China - Coastal Lands Development Project

Docunent of The World Bank FOR OFFICLAL USE ONLY Report No. 14549 IMPLEMENTATION COMPLETION REPORT CHINA COASTAL LANDS DEVELOPMENT PROJECT (LOAN 2924/CREDIT 1887-CHA) MAY 19, 1995 Agriculture Operations Division China and Mongolia Department East Asia and Pacific Regional Office 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 Current Unit: Yuan $1.00 = Yuan 3.72 (1987-89) $1.00 = Yuan 4.72 (1990) $1.00 = Yuan 5.25 (1991) $1.00 = Yuan 5.42 (1992) $1.00 = Yuan 5.8 (1993) $1.00 = Yuan 8.7 (1994) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China ADP - Agricultural Development Project BAP - Bureau of Aquatic Products BOF - Bureau of Finance DC - Development Corporation JAAS - Jiangsu Academy of Agricultural Sciences FTC - Foreign Trade Corporation MOA - Ministry of Agriculture MOF - Ministry of Finance PMO - Project Management Office (Provincial level) SPC - State Planning Commission  FOR OFFICIAL USE ONLY CONTENTS Preface ...................................... Evaluation Summary .................................. ii Part I. Project Implementation Assessment A. Project Objectives ........................... 1 B. Achievement of Objectives ...................... 3 C. Major Factors Affecting the Project ................ 11 D. Project Sustainability ......................... 14 E. Bank Performance ........................... 17 F. Borrower Performance ........................ 17 G. Assessment of Outcome ........................ 18 H. Future Operation ............................ 19 I. Key Lessons Learned ......................... 20 Part II. Statistical Tables 1. Summary of Assessments ....................... 22 2. Related Bank Loans/Credits ..................... 24 3. Project Timetable ........................... 24 4. Loan/Credit Disbursements: Cumulative Estimated and Actual 25 5. Key Indicators for Project Implementation .... ........ 26 6. Key Indicators for Project Operation ..... ........... 28 7. Studies Included in Project ........ .............. 29 8A. Project Costs .............................. 30 8B. Project Financing . ........................... 31 9. Economic Costs and Benefits .......... .. . .. .. . . . 32 10. Status of Legal Covenants ............ .. ... .. .. . 34 11. Compliance with Operational Manual Statements ..... . . . 35 12. Bank Resources: Staff Inputs .......... .. . .. .. . . . 35 13. Bank Resources: Missions ............ .. ... .. .. . 36 Appendices: A. Mission's Aide-Memoire ........ .. . . . . . . . . .. . 38 B. Borrower Contribution to the ICR ....... . . . . . . . . . 45 Maps This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwisc be disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT CHINA COASTAL LANDS DEVELOPMENT PROJECT (LOAN/CREDIT NO. 2924/1887-CHA) Preface This is the Implementation Completion Report (ICR) for the Coastal Lands Development Project in China, for which a loan in the amount of $40 million and a credit in the amount of SDR 44 million were approved on March 29, 1988 and made effective on December 9, 1988. Part A (Jiangsu) of the loan/credit was closed on June 30, 1993 and Part B (Zhejiang) on June 30, 1994. Final disbursements took place on April 23, 1993 and May 23, 1994, respectively, at which times balances of $4.153 million and $3.238 million were canceled. Total disbursements amounted to $90.04 million. The ICR was prepared by a team comprising N.K. Hill (Task Manager), J. Voegele (Agriculture Economist), R. Zweig (Aquaculturist) and consultants for the China/Mongolia Agriculture Operations Division of the East Asia and Pacific Region and reviewed by Messrs. Joseph Goldberg (EA2AG Division Chief) and Yo Kimura (EA2 Project Advisor). The borrower provided comments that are included as an Appendix to the ICR (attached). Preparation of this ICR was begun during the Bank's completion mission, October 23-November 7, 1994. It is based on material in the project file. The borrower contributed to preparation of the ICR by contributing views reflected in the mission's aide- memoire, preparing its own evaluation of the project's execution and initial preparation, and commenting on the draft ICR.   - 11 - IMPLEMENTATION COMPLETION REPORT CHINA COASTAL LANDS DEVELOPMENT PROJECT (Loan 2924/Credit 1887-CHA) Evaluation Summary Project Objectives 1. The primary objective of the project was to assist the Jiangsu and Zhejiang provincial governments to develop coastal lands for culture fisheries. The project was one of the first provincial agricultural development projects that placed responsibility for project design, implementation and debt service with the provincial governments. The major objectives of the provincial governments related to increasing production and rural incomes over as wide a geographic basis as possible, and the scope of the project included, in addition to aquatic production, components to extend benefits farther inland and involving additional farm families (para. 1). Physical objectives were established to include, in Jiangsu, construction or improvement of production facilities for shrimp, eel and laver on about 8,655 ha; establishment or improvement of some 19,700 ha of orchards and related agroprocessing facilities; development of small livestock raising and related agroprocessing; an agriculture technology component that included eight innovative production and processing subprojects; and in Zhejiang, shrimp and eel production over an area of 1,650 ha (para. 7). 2. The project also incorporated an institution building objective-promotion of Development Corporations (DCs) for handling both implementation and onlending activities, an initiative that was never executed. There were implicit objectives of breaking the tradition of government grants for development by requiring repayment from beneficiaries and imposing interest rates equal to the Agricultural Bank of China rates. Implementation Experience and Results 3. The project assisted the two provincial governments develop coastal lands for culture fisheries and, in terms of physical construction, most of the objectives were achieved. Implementation of the mariculture component proceeded relatively smoothly, and the component yielded high returns in its early years. However, in both 1993 and 1994, shrimp disease, likely caused by a virus, impacted the project (and most of the Chinese coast) by substantially reducing yields (paras. 29-30). The outbreak affected the livelihood of thousands of shrimp farmers and brought the entire vertically-integrated industry including feedmills, cold stores, processing and marketing facilities to a standstill. Despite national and international efforts to analyze this violent disease outbreak, there are no conclusive results. Possible contributing factors include virtually every aspect of shrimp production, i.e., overly high stocking densities, generally deteriorating water quality, changes in pH, salinity, dissolved oxygen, inappropriate feed and feed  - iii - management, infected broodstock, etc. Although it is believed that the disease is viral, it is unclear how it is transmitted and what role environmental factors play in the epidemic. It is generally recognized that long-term sustainability has been sacrificed worldwide for short-term profitability in shrimp production (para. 36). A major effort will be required to rehabilitate the Chinese shrimp industry and to replace the current unsustainable practices. 4. Eel production has fluctuated throughout project implementation largely due to market forces (para. 31). Eel prices have not increased commensurate with the cost of eel fry, severely curtailing financial viability in the two provinces, and only the most efficient companies appear to operate at a profit. The weak financial performance of market eel production led to a shift to elver (juvenile) production in the latter years of project development. Despite improved profitability at first, however, the profit margin has been narrowing again due to the rapidly escalating cost of wild, capture seed (glass) eels. Continuation of this trend may further threaten the financial viability of eel and elver farming in the project area. The Bank should be extremely cautious in financing operations that rely on wild catches for the supply of young, for too little is known about the sustainability of this system to assess the long-term economic and ecological viability. 5. Laver production (para. 16) turned out to be the most profitable component among the aquaculture investments, but even this component has started to see disease problems, linked to density of production. In light of these recent problems, the Jiangsu provincial government should quickly formulate measures to control the density of laver farming and concurrently to determine specific causal factors affecting the health and growth of the laver. 6. The project supported livestock production (para. 18) to utilize underemployed family labor, crop residues, and naturally occurring grasses. Implementation and production objectives were substantially met or exceeded for all subprojects except mink, which was abandoned after collapse of the international fur market in 1990. The project also provided for establishment or expansion of related livestock agroindustries, which only partially met the physical and financial objectives. 7. The project helped to provide funds and inputs for developing fruit orchards, nut groves and grape vineyards in the near-coastal regions, and implementation and production objectives were substantially met or exceeded (para. 22). Production of the project output is commercially and technically sustainable. 8. Designed to test innovative technology, the agriculture technology component was not vigorously pursued and only partially achieved its objectives; one subproject achieved most of its objectives, and another of the subprojects achieved good commercial viability, but only after changing its production output. The remaining six were either dropped or commercially unsuccessful (para. 25). 9. The total project cost was Y 801.68 million ($183.52 million) compared to the appraisal estimate of Y 887.67 million ($217.00 million)-indicating cost underruns of  - iv - 10 percent in Yuan terms or 15 percent in Dollar terms. There were no significant implementation delays (paras. 27-28). 10. The project was designed in the context of a planned economy, and adoption of market economy practices and liberalization of production have provided both benefits and difficulties for implementation and operation. Government entities participating in the project have generally followed the widespread practice of separating their commercial operations from their regulatory functions and operating the enterprises in the form of joint stock or other limited-liability entities. In practice, this distinction often does not affect either how decisions are taken or who is responsible for them. Economic reforms have shifted the role of government entities from direct procurement to market facilitation. Also, producers may now choose whether to sell their output domestically or to the Foreign Trade Corporation; more aquatic products are going directly into the domestic market, with most of these transactions handled by local middlemen in small volumes. 11. Bank performance was generally satisfactory (paras. 