevant to RC II during the preparation and the appraisal of RC IV in August and November 1989. A mission to review SOE's in China reviewed RC II procedures in September 1989. During the period of greatest disbursement, the project was supervised approximately annually. By October 1988, the credit was 82% disbursed and virtually fully committed. 36. IDA missions identified - and brought to ABC's attention - most key issues and problems (details in section J) relating to the project and provided continuous managerial and technical advice to improve the situation, but responses by ABC were not always satisfactory. IDA has been active in providing and promoting courses in procurement and monitoring and evaluation. IDA staff assisted in the design of tables introduced in 1991 to monitor overdues and problem loans. However, follow-up on some persistent issues could have been more intensive, particularly given the very rapid project implementation. More frequent supervision would have been advantageous, given the management limitations of ABC headquarters and the ongoing decentraliza- tion of authority in ABC. 37. During appraisal and early implementation of RC II, the main focus of IDA supervision was on agricultural development and technical issues. With the approval of RC III and RC IV and an increasing number of participating provinces (17 provinces in 1991), the institutional constraints of ABC to supervise RC II became more prominent and IDA's emphasis shifted gradually towards improving ABC's management and supervision capabilities. This shift in priorities was not adequately appreciated by ABC staff at all levels, however. On the other hand, IDA's objective to significantly improve ABC's operations at all levels may have been rather ambitious. 38. Initially, under RCI, IDA had requested that ABC would establish a separate project unit within the International Department at all levels to manage the project. While this has been complied with, experience during implementation indicated that this unit developed a life of its own, with only limited coordination and cooperation with other ABC departments. IDA, therefore, repeatedly proposed to reintegrate this unit into the main ABC structure, also with the view of having an impact on ABC's overall lending performance. This has not occurred. J. Borrower Performance 39. ABC implemented a large lending program in a very short period of time. Naturally this had an impact on its project preparation and supervision performance. The range of issues discussed during the mission is summarized below. 40. During supervision the speed of implementation was discussed several times to little apparent avail. The rapid approval of subprojects in 1986, 1987 and 1988 proved a considerable strain on project offices. It appears that projects were approved too quickly, not always taking into account all factors. Each county was anxious to lock in its allocated share of money,  10 leading in some cases to excessive haste. Inadequate appraisal and the selection of unsuitable processing projects led to a range of financial and technical problems. 41. Technical and financial appraisal was carried out on a routine basis; however, two constraints have been identified. Frequently, subprojects were prepared and reviewed by the same institution, often even by the same office. Secondly, technology transfer was hampered by a strong bias towards local production methods and familiar technology. While this might be acceptable for certain output targeted to the domestic consumers in a state-controlled market situation, it often prevented the sub-borrower from being able to successfully compete in the domestic market or entering the international market. 42. A major misunderstanding appears to exist between IDA and ABC concerning the role of Division I of the ABC International Department at Beijing head- quarters. In IDA's view this project management unit is responsible for overall supervision and guidance of the project. In ABC's view, Division I is responsible for setting policy, writing general guidelines and organizing training classes. Division I regards itself purely as an administrative unit rather than a management and steering body. In addition, the unit is severely understaffed. ABC has a total staff of only 11 persons at headquarters managing the World Bank/IFAD program of five projects. With the program totalling about US$620 million, this number is inadequate. The ABC International Department has issued broad and general guidelines to be refined by the individual provincial branches before introduction within these provinces. This approach not only leads to a whole range of different management procedures within the projects, it also deprives ABC headquarters of the chance to introduce an efficient monitoring system covering all levels. ABC Division I agrees that part of its role is project supervision, but, apart from accompanying IDA supervision missions, no visits were made to any province for any of the projects in 1991. ABC has obviously placed less focus on this issue than the Bank sees as useful. What is relevant is whether ABC headquarters should provide guidance and supervision at the senior level or whether it should be mainly a facilitator between the Bank and the individual provinces. It appears that ABC sees the role of project headquarters as the latter. This fits within the Chinese pattern of devolution of authority to lower levels. Only about 0.1% of ABC's total staff is at its Beijing headquarters. This process, however, causes variable results and at times non- compliance with conditionality by the provincial and lower levels. 43. The situation is similar at the provincial level. ABC provincial branches rely on information sent by prefectures, who in turn rely on county- level progress reports. Most of the actual project preparation, appraisal, supervision and evaluation work occurs at the county level. The information flow to the provincial level is not always appropriate, and timely monitoring of project progress and problem projects is rudimentary. Only the county level branches know, for instance, the amount of working capital given to the subprojects. While a substantial number of subborrowers have postponed financial problems by additional working capital borrowing, such information is not transferred to higher ABC levels. In Hunan, only the county level branches had accurate figures of loan recovery and overdue loans. 44. Interest rates were an issue for all supervision missions. County subbranches are used to flexibility in their application of interest rates.  11 Rates quoted to missions were sometimes above or below those prescribed by the loan conditionality. It is not clear whether instructions were not issued, did not reach lower levels, or were ignored. Neither ABC headquarters nor the provincial project units have followed up closely on such matters - probably reflecting the independence of county subbranches. 45. ABC has been quite reluctant to adopt major procedural Bank require- ments. It has over a long period onlent funds at interest rates lower than those agreed with IDA, has avoided LIB procedures by splitting contracts, has failed to submit proposals for larger investment to IDA for review and has not adequately addressed issues raised in qualified audit reports. Even after 10 years of cooperation between IDA and ABC through four credit projects there remains an unsatisfactory degree of non-compliance with the legal agreements. 46. ABC headquarters failed to issue clear guidelines or follow-up on procurement until 1990. While the provincial staff were aware of the credit agreement, limited effort was made to ensure that procurement was carried out in line with conditionality. Wherever possible, contracts for equipment and machinery were broken down into units below US$50,000 to avoid LIB. Except for several joint ventures supported under the project, there appears to have been very little, if any, procurement from foreign sources. In a number of cases, equipment procured from domestic sources was obsolete and inefficient, leading to less successful investments. Packaging of equipment into small contracts also led to mismatching. There clearly was strong reluctance to use credit funds to import any equipment into China. While greater use of LIB might not have led to significant foreign importation, it could have led to the purchase of better Chinese-made equipment. 47. ABC tends to allocate additional amounts of working capital to projects with marketing and/or management problems, if funds are available, to bolster their cash flow. ABC maintains an overly optimistic view that these projects only have temporary problems and merely need funds to overcome their liquidity crisis. No cases were reported of ABC actually stopping disbursement to uneconomic operations. Successful enterprises, on the other hand, which frequently lack working capital, were being told that they did not need it. In Hunan, it was a standard practice to lend working capital to enable weak subborrowers to pay back both interest and principal. 