45-46). Supervision missions were undertaken about once a year, alternately to each province. Borrower performance was generally satisfactory, with one exception-compliance with covenants in Jiangsu. The practice, in provincial agriculture development projects, of "allocating" all the Bank/IDA funds anticipated under the project to lower-level administrative units created problems in Jiangsu throughout the implementation period, generated substantial opposition to ICB procurement, and led all levels of government to adopt a sense of exclusive ownership over the funds. 12. The project's likely outcome cannot be reliably assessed in the light of the uncertainties facing the two major project components, shrimp and eel production, which account for two thirds of the total project cost and which are generating marginal or negative financial and economic benefits at present (para. 50). The shrimp component was based on production practices that, while generating high profit levels in the early years, have proved to be unsustainable over the long term, and recovery of the industry will most likely be based on a major rehabilitation effort. The eel component, also dependent on a limited natural resource (fry caught in the wild), faces economic and ecological uncertainties, and the long-term sustainability is now questionable. The outcome of the laver component has been and will likely continue to be highly satisfactory, provided production density is reduced, either voluntarily by the producers or by government restriction. The outcome of the Animal Husbandry and Agriculture components' production activities has been satisfactory and will likely continue, while that of the agroprocessing subprojects has been mixed, with successes generally related to high degrees of management autonomy and responsiveness to market conditions. Sulmmary of Findings, Future Operations, and Key Lessons Learned 13. Since project initiation, there has been a series of shrimp epidemic catastrophes in all major producing countries worldwide, which has changed the global outlook on investment in shrimp culture in general. The disease incidence in 1993 and 1994 makes it clear that China's shrimp industry will have to go through a major  readjustment (para. 51). Concurrent efforts will likely be required to salvage the industry-determination of the etiology of the shrimp disease and development of measures for disease control, and continuation of the shift to lower production intensity and polyculture with other species. Due to the uncertainty of the viability of eel farming in the project area, government support should be directed at improving the efficiency of existing facilities rather than further expansion. 14. Other lessons (para. 58) in the agroprocessing sector emphasize the importance of greater attention to commercial aspects of feasibility studies, direct contact between management and markets, and management responsibilities and internal organization conducive to motivation of both managers and workers.  IMPLEMENTATION COMPLETION REPORT CHINA COASTAL LANDS DEVELOPMENT PROJECT (Loan 2924/Credit 1887-CHA) PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. The primary objective of the project was to assist the Jiangsu and Zhejiang Provincial governments to develop coastal lowlands, mudflats and shoals for culture fisheries. The State Planning Commission (SPC) had selected these provincial project proposals for Bank consideration over an earlier Ministry of Agriculture proposal to carry out a mariculture development project in a number of coastal provinces, to be implemented along the lines of its Freshwater Fisheries project (Cr. 1689-CHA). This decision reflected government's aim to decentralize its development activities. Selection of the two provinces also reflected China's strategy in the mid-1980s to let coastal provinces "get rich quick" or as stated by Premier Zhao Ziyang in 1988, "... the coastal areas have more advantages, and if we do not take the chance to speed up economic development in the coastal areas, it will be a great pity and also a big loss." Among the advantages, in the agricultural sector, were that Jiangsu and Zhejiang were ideally situated to develop their coastal lands for intensive fish culture: they had a combined shoreline of more than 3,000 km and natural resources of eel fry and brood shrimp; water quality was good; and considerable local experience had been gained in fishery technology, particularly in shrimp production techniques, and in coastal land development schemes, which had focused on expansion of culture fisheries for both marine and freshwater aquatic products. 2. China was, at the time, engaged in a major expansion effort in shrimp production that had begun in the early 1980s, after the successful mastery of hatchery technology for the Chinese shrimp (Penaeus Chinensis). All coastal provinces began to develop tidal areas for shrimp production; this was done with the encouragement, but largely without the involvement, of the central government-as far as could be determined, no national goals were set for area or production. Coastal counties and townships, sometimes with financial assistance from provincial governments, effectively turned the coastline of China into the largest area of shrimp cultivation in the world, peaking at an estimated 162,960 ha in 1988, and eventually placing China in the position of number one producer (215,400 t in 1992)1/ with export earnings of $500 million, mainly to Japan and the United States. 3. The project was one of the first in a series of provincial agricultural development projects (ADPs), which were intended, as part of the government's 1/ Production data and area from Institute of Hydrobiology, Wuhan to R. Zweig (ASTEN) in 1994.  - 2 - decentralization efforts, to place major responsibility for project design, implementation and debt service with the provincial governments. Usually initiated under the auspices of the provincial planning commission, there was a tendency to spread the benefits over as wide a geographic area as possible and to incorporate as many different types of activities as could reasonably be linked to the major project theme. The major objectives of the provincial governments were clearly related to increasing production and rural incomes. While Zhejiang limited their coastal development efforts under the project to shrimp and eel production, Jiangsu expanded the scope of their part of the project to include, in addition to shrimp, eel and laver, components for animal husbandry and agriculture, each with its related processing capability, to provide employment opportunities for farm families and to increase rural incomes. These additional components, though, added to the complexity of the project and expanded project administration and implementation responsibilities to include not only the Bureaus of Aquatic Products (BAP), but additional line agencies, namely the Jiangsu Agriculture and Animal Husbandry Bureaus and the Science and Technology Commission. 4. At the Bank's instigation, the project also incorporated an institution building objective-promotion of Development Corporations (DCs) for handling both implementation and onlending activities. Utilization of these entities was expected to separate government's normal administrative and regulatory functions from developmental and commercial activities and to bring the development corporations into the commercial arena. This was clearly the Bank's objectivi, shared by neither the provincial governments nor the central government, as the concept of a "socialist market economy" with separation of ownership and management had yet to be introduced when the project was appraised in 1986. Concern with financial control, mainly with the DCs' ability to effect repayment, led to a Ministry of Finance directive to provincial governments, soon after project effectiveness, to onlend Bank/IDA funds through the finance bureau hierarchy at the different levels-province, city, county, and township. 5. There was also the implicit objective of breaking the tradition of govemment grants for development by requiring repayment from beneficiaries, with interest rates equal to the Agricultural Bank of China (ABC) rate for similar activities. While provincial authorities wholeheartedly adopted the beneficiary repayment objective, they saw little reason for having interest rates comparable to ABC's; in fact, they regarded the project to be the province's development effort and, as such, saw no rationale for imposing higher interest rates than MOF imposed on them. 6. Though not explicitly stated, there was also a Bank Group objective of reducing the isolation from the world market imposed by the Foreign Trade Corporations (FTCs) on shrimp and eel producers by including in the legal documents provision for the DCs to engage the FTCs as sales agents on their behalf. This measure was seen as a step toward helping producers react to market opportunities and to establish contacts with foreign buyers that would lead to "one of the most important, most effective and cheapest sources of technology transfer and marketing know-how."  - 3 - 7. In terms of physical objectives, the project had the following components. In Jiangsu, it was to include construction or improvement of production facilities for shrimp, eel and laver on about 8,655 ha; establishment or improvement of some 19,700 ha of orchards and related agroprocessing facilities; development of small livestock (goats, rabbits, mink and duck) raising in about 90 villages and related agroprocessing; and an agriculture technology component that included eight innovative production and processing subprojects. In Zhejiang, the project concentrated on providing shrimp and eel production over an area of 1,650 ha, a construction task of a smaller scope than in Jiangsu, but more technically challenging because it required sea dike construction and closure before shrimp ponds could be built. 8. Production objectives were established in terms of yields for each of the mariculture and horticultural subprojects and annual production for the animal husbandry subprojects. Financial objectives were set in terms of expected financial rates of return (FRRs) and economic rates of return (ERRs), calculated on the basis of price and output projections. No specific environmental objectives were set, other than that project activities would conform to appropriate guidelines on environmental control issued by the provincial governments and acceptable to the Bank Group. B. ACHEVEMENT OF OBJECTIVES 9. The project did assist the Jiangsu and Zhejiang Provincial governments develop coastal lowlands, mudflats and shoals for culture fisheries and in terms of physical construction, most of the objectives were achieved. Other components also achieved their physical construction objectives. However, during implementation, some of the physical resources that were seen as the provinces' natural advantages for aquaculture, i.e., abundance of eel fry and good water quality, proved to be unreliable and production fell far short of the objective for shrimp and eel. Additional employment opportunities were created and rural incomes increased during the implementation period. 10. The main institutional innovation-development corporations (DCs)-was abandoned; in fact, DCs were prohibited by the Ministry of Finance, and the legal agreements were amended to reflect direct lending through finance bureaus and the diminished role of the DCs. DCs, in many instances, became the end-users of the project funds and contracted with farmers for operation of aquaculture facilities. Through the use of contract fees, the DCs have passed on a large part of the financial risk of production to shrimp farmers, though with the severe impact of shrimp disease by 1994, many DCs had to reduce their contract fees. Interest rates for repayment were generally set at fixed rates and are currently lower than ABC rates. Project facilities generally adhere to local and environmental guidelines; a notable exception is the Dongtai Tannery. Enterprises know their environmental risks and have installed appropriate infrastructure; however, there is a tendency not to operate these facilities, especially if they require the purchase of materials for regular operations. Greater attention has been paid to the environmental concerns related to shrimp production (water quality, dissolved oxygen, etc.) as attention focuses on the etiology of shrimp disease.  - 4 - 11. Shrimp. In Jiangsu, shrimp culture development involved construction of 2,095 ha of new ponds, improvement of 4,634 ha of existing ponds, construction of shrimp hatcheries covering 12,544 m2 and 12 cold stores for a total investment of Y 223.83 million. This physical development represented 53 percent of new shrimp ponds, 108 percent of improved ponds, 12 out of 14 cold stores, 132 percent of the hatchery area, and 70 percent of the total investment estimated during appraisal (see Table 5). Zhejiang constructed and rehabilitated 1,729 ha of shrimp ponds, 4 feedmills, 4 cold stores and established 3,000 m2 of hatchery area, with a total investment of Y 197.23 million, thus exceeding the SAR estimate substantially (153 percent). Physical implementation proceeded relatively smoothly, shrimp farms were managed at a satisfactory level, and the component yielded high returns in its early years. However, shrimp yields never fully reached SAR estimates. In Jiangsu, annual shrimp production from project ponds increased from 2,100 t (average 1.2 t/ha) in 1988 to 9,200 t (1.4 t/ha) in 1992, after which significant early mortality (see paras. 29, 30, 36, 51-52 on shrimp disease) resulted in substantially reduced yields of 0.5 t/ha in 1993. Preliminary data for 1994 are showing a further decrease to about 0.1 t/ha. New ponds in Zhejiang reached a maximum output of 1.2 t/ha in 1992, declining to 0.49 t/ha in 1993. In 1992 the rehabilitated ponds were slightly ahead of the SAR target (0.9 t/ha) with an incremental yield of 0.92 t/ha, but falling dramatically to a negative incremental yield in 1993. Overall, the SAR shrimp production estimate of 1.95 t/halyr was considerably higher than the best yields achieved during implementation. 12. Financial and economic rates of return were recalculated for all subprojects with a sufficient data base. Since a somewhat reliable prediction of future shrimp yields is difficult at present, three scenarios were calculated for each subproject. The first scenario assumes that shrimp yields will eventually recover, though to only about 50 percent of pre-epidemic levels; similar trends were experienced in other countries affected by shrimp disease. In the second scenario, it is assumed that shrimp yields will remain low and farmers mainly rely on polyculture of shrimp/clam/crab and shellfish. In the third scenario, a break-even yield is calculated at which the FRR/ERR would become greater than 12 percent. With shrimp yields recovering to 50 percent of previous levels (0.6 tlha), FRRs and ERRs remain generally below 12 percent, unless farmers introduce polyculture in their ponds. With polyculture of crabs and clams, recalculated rates of return exceed 12 percent, although price projections for crabs and clams are based on the current market situation, which is unlikely to be sustainable. In fact, it is very likely that prices will fall drastically as soon as production is expanded to a larger area. In order to achieve long-term financial viability therefore, shrimp yields would have to recover to at least 1.0 t/ha. ERRs exceed 12 percent at current world market prices if shrimp yields are assumed to exceed about 0.8 t/ha in the long run. 13. Eel. In Jiangsu, eel culture included 13.6 ha of covered rearing tanks (156 percent of the appraised estimate of 8.7 ha) while the proposed open culture tanks were canceled (appraisal estimate was 32.7 ha), and one eel feed mill was established as planned at appraisal for a total investment of Y 76.1 million or 118 percent of the appraisal estimate. Investments in Zhejiang remained, at Y 34.44 million (44 percent), well below the SAR estimate, largely due to high operating costs and marketing problems during the  - 5 - late 1980s. Eel yields have fluctuated throughout project implementation, largely due to market forces. In Jiangsu, yields peaked in 1991 at 851 t (73 t/ha) but dropped to 377 t (28 t/ha) in 1993. This drop in production was supplemented in part by the rearing and sale of elvers rising from 6.5 million in 1991 to 26.32 million in 1993, resulting in the reported conversion of estimated financial losses of Y 2 million in 1991 to a profit of Y 32 million in 1993. Eel yields in Zhejiang were even lower, peaking at 19.5 t/ha for indoor systems and 4.3 t/ha for outdoor systems. The SAR projections were 50 t/halyr for the indoor ponds and 11.5 t/halyr for outdoor ponds. 14. Apart from yield levels, the financial viability of eel farming is determined mainly by the price of eel fry, which accounts for more than 50 percent of operational costs at present, and the export price determined by Japanese market demand. While the cost of eel fry has increased by a factor of 11 since 1988, eel prices have only tripled during the same period. This has severely curtailed the viability of eel farming in the two project provinces. Only the most efficient companies appear to operate at a profit margin. Among the subprojects supported by the Bank, about half seem to be able to survive the increasing competition in the long run. Recalculated rates of return, however, remain below 12 percent because facilities are operating well below capacity, profit margins are narrow and most companies have experienced several years of negative returns during the early years of production. 15. Laver. In Jiangsu, laver culture was expanded to an area of 1,107 ha or more than 400 percent of the appraisal estimate of 273 ha. The procurement of 34 sets of laver processing equipment imported from Japan exceeded the appraisal estimate by 15 sets, and construction of about 9,100 m2 of hatchery buildings amounted to 250 percent of the appraisal estimate. The total investment cost for laver culture development was Y 75.5 million or 172 percent of the appraisal estimate. Total production generally increased throughout project implementation from about 2,700 t in 1989 to 10,500 t in 1993, although per unit area production declined from 14 tlha/yr to 10 t/halyr over the same time period as compared to the SAR production target of 15 t/halyr. Although treated with considerable skepticism during appraisal, laver production turned out to be the most profitable component among the aquaculture investments (see also Box 1). 16. Laver culture is highly profitable, to the extent that the Chinese company owners refer to the laver processing machines as money printing machines. Market demand has been steadily increasing, and with improving quality of the dried laver sheets produced, prices have continued to go up. Recalculated rates of return are well above 20 percent in the financial analysis and even higher if economic prices are applied. 17. The total cost for aquaculture development was Y 607.04 million or 89 percent of SAR estimate of Y 685.75 million (base cost plus physical and price contingencies), with shrimp culture representing about 60 percent, and eel and laver culture about 20 percent each of the actual investment as compared to the appraisal proportion of 80 percent for shrimp, 16 percent for eel, and 4 percent for laver. As is apparent from the above, significant changes were made in the scale of the individual subcomponents during project implementation. These adjustments were made largely due to changes in  Box 1: JIANGSU: SEAWEED PRODUCTION IN LANYuNGANG CiTY- A SuccEss STORY Seaweed-or laver-production was virtually unknown in this northernmost municipality in Jiangsu province until the mid-1980s, when steadily increasing demand for laver sheets from Japan promised a lucrative market. In Japan, dried and pressed into sheets, laver is used to prepare sushi, a rice dish wrapped in seaweed. However, the technology required to produce the desired export quality was not available in China and foreign exchange to import equipment was scarce. In 1987, when the Municipal Bureau of Aquatic Products applied for a $1 million subloan under the project to establish a small laver industry in the city's harbor, both Bank staff and the local officials had their reservations about the feasibility and viability of such an undertaking. But eventually they concluded that the risks involved were manageable and decided to import processing equipment and establish a production area of about 130 ha along the city's shore. Today, laver production has expanded to nearly 2,500 ha involving 7,000 farm households and supplying a processing industry with an annual turnover exceeding $20 million. The original company has continuously expanded and remains the innovator in new technologies and marketing in the area. It employs about 50 staff and produces not only high-quality laver sheets exported at a premium price, but also produces and exports dehydrated vegetables and various other products. The company's foreign exchange earnings exceed $3 million per year with about half the profit derived from laver export. Many of the staff trained during the early years have left the company and have established their own laver production and processing companies in the area. Today about 50 companies owning some 73 processing lines are competing for raw material and markets. Initially, the company produced the necessary equipment for laver production (nets, ropes, small boats, etc.) and sold or leased it to the farmers. In return, farmers had to sell their fresh laver to the company. After a few years of profitable operation, though, most farmers had repaid the initial investment and became more independent. Other companies, villages and cooperatives started laver production and processing and now the sector displays a diversified structure. Today, an independent household cultures on average 0.4 ha of laver, contracted from the municipal government for an annual fee of about $20. Typically, the initial investment of $1,800 can be recovered in the first season, and similar net profits can be expected in the following 2 to 4 years. Ironically, although almost all the laver is eventually consumed in Japan, none of it is exported directly. Japan does not permit laver imports from China, thus Hong Kong-based companies get involved to correct these market distortions. the market situation, financial efficiency of the various technologies, and, to some extent, the degree of risk associated with the various subcomponents. 