48. During supervision several marketing studies were requested: fresh water fisheries in Hunan in 1987, in 1988, in 1990 and in 1991 and a review of the shrimp industry in Fujian in 1990 and 1991. Despite these frequent requests and serious concerns about marketing, none of these studies materialized. The studies were to be a joint effort of ABC and the Fisheries Bureau. It does not seem that ABC was very active in promoting or following up on this issue. Neither ABC headquarters nor provincial staff appeared to want to get involved in areas such as marketing, seeming to believe that these were outside their responsibilities. This attitude might well result in ABC's continuing to finance production of unmarketable commodities until gross over-supply occurs. K. Experience and Lessons Learned 49. The project completion reporting exercise provides useful experience and lessons for similar projects. These include:  12 50. The size of the original project may be materially changed by exchange rate adjustments. In this case it resulted in a large increase of investment, with mixed benefits. The increase caused pressure on local counterpart funds, and the additional portfolio was weaker than the originally appraised one. 51. Drastic changes in input and output prices indicate the need for more rigorous sensitivity analysis during financial and economic appraisal. The assumptions of a maximum of 20% potential increase in input cost or a maximum of 20% decrease in output value were unrealistic. No switching values were calculated. In addition, a number of feed mills and cold stores operated well below capacity, showing negative IRR's. 52. When a series of similar projects is launched within a short period of time (4 Rural Credit projects within 7 years), there is a risk that second generation problems in subprojects are not adequately addressed because the focus is directed to the preparation of the next project. Particularly in agroprocessing subprojects, problems tend to appear shortly after the facility goes into operation. At the least at this critical stage, issues such as design flaws, poor working capital management, inadequate quality and hygiene standards and poor marketing strategies need to be addressed and improvements implemented. On the positive side, lessons learned during the early implemen- tation stages of RCI were incorporated without delay into the other projects. 53. Staff of ABC Guangxi provincial branch was seconded to train the other provinces' project staff. While this was convenient, other provinces avoided bringing in foreign consultants for training seminars. Due to the complex structure of ABC, the county level officer in charge of project appraisal, supervision and monitoring received training from a county level colleague, who had been trained by a prefecture level staff, who had received training from a provincial level officer, who had attended a training course given by a Guangxi ABC staff member, after having been trained from ABC headquarters or participating in one of three EDI courses held in Shanghai between 1983 and 1985. Since these courses averaged about ten days only, quality of project analysis is variable. 54. ABC and its subborrowers have been very reluctant to incur any cost for consulting services. It appears that ABC and its clients only think of technical assistance in terms of hard sciences such as engineering. However, the major shortcomings are related to marketing and financial management. The training system in China is quite strong technically, but has significant weaknesses in fields such as marketing. China's biggest successes have often come from joint ventures, where both technical and marketing expertise have been provided by foreign owners. Internally, many officials from ABC and government planning committees responsible for investments have yet to move from a production-oriented focus to a marketing focus. 55. Devolution of authority in China resulted in a rush of projects from every county, leading to rapid commitment and disbursement. In order to allow adequate time for appraisal and analysis a more constant investment flow would be desirable. Action is required to ensure that rushed project approval does not lead to unsatisfactory projects. Better project analysis is a require- ment. 56. ABC's role remains somewhere between being the rural financing arm of government and an independent banking agency. IDA needs to recognize that, at  13 present, ABC - despite significant improvements in its appraisal capacity - has only a limited voice and control over subproject selection and that ABC headquarters has limited control of its lower levels. 57. Without improved training and closer monitoring, lower ABC levels and/or planning committees at these levels will not always know or follow procurement and approval rules. 58. ABC headguarters Rroject staff of eleven is inadequate in number and skill composition to supervise the implementation of IDA - supported projects. The limited supervision which does occur seems acceptable to ABC's management and the government, however. Headquarters staff have also had difficulties in providing appropriate guidelines promptly and monitoring the project effec- tively. ABC headquarters has been unable to provide the required.leadership in studying the prospects of the different activities it is financing. While IDA would prefer to see ABC in a more active role, ABC or government have tended to see this as a function of government ministries and other entities. 