18. Animal Husbandry. The project supported livestock production, mainly as a sideline activity for rural households, to utilize underemployed family labor, crop residues, and naturally occurring grasses. The project was to provide improved breeding stock (both domestic and imported), on-farm infrastructure, veterinary facilities and breeding stations for promotion of Artificial Insemination (AI), and animal collection stations for an expected annual incremental output of 1.09 million goats, 1.02 million rabbits, 129,300 mink, and 460,000 ducks. Implementation and production objectives  - 7 - were substantially met or exceeded for all subprojects except mink, which was abandoned after collapse of the international fur market in 1990. Mink cages were reported to have been used for raising doves; however, this practice did not spread throughout the project area, probably because of limited market opportunity. After a slow start, farmers appear to have adopted Al for goats and rabbits. With the introduction of the market economy and the cessation of government procurement for state-owned enterprises' (SOEs') raw material supplies, designs of collection stations were adjusted to set up specialized livestock trading centers, which have been very successful. Despite the fact that no imported breeding stock was ever procured, local breeds of Shaneng goats (from Shaanxi) and Angora breeding rabbit stock from a Jiangsu-Germany cooperative breeding farm appear to have given acceptable results. Locally produced Cherry Valley duck parent stock was introduced, but when the market for this type of duck declined, project authorities substituted a local breed, which contributed to processing difficulties (the automatic processing line procured for the duck slaughter damaged the skin surface of larger ducks and left feathers intact on the smaller ones) (Box 2). FRRs and ERRs were calculated for each category of production activity, using the production costs and output prices provided by the Project Management Office (PMO); generally, the FRRs and ERRs are substantially higher than calculated at appraisal, ranging from 26 percent to > 100 percent (FRRs) and 56 to > 100 percent (ERRs). 19. In addition to the livestock production activities, the project included construction or expansion of and equipment for six agroindustries (Yancheng down factory, Dafeng fur processing, Yancheng meat canning factory, Dongtai tannery, Dafeng goat slaughterhouse; and Sheyang duck processing/down factory); three feedmills (Sheyang, Xiangshui and Dongtai) and a training center (Yancheng). Five out of the six agroprocessing facilities (all except the goat slaughterhouse) were constructed as planned at appraisal. Further construction of the goat slaughterhouse ceased after constructing a cold store, and the subproject remained at this level. Also, the Yancheng meat canning was never put into operation and the Sheyang duck processing factory was closed in 1993. The Yancheng down factory, Dafeng fur processing and Dongtai tannery are currently in operation. Of the three feedmills, two were constructed and put into operation; only the mink feedmill was dropped, along with the mink production subproject. In summary, the component as a whole has only partially met the physical and financial objectives; however, the three agroprocessing projects in operation have FRRs at or above 12 percent, although the one financial analysis carried out for a feed mill indicates a low FRR.  - 8 - Box 2: JIANGsu: SHEYANG DUCK PACKING AND DowN PRoCEssING- A SToRY OF OuiEcTnvEs NOT AcI.VFED The plant was designed to process 2 million ducks per year into 3,100 t of meat and 350 t of feathers, yielding 30 t of down. Costs were projected to be Y 6.45 million, but were actually Y 10.285 million. At the time of appraisal, the price of live ducks was Y 2.4/kg and duck meat Y 5.0/kg, allowing a margin of Y 4.4/duck to cover processing and profit. The company stared operation with purchase contracts, but did not offer growers inputs or technical support. By June 1992, the price of live duck had risen to Y 4.3/kg and duck meat stayed at Y 5/kg, with a margin of -Y 2.2/duck. After one year of trial nuning, the plant ceased duck processing in July 1992 and down processing in June 1993. Other duck packing plants ceased operations during this period as well. Reasons for the closures include a shift in balance of consumption among poultry types, from duck to chicken, with much faster growth in chicken against fairly stagnant duck consumption levels. There has also been an increase in the small shop and individual sales of birds, at the expense of the large public sector packing operations. The product of this factory was heterogenous in size and meatiness, and it had significant skin blemishes, blood clots and pin feathers because the automated line was unable to perform well on such a wide variety of bird sizes and conformations. The problem of nonuniform live ducks supplied to the plant was recognized early in the development stage. The original design was for an imported, uniform meat breed, and the equipment was related to that choice. Local officials claimed that there was no market for the imported bird and went with the local breed instead. This changed the configuration to a leaner, small individual, but this could have been accommodated by adjustments to the equipment. The equipment supplier did in fact send technicians to the site after start-up to adjust the lines to get the best performance on the typical local duck conformation. However, the added problem was the wide range of age and size in the small lots of live birds purchased from many small growers. Although the project financed production capacity of 500,000 birds per year in the Yancheng area, there appears to be no large-scale production base supplying this plant. Smaller growers have done better by selling their birds directly into the fresh household or restaurant market, so the plant was stuck with a very heterogenous bird population and the need to buy birds in small lots at variable but generally higher prices. In the plant, processing efficiency was low, skin and limb damage considerable, and feather removal was incomplete. The company now plans to establish its own production base, to develop new products, and to increase marketing activities. Lessons: In a declining market, it is the poor-quality, undistinguished commodity that suffers the greatest decline. The Sheyang bird had no favorable distinguishing features that could have held onto a market share. In fact, because of processing damage, it was at least visibly inferior. Furthermore, since it was frozen, it was costly to store, and traders and merchants did not want to tie up freezer space on this slow-moving product. The plant was conceived in a planned economy setting, and the sponsors and managers were not able to recognize the source of their problem as failure to respond to changing market conditions. The industrialized poultry business is highly volatile in a shifting economy, usually because the margins are so small when using improved inputs to compete with extensively fed birds and street-side butchers. It requires an intimate knowledge of market segments and the specialization of product or market to avoid head-on competition with the old-style poultry business until opportunity costs drive its cost up as well, which may take 10 years or more. Recommendation: No new investment in production base should be undertaken in Sheyang without a careful evaluation of the market conditions faced by the enterprise, and the identification of various options for the use of the facilities that have been created, ranging from the obvious one of starting over again with ducks to alternatives such as processing chickens, leasing out the plant to another operator, or selling the equipment and using the plant for an entirely different purpose. Now is the time for this fundamental review, before any new capital is committed to this site.  - 9 - 20. The total cost of the animal husbandry component was Y 84.73 million or 11 percent of total project costs, compared to the SAR estimate of Y 107.03 (base cost plus physical and price contingencies) or 12 percent of total project costs. 21. Near the end of the implementation period, there was a question as to whether Bank disbursements for the animal husbandry subproject in Jiangsu had been partially reallocated to other subprojects without the Bank being informed, as had happened from time to time in Jiangsu (para. 47). It appeared that farmers' financed their on-farm investments (Y 17.09 million) by their own independent borrowing from ABC and that the Loan/Credit funds designated for this purpose (about $2.0 million) were used to finance other subprojects. About two months before the scheduled Loan Closing, the Bank requested that the Jiangsu PMO provide a list of expenditures incurred for the component. Lack of a response before the Closing Date led the Bank to conclude that extension could not be justified, and the original Closing Date for the Jiangsu component was maintained, even though an extension had been requested. 22. Agriculture. The project helped to provide funds and inputs for developing some 18,300 ha of fruit orchards, nut groves and grape vineyards in the near-coastal regions-about 10 percent more area than at appraisal. These areas comprised both new orchards and improvements to existing orchards. Implementation and production objectives were substantially met or exceeded for all subprojects. Intercropping, which is widely practiced, not only reduces the need for additional inputs specifically for the orchards during the prematurity period, but also provides farm income before the trees start bearing. Benefits are shared between individual farmers and the village/township through imposition of contract fees, a practice that appears to place the majority share of benefits in the hands of the village/township governments, even after taking account of their loan repayment responsibility. Only one species seems to have saturated the market at this point-hawthorn; this has been reflected in a steady decline in prices in nominal terms from Y 800/t in 1988 to Y 200/t in 1993, and while drought in 1994 pushed prices back to Y 600/t, it is unlikely that this price level will be maintained in normal years. Gingko may experience a similar situation in the future, as its current farm-gate price of Y 48,000/ton can be expected to decline as the project area reaches full development production levels and new areas in other locations come onstream. 23. In addition to cold storage facilities for fruits and nuts, two processing facilities were included in the project: a grape juice plant and hawthorn processing, both under Lianyungang municipality. Incomplete cost and financial data do not allow FRRs and ERRs to be recalculated for the individual components, but site inspection of the hawthorn processing plant indicates that the facility is operated at far less than its capacity would allow and suggests lack of funding, poor management and possible market problems. 24. The total cost of the agriculture component was Y 54.55 million or 7 percent of total cost, compared to the SAR estimate of Y 54.35 million (base cost plus physical and price contingencies) or 6 percent of total costs. Cost increases were incurred in the agroprocessing facilities (consolidated financial material provided for the two  - 10- agroprocessing plants does not permit pinpointing which plant incurred cost overruns) and construction of one additional storage facility. FRRs and ERRs for the production activities fell in the very high ranges of 28 to 59 percent and 35 to 79 percent, respectively. 25. Agriculture Technology. The Jiangsu Ocean Administration Bureau chose subprojects for this component from projects endorsed by the Science and Technology Commission under the SPARK program, a national program to promote innovative technologies in rural areas. Designed to test unproven technologies, it might be expected that the "success" ratio would be less than for normal development projects, and this was the case. After approval of the project, though, it seemed that in the face of any substantial challenge, whether it was purchase of patented technology (as in the case of shrimp feed mills and rapeseed processing) or participation by a foreign partner (serology test kits), implementation ceased. Of the eight subprojects, only one, the barley and malt development/processing subproject, achieved most of its objectives-creation of a production base to increase output of a field-proven, relatively superior beer barley and construction of a malt plant with modified technology to produce basic brewery material of high standard; the other objective, funding of a research program to further improve malt quality through breeding of improved barley varieties, does not seem to have been pursued any further. Another of the subprojects, improvement of asparagus production and processing (Ganyu Fruit & Vegetable Freezing Plant), achieved good commercial viability, but only after abandoning its emphasis on hybrid asparagus and switching to other locally produced fruits and vegetables. Its objectives were to continue an asparagus improvement program using modem biotechnology techniques to produce male hybrid varieties and to introduce modem technology for quick freezing and canning of asparagus, and to experiment with new technology to produce other asparagus products utilizing processing waste. A three-year contract was made with the Jiangsu Academy of Agricultural Sciences (JAAS) for tissue culture work aimed at increasing yields by moving to a larger population of male plants and overcoming a stem wilt problem. JAAS was also to have worked on developing new food products (forms and packs) for the enterprise. Both these initiatives were failures; the plantation is normal male/female plant balance and the enterprise manages its stem wilt problem by completing the harvest before the summer rains, when the fungus that causes stem wilt develops. Despite these shortcomings in the results of the original design, the enterprise has been successful in developing a wide variety of high- quality fresh, frozen and dried fruit and vegetable products (including asparagus) with a good export market. 26. The total cost of the agricultural technology component was Y 22.51 million or 3 percent of total project costs, compared to the SAR estimate of Y 40.54 (base cost plus physical and price contingencies) or 5 percent of total costs. C. MAOR FACTORS AFECTING THE PRoJEcT 27. The total project cost was Y 801.68 million ($183.52 million) compared to the appraisal estimate of Y 887.67 million ($217.00 million)-cost underruns of 10 percent in Yuan terms or 15 percent in Dollar terms. The completed cost of the Jiangsu  - 11 - component was Y 569.56 million, compared to the SAR estimate of Y 648.39 million-a cost underrun of 12 percent, while the Zhejiang component cost Y 231.67 million, compared to the SAR estimate of Y 239.29 million-a cost underrun of 3 percent. 28. There were no significant implementation delays. In Jiangsu, most project activities were completed in 1992 and the project was closed as originally scheduled. In Zhejiang, some difficulties were experienced in sea dike construction, but these were resolved with the help of the PMO. Project works in Zhejiang involved new pond construction, which could only be carried out after considerable time had been spent on sea dike construction and which translated into lengthy periods without benefits; thus, when one subproject (Dingshan) dropped out, after suffering considerable typhoon damage and determining that shrimp production in such a location was not their best economic option, project authorities requested that these funds be shifted to pond improvement at other locations (Zhoushan and Dongtou) in order to gain quick benefits, and the Bank agreed in 1991 to investments of Y 48.1 million and Y 8.2 million, respectively. While the Dongtou subproject was completed, at Zhoushan local authorities stopped investments at Y 35 million after two years of losses due to red tides and diseases. The PMO has provided a plan to complete the investment starting in late 1995, but this would be conditional on reevaluating prospects for recovery of the industry or related uses for the ponds. The Zhejiang component was substantially completed by June 1993, but the PMO requested and the Bank agreed to an extension of the Closing Date by one year to allow them to enforce quality control measures (holding up payments until subproject construction activities met the design standards). 29. Shrimp Disease. In 1993, China experienced very serious early mortalities in its shrimp production. This disease, which is likely caused by a virus, most seriously affected the endemic Chinese white shrimp P. orientalis, but unrelated species in the South also suffered substantial losses. The outbreak affected the livelihood of thousands of shrimp farmers, caused direct and indirect losses on the order of hundreds of millions of Yuan and brought the entire vertically integrated industry including feedmills, cold stores, processing and marketing facilities to a standstill (see Box 3). Soon after the disease occurred, all parties involved desperately tried to analyze and understand the reasons behind this violent disease outbreak, without conclusive results.2/ Potential contributing factors include virtually every component in shrimp production including overly high stocking densities, generally deteriorating water quality, changes in pH, salinity, dissolved oxygen, inappropriate feed and feed management, infected broodstock, etc. There is 2/ The Bank has worked with various project organizations to submit specimens for histologic analysis by one of the world's foremost authorities on shrimp disease, Dr. Donald Lightner at the University of Arizona. Samples from Bank projects in Zhejiang, Hebei and Shandong were submitted to him after the December mission; his analysis of the Zhejiang adult brood stock specimens showed that while he could not determine conclusively whether these animals were carrying the China virus HHNBV (a name given by the Yellow Sea Fisheries Institute in China), (1) there were lesions in various organs and connective tissue which may be indicative of low-grade carrier state infections, and (2) the animals evidenced enlarged lymphoid organs which is sometimes associated with active bacterial or viral infections, but also recently shown to occur in recovered animals and/or those with low-grade chronic infections by systemic viruses. Dr. Lightner believes that further analysis awaits development of gene-probe technology, currently being developed.  - 12 - evidence that all of these factors may have played a role in one area or another, yet overall none of the factors explain why the disease hit harder in China than in most other countries. In fact, management standards in China's shrimp farms are fairly high by international standards. Box 3: THE SHRRIM IND TY-HARD LESSONS Starting from virtually zero in 1979, China became the leading exporter of shrimp in the late 1980s and held this position until the early 1990s when production leveled off at around 200,000 metric tons and Thailand took over. Total investment in shrimp culture during the 1980s exceeded $2 billion, making shrimp farming the most rapidly developing export industry in the fisheries sector. About 160,000 ha of ponds, several hundred hatcheries with a capacity of 100 billion post-larvae and related infrastructure such as cold stores and feedmills were established. At its peak in 1992, the industry provided I million jobs, and export earnings exceeded $500 million, equivalent to one third of the total foreign exchange earnings of the fisheries sector. Several years of high performance in China were followed by a disastrous collapse in production in 1993, down to merely 80,000 metric tons, affecting almost the entire coastline of China. Similar disease-related events were observed earlier in other major producing economies such as Taiwan (China) (in the late 1980s) and Indonesia (in the early 1990s), as well as several Latin American countries, where shrimnp output dropped sharply after years of expansion. 30. At present, it is believed that the disease is caused by a virus known as Rhabdovirus-PJ. However, it is still unclear how it is transmitted and what role environmental factors play in the epidemic. In 1994, in spite of extensive changes to the culturing practices, the shrimp virus again had a devastating effect on Chinese shrimp production. It spread very quickly, affected large areas, and caused the shrimp to die at an early stage of development. Because of the high mortality rates in the affected areas, the shrimp that were harvested were only 40 to 60 days old, and measured only 6 to 7 cm in length. The economic impact in both Jiangsu and Zhejiang has been serious, considering not only the loss of production inputs, but also the losses incurred by the feed mills and processors/cold stores. 31. Eel Profitability. The decline in total and average unit output appears to be due to weak financial performance of market eel production in the project area, which has led to a shift to elver production in the later years of project development. This shift had dramatically improved profitability of eel farming. Nevertheless, the profit margin of elver and market eel production has been narrowing due to the rapidly escalating cost of wild caught seed (glass) eels in recent years. If this trend continues, the financial viability of eel and elver farming may be seriously threatened in the project area. This is largely due to the lower production costs of market-size eels in warmer southern provinces, particularly Guangdong. Glass eels have to be caught in the wild and supplies fluctuate over time. Historically, China catches about 40 t of glass eels per year (total catch in the East Asia region is about 100 t per year), barely enough to maintain its current eel production. With increasing demand, the pressure on the resource will increase and further brood stock price rises are likely.  - 13 - 32. This trend is of particular concern because the export prices for eel are high at present, and yet, eel producers appear to operate at the margin. Japan is the principal export market for the eels produced in China. The demand has increased as Japanese domestic production, as well as the production in Taiwan (China) and the Republic of Korea, has decreased. Approximately 70 percent of eel production from China is currently exported in live form. The balance of eel production is smoked, seasoned and frozen. In 1994 the export price in dollars was $16,500 per ton or approximately 1,617,000 yen in Japan. This accounts for only minor increases for the Japanese buyer over 1992 and 1993 prices, but a major increase for the Chinese producer of about 40 percent as a result of the recent exchange rate adjustments. Also, Chinese companies with an assigned export quota from the Foreign Trade Bureau, now exchange 100 percent of the Dollar revenue at the free market rate; currently one dollar equals 8.5 yuan. Despite these favorable conditions most of the project ponds in Zhejiang were currently producing for the domestic market. Furthermore, the low utilization rate, and the lack of positive production results have made it more difficult for eel farms to secure financing in a tight credit market. 