59. ABC has little control over the management of unsound borrowers. While it identified weak management in a number of the subprojects reviewed, little was done to change such management. ABC seemed, in fact, prepared to support such borrowers by providing additional funds. 60. The quality of construction and equipment in agroprocessing enterprises is generally acceptable. Most elements are well designed. However, design flaws in raw material flow occur, and energy conservation and preventive maintenance need to be improved. Buildings and facilities tend to be larger than necessary. L. Prolect Documentation and Data 61. While most of the covenants of the Credit and Project agreements were complied with, important exceptions in areas such as interest rates and procurement occurred from time to time (see para 45 above). The record of compliances with the covenants is available in Table 9 (Part III). M. Recommendations 62. The following recommendations evolved from discussions with the Chinese counterparts: 63. Implementation is generally extremely rapid in rural credit projects in China, leading to rapid and limited appraisals. Whether a more careful review would result in better subprojects is unclear, as the planning groups may either determine the project must go ahead or have unrealistic assumptions that may not change with more study. However, IDA should encourage a steady rate of disbursement, while emphasizing better subproject preparation and analysis. 64. From a production standpoint the aquaculture component has been very successful. However, in Hunan the lack of freezing facilities, cold stores and ice machines remains a serious constraint to the economic utilization of fresh water fisheries investments. It is strongly recommended that funds are made available (possibly RC IV funds) to improve post-harvest facilities.  14 65. It is evident that some agroprocessing investments are unsound and that production of some commodities is reaching saturation. The major problems are weak management, weak markets and low quality goods. ABC has not shown much interest or skill in analysis of these key factors. Before further agropro- cessing projects are approved, it is proposed that the following be agreed upon: a) ABC would require a market study by an outside entity (e.g., university) for every processing project; and b) ABC would invite international consultants to review prospects for commodities already largely reliant on foreign trade, such as shrimp, ramie, and lean pork. Given the huge supply of oranges a study of prospects of orange juice and other fruit exports should be carried out. 66. IDA procurement terms ran counter to the government's tendency to favor purchase of only Chinese equipment and also to the personal preferences of county procurement committees, which may want to stimulate or help local industry or merely choose equipment already known to the technicians. In any case IDA needs to take a firmer stand on procurement protocol enforcement in the future. It is suggested that procurement be reviewed in detail and appropriate remedies applied in the ongoing RC III and RC IV projects. Unless such action is taken, it seems likely that this will remain a problem in ongoing projects. 67. During RC II implementation, a relatively small and often inadequate amount of the IDA funds was utilized for working capital. The definition of working capital as used by ABC was for many subprojects excessively restrictive e.g., excluding fertilizer for new orchards in years 2-4. While this greatly increased the physical scope of the project, it resulted in a very large increase in requirements for working capital from other sources - namely, ABC's domestic resources and, more recently, recycled funds from RC II and new funds from RC IV. However, much of the working capital funds are instead being used for financing repayment of the RC II first stage loans and for offsetting losses of unprofitable enterprises. In many cases, these working capital loans are being given years after implementation. Clear guidelines are now required. The following procedures are recommended for working capital loans for IDA funded subprojects: a) working capital from recycled RC II funds, RC III or RC IV should not be given to make repayments of 1st stage RCII loans; b) working capital loans should not be given to enterprises to offset operational losses, unless ABC is convinced the project will make profits during the upcoming year; c) working capital should only be used