33. Economic Reforms. The project was designed in the context of a planned economy, and adoption of market-economy practices and liberalization of production have provided mixed blessings for implementation and operation. Government entities participating in the project have generally followed the widespread practice of separating their commercial operations from their regulatory functions and operating the enterprises in the form of joint-stock or other limited-liability entities. In practice, this distinction often does not affect either how decisions are taken or who is responsible for them. Without legal tests in the form of suits or financial tests in the form of arm's length credit relationships, these changes have often been cosmetic, with much the same set of authorities and considerations governing resource allocation and operating decisions as prevailed before the institutional change. As an example, the distinction between the Lianyungang Development Corporation and the Lianyungang Bureau of Aquatic Products is fuzzy, with both operating under the same manager/bureau chief, but the Development Corporation's financial success is mainly attributable to the combination of technical competence, entrepreneurial vision, and financial expertise of this individual. Several enterprises clearly operate as distinct entities, where management has been given the autonomy and resources to exercise the 14 freedoms of the economic reform. The Asparagus Processing (Ganyu Fruit and Vegetable Freezing Plant) and the Yancheng Down Processing Company are significant examples of this pattern, and financial results they are realizing are directly related to the autonomy and skill evident in enterprise management. In contrast, the enterprises that have experienced the most difficulty are those that were designed for a centrally planned environment and that are still subject to strong local government influence over daily operations and capital allocations. The Duck Slaughter/ Down Processing Factory (Sheyang) and the Jiangsu Ocean Fisheries Cold Store are examples of projects that depended on central planning and control for their operation. 34. Economic reforms have shifted the role of government entities from direct buying to facilitating sales, e.g., the Jiangsu livestock markets. Project authorities report that domestic prices of processed products are not always commensurate with the high quality of product produced with the sophisticated imported equipment procured under the  - 14 - project, but expect that with rising incomes, consumers will become more selective in their purchasing and price differentiation will reflect varying quality standards. Also, shrimp producers and/or farms may now choose whether to sell their output domestically or to the FTC; more aquatic products are going directly into the domestic market, with most of these transactions handled by local middlemen in small volumes. 35. Even training has been impacted by the economic reforms-in the planned economy, the project office could choose farmers for technical training, but now training cannot be compulsory, and the project offices have difficulty in even organizing training. D. PRoJEcT SUSTAINABELITY 36. Shrimp. Despite its economic significance, shrimp farming in China-as in most other countries-is primitive, dependent upon the capture of wild animals, unsophisticated breeding practices, limited knowledge of diseases and their prevention/ control and common property water resources. It is generally recognized that long-term sustainability has been sacrificed worldwide for short-term profitability in shrimp production. A major effort will be required to rehabilitate the Chinese industry and to replace the current unsustainable practices with an integrated production system based on disease prevention, sustainable stocking densities and sound pond management techniques. A detailed project proposal for this purpose has been discussed with the Chinese government in the spring of 1994 and again in the fall of 1994. 37. Eel. In eel farming the production system, as in shrimp, entirely depends on a limited natural resource. The Bank should be extremely cautious in the future in financing operations that rely on wild catches for the supply of fry. Too little is known about the long-term sustainability of this system to assess the long-term economic and ecological viability of investments in eel production in this region. This situation may dramatically improve once techniques have been developed to multiply eels in captivity, as has been the case with some freshwater fish species, softshell turtle and crabs, and to a certain extent with shrimp. 38. Laver. In light of the recent disease problems and resultant reduction in per unit area yields, it is critical for the Jiangsu provincial government to formulate guidelines, enact regulations, and develop enforcement capacities to control or reduce the present high density of laver farming in the more traditional producing areas. Density of production, which has been attributed to being the major cause of decline in yields, is likely to increase without government intervention because of the currently strong market. Concurrent with the development of regulations, efforts should also be made to determine what specific causal factors affect the health and growth of the laver. 39. Agriculture. Production of the project's fruits and nuts is technically sustainable, but market saturation may impact the financial sustainability. Tree farmers, particularly when there are other sources of family income, have considerable flexibility to react to market conditions-they can reduce inputs (labor and fertilizer), even though this will reduce yields and production to some extent; another measure that could be taken  - 15 - would be renegotiation of the contract fee to achieve a more equitable distribution of benefits between producers and township/village governments. 40. The Hawthorn Processing subproject (Ganyu) is not sustainable in its present condition. Internal operating inefficiencies give it a higher cost structure than competitors. The product mix and packaging need work to appeal more to customers; there is a need for more working capital to extend the plant's operating season. There appears to be either limited management capacity or inadequate autonomy afforded to the management by the sponsors. Either way, the plant is not sustainable because it is not responsive to its problems or the market around it. 41. Aninal Husbandry. Overall, production of livestock, particularly the goat and rabbit subprojects, proved to be popular with rural households; with an initial investment ranging from a few hundred to a few thousand yuan, a farm family could begin to build up herds of animals that required low inputs and a moderate level of technical expertise and for which there was a market. After a decline in rabbit meat prices, many farmers switched to fur rabbit production, which is even more profitable at present. The village goat markets have greatly facilitated trade between producers and buyers. The free- market economy has had a positive impact on this subproject, and these operations are sustainable. 42. Based on site visits and financial information provided, comments are made on the following subprojects: (a) Down Factory Renovation (Yancheng). Careful attention to quality, constant contact with markets for designs and colors, dynamic management and a motivated staff are the keys to the sustainability of this enterprise. (b) Duck Slaughter/Down Factory (Sheyang). Not sustainable. This plant cannot compete with other suppliers of duck meat. Its designers failed to take into account changes in producer habits and consumer preferences, as well as shifts in producer practices, that were to accompany market liberalization. Management and County ownership have been unable to address alternative approaches to product specification, distribution or raw material supply. There is no simple adjustment that would make this project viable; a wide-ranging investigation of alternative uses is required to salvage any significant share of these new assets. (c) Meat Canning (Yancheng). Not sustainable; in fact, never brought into operation. (d) Fur Processing (Dongtai). Sustainable in its present form because it has identified market niches that defy the current trend away from fur. Low- cost fur species permit the company to enter markets that are not as affluent as the West, but which are also not as influenced by activities of animal rights groups. The firm should not go into the high-price fur markets.  - 16 - (e) Feedmill (Sheyang). After a poor start, this mill is now sustainable. It has adopted an active approach to marketing and technical support for its feed, and the management maintains that its label is now associated with a consistent quality product. Enterprise management has matured very well over the last several years and, despite a slow start after construction, the plant is now working near capacity. (f) Goat Tannery Renovation (Dongtai). This plant is financially successful, but its sustainability will depend on continued availability of capital to ensure adequate raw material and supplies. The mission noted some deterioration in quality of finished skins over the last three years, a trend that will need to be reversed if the plant is to continue to be successful. Finally, the enterprise and its sponsors continue to neglect the environmental impact of the failure to treat plant effluent properly. There is some scope for the recovery of expensive tanning agents, but the fundamental issue is the degradation of surface water channels near the plant and the buildup of chrome salts in the subsoil of these waterways. 43. Agriculture Technology. Designed to test innovative technology approaches in various fields of agricultural production and processing, commercial experience has shown that only two of the subprojects are likely to be sustainable: (a) Barley Malt Processing (Yancheng). This plant is sustainable because its simple technology has been enhanced to improve efficiency, and it has been careful to establish market relations with a large brewery group. (b) Asparagus Processing (Ganyu). Sustainable, and growing fast, because it has a clear, market-oriented strategy, good management, and an internal organization that motivates personnel. 44. Jiangsu Ocean Fisheries Cold Storage. This operation is not sustainable as designed. It must find a combination of custom services and new product lines to generate business for the facility because the sponsors have neither the capital nor the fish to operate the plant as conceived. Furthermore, whole frozen fish are no longer the major market item they were under central planning. E. BANK PERFORMANCE 45. At the stage of the Bank's relationship with China in 1986, three-year lending programs had not become a normal part of the dialogue between the Bank and Government, and the Bank's relationship with project entities was initiated upon SPC approval of the project for presentation to the Bank for financing consideration. Once SPC had approved the project, its formulation and design were well under way, with commitments between the provincial planning commissions and various participants relatively fixed. After presentation to the Bank in August 1986, preparation of this project proceeded quite rapidly-identification in November, preappraisal in February and  - 17 - appraisal in June. Partly due to this rapid processing and partly due to the Bank's major reorganization in mid-1987 with a new division chief, a postappraisal mission was carried out in November 1987. With each visit, additional components were added to the scope of the project in Jiangsu and what had begun as a mariculture project became a multifaceted project involving more line agencies; at appraisal, the orchard components were added and at postappraisal, the agriculture technology components were included. For each addition, the amounts were relatively small compared to the total project costs and Bank missions agreed to their inclusion. The Bank may have erred in acquiescing too easily to repeated changes in project content during the preparation process. In Zhejiang, changes in project content essentially served to simplify, rather than complicate, the project. 46. Supervision missions were undertaken about once a year, alternatively to each province. With postappraisal in Jiangsu in the fall of 1987, the first supervision mission was scheduled to Zhejiang in 1988 and not to Jiangsu until 1989. By this time, implementation was well under way and the Bank had missed the opportunity to instill "good implementation habits" (following Bank policies and procedures and encouraging openness and candor) in Jiangsu. With the more complex and costly components being in Jiangsu, the Bank should have focused its supervision efforts in that direction rather than attempting an equitable distribution of time between the two provinces. During the first full field supervision mission to Jiangsu in 1989, the Bank learned that the provincial finance bureau (BOF) had assumed a major role in the project-onlending was being carried out directly from the provincial BOF to the municipal BOFs. F. BORROwER PERFORMANCE 47. After appraisal of the project in June 1987, the provincial governments "allocated" to all the lower-level administrative and production units all the Bank/IDA funds anticipated under the project. Each unit was assured of entitlement to loan/credit funds equal to 50 percent of the total cost of its investment, regardless of its requirements for foreign exchange, and was assigned responsibility for repaying both domestic and foreign exchange amounts. In Jiangsu, this created problems throughout the implementation period (particularly for enterprises with equipment requirements in excess of their foreign exchange allocation), generated substantial opposition to international competitive bidding (ICB) procurement (except for materials that were scarce in China at that time-fishmeal, fertilizer, steel, timber, etc.) and led all levels of government to adopt a sense of exclusive ownership over the funds, often omitting to involve or even inform the Bank about design changes, project modifications and procurement decisions. For example, only ex-post did the Bank learn that the Dafeng fur factory subproject (Yancheng) was modified to cover construction of a completely new facility instead of the expansion envisaged at appraisal; the orchard subproject was modified to include two cold stores instead of one; and the Jiangsu Ocean Fisheries Cold Store, which at appraisal had been one of 14 cold stores supporting the shrimp development with a combined total cost of about Y 30 million, was actually an SOE for the provincial BAP's marine fishing fleet and was expanded and modified until its cost alone reached a level of Y 25 million  - 18 - (furthermore, the facility was still under construction during the ICR mission, and prospects for its sustainability are poor). 48. Shortly after appraisal, SPC agreed with the provincial governments on a list of materials to be procured through ICB and though some progress was made in expanding the list, the agreed Minutes of Negotiation included as an annex a list of equipment that could be procured as exceptions to ICB (mostly agroprocessing auxiliary equipment for Jiangsu and construction and production equipment for Zhejiang). However, with liberal interpretation of exactly what constituted "accessory" and "supporting" equipment, virtually all cold store and most feed mill equipment for Jiangsu was procured locally. Total ICB procurement amounted to about $26.3 million ($17.0 million in Jiangsu and $9.3 million in Zhejiang) compared to the SAR estimate of $41.8 million. 49. The Zhejiang Provincial PMO was particularly effective in accomplishing the construction objectives. They implemented a unified engineering review that we recommend be incorporated into the construction phase of other agricultural development projects in China. This review required an engineering and construction team to review the design of the shrimp farms, eel ponds and supporting facilities. This team would then inspect the construction during the project development, and the financial review and acceptance would be carried out by this monitoring organization. Only at the time of acceptance of the construction work by the review team would the PMO disburse the final payments to the prefecture and county levels. This system resulted in more cost-effective designs and the adaptation of new technologies such as the use of geotextiles in the sea dike at Damutu. The PMO adhered to the LCB and ICB bidding procedures and submitted frequently lists of planned procurement for Bank review. G. ASSESSMENT OF OUTCOME 50. The project's likely outcome cannot be reliably assessed in the light of the uncertainties facing the two major project components, shrimp and eel production, which account for two thirds of the total project cost. Both components are generating marginal or negative financial and economic benefits at present. The shrimp component was based on production practices that, while generating high profit levels in the early years, have proved to be unsustainable over the long term, and recovery of the industry will most likely be based on a major rehabilitation effort involving virtually every aspect of production. Even if the project ponds were to be devoted to polyculture of other marine species, the output from such a large-scale effort would face market uncertainties. The eel component, dependent on a limited natural resource (fry caught in the wild), faces economic and ecological uncertainties and the long-term sustainability is questionable. The outcome of the laver component has been and will likely continue to be highly satisfactory, provided production density is reduced, either voluntarily by the producers or by government restriction. The outcome of the animal husbandry and agriculture components' production activities has been satisfactory and will likely continue. The outcome of the agroprocessing subprojects (in the animal husbandry, agriculture and agriculture technology components) has been mixed, with successes generally related to high degrees of management autonomy and responsiveness to market conditions.  - 19 - H. FUTURE OPERATION 51. Shrimp. Since project initiation, there has been a series of shrimp epidemic catastrophes [commencing with Taiwan (China) in 1988] in all major producing countries worldwide, which has changed the global outlook on investment in shrimp culture in general. The disease incidence in 1993 and 1994 makes it very clear that similar to the situation in other countries, China's shrimp industry will have to go through a major readjustment. Two concurrent efforts will likely be required to salvage the industry: (a) a comprehensive scientific analysis, which may require substantial central government Bureau of Aquatic Products technical and financial involvement, that systematically determines the specific causes of and the development of means to control shrimp mortality and (b) continuation of the shift to lower production intensity and polyculture with other species (e.g., crabs, clams, finfish, etc.) at existing farms. The latter would require identification of new markets for fresh or processed products for species (other than shrimp) that presently have weaker market potential, which would likely not meet the needs of large-scale production. The sooner both measures are initiated, the better the chances of success, since the condition of existing farms and support facilities (hatcheries, feed mills, and processors/cold stores) will otherwise deteriorate and likely become dysfunctional due to lack of regular maintenance. The objective of the research effort should be to facilitate the necessary transition toward more sustainable shrimp farming in China, and the components would likely require a detailed survey of affected areas identifying the factors causing shrimp mortality, coordination with other affected provinces, and possibly international collaboration. Without these efforts and recovery of the shrimp industry, the prospects for employment in the afflicted areas are extremely limited due to most jobs being confined to aquaculture-related activities and would require costly resettlement or public welfare programs. So far, ABC has been providing working capital loans to affected farms, most of which will likely not be recovered due to the persistent production problems. Continued credit support from ABC is anticipated by these farms, though the farms have no clear strategy on how to deal with the technical problems and mounting debt. 52. The research effort appears to be insufficiently funded at present and will require a more comprehensive and coordinated central government approach involving other provinces (for example, almost all northern provinces obtain their broodstock from one area of the Yellow Sea off the Shandong coast) and possibly international collaboration. Reduction in shrimp seed stocking densities, feed rates, and per unit area production targets has not shown significant improvement in survival rates in the project area to date. The polyculture of marine species has been shown to be technically feasible and economically viable on a small scale; however, definite concerns remain over the strength of the market for the promising species and feasibility of widespread application of the technology. Similarly, there is a limit to the alternate employment options for affected farmers due to the constraints of the natural setting of shrimp farms. It is also likely that the current shortage of operating capital will lead to deterioration in the condition of shrimp ponds due to neglect of required annual pond maintenance.  - 20 - 53. Eel. Due to the uncertainty of the future financial viability of eel farming in the project area, further expansion of eel farming with government support should not take place. Rather, efforts at improving the efficiency of the existing facilities should be explored. 