for justified incremental require- ments e.g., increase in raw materials over what is on hand; d) working capital should not be utilized for increase in stocks of finished products beyond normal levels or to pay down debts arising from existing stocks or non-payment by purchasers; e) Project working capital should not be a part of the current ABC triangu- lar debt adjustment exercise; f) all working capital loans should be approved at provincial level ABC, above Y500,000 cumulative at ABC headquarters and above Y1 million by IDA; and  15 g) ABC should report quarterly to IDA the detailed amounts of working capital loans to project beneficiaries. This should be included in the form of a specific table. ABC headquarters should prepare clear guide- lines, to be approved by IDA, and distributed as soon as possible. 68. IDA would like a more active and forceful ABC headguarters staff role as discussed earlier. Regardless of the level of supervision, ABC headquarters need more staff for faster preparation of guidelines and better monitoring of the ongoing projects. An increase of perhaps five or six persons would help, provided they were recruited very soon. 69. Currently ABC has not been following up provincial audit reports carefully, even when the auditors pointed out serious problems. It was disturbing to find little follow-up even at provincial levels. ABC headquar- ters has been requested to present a follow-up on the 1990 audit reports and a record of actions taken by the end of February 1992. In subsequent years, a follow-up should be prepared and forwarded to IDA by the end of October for all provincial audit reports which are due and generally available by June for the preceding year, which ends on December 31st. 70. With changing economic conditions in China and the expectation of greater autonomy for financial institutions, ongoing credit projects face probably more uncertainty than those already completed. It is, therefore, necessary that ABC performance be improved. Otherwise excessive volumes of credit could be used for unproductive purposes.  16 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. Part I of the project completion report prescribed by the Operations Evaluation Department of World Bank has been carefully reviewed and evaluated by the First Division of International Business Department of the Agricultural Bank of China. On the whole, the factual information contained in Part I are objective and accurate, and we agree to your main point on the problems and lessons raised in the contribution, but there are also some ideas in the Part I, from which we have different ideas and judgement. Here we would like to take the opportunity to offer our comments on some of the completed operations. 2. The Part I states that orange output increased by 20% in 1990 resulting in a 30% decrease in price. Actually the price drop was not so drastic in 1990 and 1991, there was a big increase in orange output in Fujian province, and the price went down a little during the harvesting seasons but later on remained at the same pace with that of 1989. It is impossible that the orange price in the city would drop by a big margin. 3. According to Part I, the project design was based on the demand of planned economy. This is unrealistic. The project coordinating committee was formed at the instigation of the World Bank. Its duty was to oversee the implementation of the project and to ensure coordinated planning and execution of project operations between ABC and the line agencies. The World Bank at appraisal confirmed the acceptability of the subprojects we proposed, such as fresh water fisheries, fruit development, poultry raising, livestock and agro- processing. One of the considerations in selection of these sub-project was potential market demand for the expected output. Most of the subprojects were selected by our division with the participation of WB missions, and approved with the considerations of the marketing economy. 4. The Part I states that ABC are not willing to follow the World Bank procurement guidelines and has avoided LIB procedures by splitting contracts. This is not true. The Agriculture Bank of China made some mistakes in practising the procurement guidelines made by the WB due to the misunderstanding of the procurement procedures, and lack of the training on the procurement concept. That doesn't mean that ABC violate the procurement rules deliberately. The WB paid close attention to equipment procurement, but didn't provide practical guidance. Project units wanted to follow procurement procedures, but didn't know where to begin. The World Bank provided training classes on appraisal and supervision, but neglected to give training on procurement, especially in inland procurement. World Bank once held a seminar but mainly focusing on LIB procurement, giving a very little talk on the media and small-sized domestic procurement which constitute the major procurement in our project. As a matter of fact, project units welcomed the LIB, and have already obtained satisfactory results from LIB practice through familiarizing and deep-understanding the procurement concept. Great advances have been made in the procurement activities.  17 5. Considering Zhangpu fruit juice plant as an example, limited international bidding was adopted for equipment procurement, in conformity with the procurement guidelines of the World Bank. We are confident that in near future more and more international bidding will be put into practice. 6. Part I states that ABC tended to use the long-term loan as short-term loan. There is some dispute with this statement. In reality ABC treasured the long-term loan from WB very much for its long-term investment. Some individual projects used WB loan as working capital mainly in the period between 1988-1990, resulted by the austerity situation in China after 1990, ABC clearly regulated the WB loan and recovered loans as long-term investment. Lessons Learned: 7. Project units concentrate their management efforts on the initial phase of preparation and implementation, and pay less attention to the activities at the later phases of the project which is unfavorable to the normal operations of World Bank financed projects. 8. Working capital should be provided under the project at the beginning of implementation, subloans were earmarked for capital construction and no arrangements were made for working capital. This resulted in shortage of funds of orchard management and processing industries. 9. Marketing analysis should be adequate in project selection, especially on some sectoral analysis. The marketing studies were mainly done in the field of domestic markets, neglecting the international markets, which led to some deficiencies in design in some agroprocessing projects. 10. The rapid implementation of the project resulted in inadequate appraisal and selection of unsuitable projects. 11. Less attention was given to the sensitivity analysis, some appraisal work was done with the optimistic estimation, neglecting the price-lowering and the cost-rising effects, many risk factors were not taken into the risk- studies, which resulted in the poor IRR of some subprojects. 12. The RC II now comes to the end. Though there were some problems and mistakes in the project implementation, ABC takes a satisfactory overview of the project implementation. The completed operations of the project not only provided the valuable long-term funds for ABC to develop the rural economy, but also introduced the most advanced World Bank loan management into ABC, which are even more important than the loan itself. ABC appreciate the result of the completed operations for having prepared ABC to join the main stream of international financial competition. 13. During the project implementation and evolution the Bank offered very effective help in project selection, appraisal, monitoring, training etc. Without Bank support the success of the implementation of the project could not be achieved. ABC is very satisfied with the good relationship between the Bank and ABC, relating to the understanding of each other, respect to each other, and very effective co-operation between each other.  18 PART III STATISTICAL INFORMATION Table 1 CHINA RURAL CREDIT PROJECT II PROJECT COMPLETION REPORT Related Bank Loans and/or Credit Loan/Credit Purpose Year of Status Comments Title Approval Rural Credit I Provision of medium and FY84 completed rated satisfactory long term loans in Guangxi by PCR mission for investment in aquaculture, orchards, agroprocessing, livestock and technical assistance. Rural Credit III Provision of mediun and FY88 Under mainly disbursed, long term Loans in six implementation project has a provinces of Guizhou, number of problems Sichuan, Yunnan, Anhui, Henan and Hubei for investment in tree crops, livestock, aquaculture and agroprocessing, and also for institutional deveLopment of ABC RuraL Credit IV Provision of mediun and FY91 Under Long term loans in nine impLementation provinces of Jilin, Liaoning, Shaanxi, Jiangxi, Guangdong, Inner Mongolia, Hunan, Guangxi, Hebei and Beijing Municipality for investment in tree crops, livestock, aquaculture and agroprocessing, and also for institutional development of ABC -- - -- - - -- - -- -- . -- -- . -- -- - -- - . . -- - . - -- -- - - . . . . - . . - -- -- - . - -- -  19 Table 2 CHINA RURAL CREDIT PROJECT 11 PROJECT COMPLETION REPORT Project Timetable Item Date Date Planned Actual Identification (PB) n/a April 1984 Preparation n/a October 1984 Appraisal Mission n/a April 1985 Negotiations n/a November 1985 Board Approval n/a 12/17/85 Signing Date 12/15/85 01/03/86 Effective Date 12/15/86 04/18/86 Closing Date 12/31/91 09/16/91 Completion Date 06/30/91 06/30/91 Source of Information: Project Supervision Timetable and the Project Files  20 CHINA TabLe 3 RURAL CREDIT PROJECT II PROJECT COMPLETION REPORT .... . .. ............. Loan/Credit Disbursements (USS miLlion) Bank FiscaL Year 1986 1987 1988 1989 1990 1991 1992 Semester - 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st Appraisal Estimate 0.0 0.9 5.4 13.5 23.4 35.1 48.6 62.1 74.7 84.6 90.0 90.0 Actual 8.0 12.3 29.8 50.7 71.1 89.7 97.0 106.1 107.8 107.8 108.3 108.9 Actual as X of Estimate n/a 1366.7 551.9 375.6 303.8 255.6 199.6 170.9 144.3 127.4 120.3 121.0 Date of Final Disbursement 9/14/91  1;Orl;;2;8wOpl4O4s 21 Table 4 CHINA RURAL CREDIT PROJECT It PROJECT COMPLETION REPORT Project ImpLementation Appraisal Actual Indicators Unit Estimate Orange ha 10,500 23,400 Plantations Longan ha n/a 2,750 Litchi ha n/a 2,080 Pomelo ha n/a 109 Grape ha n/a 22 Peach/Plin ha n/a 85 Red dates ha n/a 431 Other fruit a/ ha n/a 3,240 Subtotal ha 2,500 8,717 Fresh water ha 9,000 17,500 Fishery Salt water ha 3,300 7,600 ponds Marine ha 2,500 b/ 177 c/ fisheries Livestock y million 56 31 Agroprocessing y mitlion 130 454 a/ includes banana, bayberry, pomegranate, persimmon, Loquat etc. b/ oyster, clam and other shellfish culture c/ only sea breams and groupers were cultivated in 117 net-cages with a total production of 826 tons by 1991  22 CHINA Table 5 RURAL CREDIT PROJECT 11 PROJECT COMPLETION REPORT Project Cost Appraisal Actual Actual Expenditure X Oistribution Estimate Fujian Hunan Total ActuaL Appraised a/ b/ ------------------ (Y million) ------------------ AquacuLture Freshwater fish 167.1 67.5 88.1 155.6 12.9 23.2 Marine products 103.9 237.9 237.9 19.8 14.4 Subtotal 271.0 305.4 88.1 393.5 32.7 37.7 Fruit Orange 184.2 99.5 154.8 254.3 21.1 25.6 Other 64.2 56.8 6.7 63.5 5.3 8.9 Subtotal 248.4 156.3 161.5 317.8 26.4 34.5 Agroprocessing Coldstore 35.6 47.5 8.8 56.3 4.7 4.9 Fruit/Food proc. 33.3 - 79.5 79.5 6.6 4.6 Feed miLLs 19.8 33.5 9.6 43.1 3.6 2.8 Other c/ 41.8 47.0 227.4 274.4 22.8 5.8 SubtotaL 130.5 128.0 325.3 453.3 37.7 18.1 Livestock Poultry 38.6 11.9 17.4 29.3 2.4 5.4 Other 17.4 1.9 1.9 0.2 2.4 SubtotaL 56.0 11.9 19.3 31.2 2.6 7.8 Technical Assist. 13.4 4.1 3.8 7.9 0.7 1.9 Total 719.3 605.7 598.0 1203.7 100.0 100.0 a/ Appraisal estimate in SAR bl Actual costs at completion c/ IncLudes wide variety of agroindustries  23 TabLe 6 CHINA RURAL CREDIT PROJECT 11 PROJECT COMPLETION REPORT Project Financing ~~~~~~~.... ..... .. .... ..... Labor Construct. Equipment Land Others Total Source of Fund Material Exprop. ActuaL ---------------------- (Y million) ---------------------- IDA Fujian 27.5 79.3 44.6 2.7 49.7 203.8 Hunan 3.0 68.3 72.3 1.3 58.3 203.2 Subtotal 30.5 147.6 116.9 4.0 108.0 407.0 a/ ABC Fujian 27.5 79.3 44.6 2.7 48.1 202.2 Hunan 3.0 72.8 75.8 1.3 44.7 197.6 Subtotal 30.5 152.1 120.4 4.0 92.8 399.8 SELF RAISED Cash/Kind Fujian 18.1 18.9 12.2 2.0 23.4 74.6 Hunan 11.8 22.2 12.4 1.7 24.9 73.0 Subtotal 29.9 41.1 24.6 3.7 48.3 147.6 LABOR SERVICES Fujian 45.7 45.7 Hunan 79.6 79.6 Subtotal 125.3 125.3 INVEST. BY GOV'T/FIN Fujian 0.4 6.0 4.5 0.1 3.4 14.4 Hunan 14.6 6.0 0.9 13.2 34.7 Subtotal 0.4 20.6 10.5 1.0 16.6 49.1 OTHER LOCAL SOURCES Fujian 4.8 4.9 15.1 0.1 33.7 58.6 Hunan 2.4 3.1 0.2 9.5 15.2 Subtotal 4.8 7.3 18.2 0.3 43.2 73.8 TOTAL SELF RAISED Fujian 69.0 29.8 31.8 2.2 60.5 193.3 Hunan 91.4 39.2 21.5 2.8 47.6 202.5 Subtotal 160.4 69.0 53.3 5.0 108.1 395.8 TOTALS Fujian 124.0 188.4 121.0 7.6 158.3 599.3 Hunan 97.4 180.3 169.6 5.4 150.6 603.3 PROJECT TOTAL 221.4 368.7 290.6 13.0 308.9 1202.6 . . ............. ....................... ....................................................... a/ equivalent to SOR 84 million  24 TabLe 7 CHINA RURAL CREDIT PROJECT II ....................... PROJECT COMPLETION REPORT ....... ..... _ ....... Direct Benefits Appraisal Estimated at Estimated at Indicators Estimate Nov. 1991 FutL DeveLopment Households Benefited 16,000 170,000 170,000 Jobs Created 61,000 184,000 184,000 Incremental Annual Incmo CY) 1,000 - 1,500 2,000 > 2,000 per Household Incremental TotaL Profit 378.0 a\ 364.0 b\ 223.4 c\ (Y miLLion) a\ Estimated incrementaL output vaLue, no incremental profit was estimated b\ Figure avaiLabLe for Fujian onLy c\ Figure availabLe for Hunan only Note: Estimated by ABC C:\pcr\tabte7.wkl  25 CHINA Table 8 RURAL CREDIT PROJECT II ..... .......... .. .. PROJECT COMPLETION REPORT Economic and Financial Rates of Return ..............-- - - -- - ..................... . . Economic Rate of Return Financial Rate of Return Appraisal Estimate at Appraisal Estimate at Indicators Estimate a/ Completion b/ Estimate a/ Completion b/