54. Laver. Increasing market demand and higher unit prices for laver have resulted in a rapid expansion of the cultivated area and intensity of production. Concurrently, in some of the more developed areas, per unit area yields have declined, possibly due to insufficient nutrients for optimal growth and health or other biochemical defense mechanism/disease causal agents of the plants due to overcrowding. In Nantong, for example, where production problems including up to 60 percent mortality have occurred in some areas, the number of laver processing sets has increased from 3 to 63 (21 times) while the production area has increased from 200 ha to 2,000 ha (10 times). Moreover, the production density in Nantong is 3,750 m2 of culture net per ha of water surface area. In Lianyungang, where a production problem has not occurred, 2,700 m2 of culture net is used per ha. The higher production density in Nantong could be a result of the rapidly increasing demand by the laver processors with limited suitable production area in the vicinity. The importance of production density for laver culture has been recognized by the PMO. In response, provincial authorities are developing policy guidelines to control production density, introducing superior species, and applying improved production technologies. 55. Project Offices. In Jiangsu, the PMO indicated its intention to propose to the provincial government that the office be maintained with the following functions: monitoring production, carrying out market studies to help borrowers, coordinating training, and helping to ensure repayment; they are also recommending that the city and county project offices be maintained with 2 to 3 staff each. In Zhejiang, the PMO will be incorporated into the provincial BAP and the BAP will assume responsibility for bringing the project up to its production potential. I. KEY LESSONS LEARNED 56. Shrimp is too valuable a commodity, with capture fisheries production reaching an absolute global constraint, to ignore the proven possibilities of coastal shrimp aquaculture. On the other hand, disease represents the biggest obstacle to the financial (and economic) viability of marine shrimp farming, and epidemics have had catastrophic results in Taiwan (China), Indonesia, Thailand, Ecuador, Mexico, Philippines, China and most recently, India. A sustained and multifaceted approach to this problem will be required from all sides-using such simple technology as design and construction of ponds at carefully selected sites, to improved pond management aimed at disease prevention, with water quality testing, environmental control and reduced stocking density, to worldwide collaboration among producing countries, whose scientists' current research and development efforts are focusing on sophisticated diagnostic tools, genetic resistance and high-health broodstock. Meanwhile, further investments in coastal shrimp farming with the least risk would be those where natural conditions allow a fall-back position for production, e.g., an accessible water source that could be utilized to shift production to  - 21 - high-valued fresh or brackish-water species of fish or other crustaceans for which there is a unfulfilled market demand. In the future, the starting point for production may have to shift from captured broodstock to controlled breeding, for which the technology has yet to be developed. 57. Further investments in eel farming, even though not at such dramatic risk from disease, will be more stable once the technology is developed for breeding in captivity. Despite limited research, no significant breakthroughs have yet been made in this field. Meanwhile, government support should be directed at improving the efficiency of existing facilities rather than further expansion. 58. While the major components of the project were at risk in the production phase and dependent on factors basically out of the producers' control, the success of agroprocessing subprojects is clearly related to their management autonomy and responsiveness to market conditions. Experience emphasizes the importance of (a) greater attention to commercial aspects of feasibility studies, both in terms of markets for finished goods and reliable sources of raw materials; (b) direct contact between management and markets, preferably through contractual relationships that provide access to information and inputs to insure consumer acceptance; and (c) management responsibilities and internal organization conducive to motivation of both managers and workers to exercise initiative and to respond promptly to market conditions.  - 22 - Table 1: SUMMARY OF ASSESSMENT A. Achievement of Substantial Partial Negligible Not Applicable Objective Macroeconomic policies X_ Sector policies _X_ Financial objectives _X_ Institutional development _X_ Physical objectives _X Poverty reduction X Gender concerns X Other social objectives X_ Environmental objectives X_ Public sector management _X_ Private sector development _X_ Other B. Project Sustainability Likely Unlikely Uncertain Aquaculture _X_ Agriculture X__ Animal Husbandry X Agroprocessing _X_ Agriculture Technology _X_ C. Bank performance Highly satisfactory Satisfactory Deficient Identification X_ Preparation assistance X_ Appraisal X- Supervision _X_  - 23 - D. Borrower performance Highly satisfactory Satisfactory Deficient Jiangsu: Preparation _X- Implementation X Covenant compliance _X_ Operation _X_ Zhejiang: Preparation _X Implementation _ X Covenant compliance X- Operation =X= E. Assessment of outcome X-  - 24 - Table 2: RELATED BANK LOANs/CREDITs Loan/credit title Purpose Year of Status approval Preceding operations 1. Rural Credit II Ag. credit FY84 Completed. (Cr 1462-CHA) 2. Freshwater Fisheries Aquaculture FY86 Completed. (Cr 1689-CHA) Following operations 3. Shandong Agricultural Area development FY89 Closed 12/31/94. ICR mission Development scheduled for 4/95. (Cr 2017-CHA) 4. Guangdong Agricultural Area development FY92 Under implementation; shrimp Development component substituted by polycul- (Cr 2924-CHA) ture. 5. Songliao Plain Agricul- Area development FY94 Shrimp pond rehab subproject tural Development delayed and possible substitution of (Cr 2571-CHA) river crab subproject under consid- eration. Table 3. PROJECT TIMETABLE Date Actual/ Steps in Project Cycle Date Planned Latest Estimate Identification (EPS) 11/29/86 Preparation (Preappraisal) 02/13 - 3/7/87 Appraisal 06/13 - 6/30/87 Postappraisal 10/31 - 11/7/87 Negotiations 02/1 - 2/5/88 Board Presentation 03/29/88 Signing 04/15/88 09/14/88 Effectiveness 06/30/88 12/09/88 Project Completion 12/31/92 06/30/94 Loan Closing 06/30/93 06/30/94  - 25 - Table 4: LOAN/CRED1r DISBURSEMES: CUMULATIVE ESIMATED D ACTUAL ($'000) T__ _ FY89 FY90 FY91 FY92 FY93 FY94 Appraisal Estimate 19,000 38,500 66,500 91,000 100,000 Actual Jiangsu Ln. 2924-CHA - 2,774 10,245 18,190 25,437 23,446 Cr. 1887-CHA 19,850 38,450 39,330 39,330 39,330 39,330 Actual Zhejiang Ln. 2924-CHA - - 594 4,332 9,690 9,162 Cr. 1887-CHA 6,830 12,060 18,100 18,100 18,100 18,100 Total 26,680 53,284 68,269 79,952 92,557 90,038 Actual as % of 140 138 103 88 93 - Estimate Date of final May 23, disbursement 1994  - 26 - Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Key Implementation Indicator Estimated Actual in SAR/President's Report JIANGSU Shrimp Shrimp ponds - new (ha) 3,958 2,095 production Shrimp ponds - improved (ha) 4,303 4,635 Cold stores (no. /capacity) 14/5,300 t 12/2,600 t Feedmills (no./capacity) 12/27,500 t 5/10,500 t Eel production Enclosed ponds (m2) 87,000 135,992 Open ponds (ha) 32.7 0 Laver production Culture fields (ha) 273 1,107 Hatcheries (m) 3,600 9,100 Processing equipment (no.) 19 34 Agriculture Production Grapes (ha) 540 515 Chestnuts (ha) 1,300 1,299 Hawthorn (ha) 3,500 3,500 Orchards (ha) 2,000 2,000 Gingko (ha) 9,364 10,999 Agroprocessine Grape juice New construction Implemented Haw;horn processing New construction Implemented Animal Goats Husbandry Breeding stock (no.) 61,500 78,360 Veterinary/Al stations (no.) 35 35 On-farm sheds (m2) 214,000 354,464 Rabbits Breeding stock-foreign (no.) 600 0 "-domestic (no.) 1,000 15,733 Veterinary/Al stations (no.) 56 35 On-farm sheds (m2) 145,000 64,309 Breeding farms (no.) 2 6 Ducks/fish Breeding ducks-foreign (set) 10 0 "-domestic (ea) 4,000 4,600 Duck Hatchery 1 1 Fish ponds (ha) 100 120 On-farm pens (m2) 18,860 16,000 Mink Breeding stock-foreign (no.) 3,000 0 -domestic (no.) 7,000 10,177 Breeding farm (no.) 1 1 On-farm cages (m2) 125,000 10,506  - 27 - Key Implementation Indicator Estimated Actual in SAR/President's Report l Agroprocessing Agroprocessin2 Down factory (Yancheng) Expansion Implemented Goat slaughterhouse New Cold store Dongtai tannery Expansion Implemented Duck slaughter New Implemented Meat canning Expansion Implemented Fur factory Expansion New Feed mill (Sheyang) New Implemented Feed mill (Xiangshui) Expansion Implemented Mink feed mill (Dongtai) New Dropped Agriculture Shrimp Feed (Sheyang) New formulation Std feed mill technology Shrimp Feed (Haimen) New formulation Dropped Mink Feed New formulation Dropped Rapeseed processing Patented technology Dropped Sesbania Gum production Implemented Barley/Malt Barley improvement Implemented Malt factory expansion Implemented Serology test kits Production Dropped Asparagus Breed improvement and processing Implemented ZHEJIANG Shrimp Shrimp ponds - new (ha) 1,382 1,265 production Shrimp ponds - improved (ha) - 465 Feedmills (no./capacity) 4/8,200 t 4/10,100 t Cold stores (no./capacity) 5/1,300 t 5/1,450 t Eel production Warm water (ha) 42 2.8 Enclosed (ha) 2 - Open (ha) 89 39.4 Net cages (ha) - 0.3 Roast eel plant (no.) 1 - Carton factory (no.) 1 I Eel transfer station (no.) 1 I  - 28 - Table 6: KEY INDICATORS FOR PaOjECr OPERATION Key Operating Indicators in Estimatod Actual SAR/President's Roport JIANGSU Shrimp production Shrimp ponds (new) Yield (t/ha) 1.95 Shrimp ponds (improved) Yield (t/ha) 1.95 Agriculture Production: Grapes Yield (t/ha) 1S 9.3 Chestnuts Yield (t/ha) 2.25 1.6 Hawthorn Yield (t/ha) 3 7.4 Orchards Yield (t/ha) 15-21 t 15 Gingko Yield (t/ha) 1.5-3.75 1.9 Animal Husbandry Production: Goats Annual production 1.09 million 1.6 million Rabbits Annual production 1.016 million 1.1 million Mink Annual production 129,300 Dropped Ducks/fish Annual production 460,000 520,000 ZHEJIANG Shrimp production Shrimp ponds (new) Yield (t/ha) 1.95  - 29 - Table 7: STUDIES INCLUDED IN PROJECT Purpose as defmed Study at appraisal/redefined Status Impact of Study NOT APPLICABLE  - 30 - Table SA: PRoJEcT Coms ($ million) l____________________________ Appraisal Estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total costs costs costs costs JIANGSU 1. Shrimp Development 46.7 31.9 78.6 47.9 8.5 56.4 2. Eel Development 8.9 7.2 16.1 10.2 8.3 18.5 3. Laver Development 2.6 1.4 4.0 7.0 10.0 17.0 4. Agriculture 6.3 5.8 12.1 9.1 4.0 13.1 5. Animal Husbandry 8.3 15.4 23.7 6.4 12.2 18.6 6. Agr. Technology 4.0 4.9 8.9 3.2 2.6 5.8 7. Ocean Fisheries Co. 5.6 1.0 6.6 8. Overseas training and Tech 0.6 0.6 Assistance Base Cost 76.8 66.6 143.4 89.4 47.2 136.6 Physical Contingencies 6.9 5.6 12.5 Price Contingencies 1.5 1.3 2.8 Subtotal 85.2 73.5 158.7 89.4 47.2 136.6 ZHEJIANG 1. Shrimp Development 14.4 18.2 32.6 20.5 18.2 38.7 2. Eel Development 12.8 7.9 20.7 5.1 3.1 8.2 Base Cost 27.2 26.1 53.3 25.6 21.3 46.9 Physical Contingencies 1.9 1.8 3.7 Price Contingencies 0.7 0.6 1.3 Subtotal 29.8 28.5 58.3 25.6 21.3 46.9 TOTAL PROJECT COST 115.0 102.0 217.0 115.0 68.5 183.5  - 31 - Table 8B: PROJECT FINANCING ($ million) Appraisal estimate Actual estimate Local Foreign Total Local Foreign Total costs costs costs costs JIANGSU IBRD/IDA 0.0 69.0 69.0 15.6 47.2 62.8 Domestic cont. 85.2 4.5 89.7 73.8 0.0 73.8 Subtotal 85.2 73.5 158.7 89.4 47.2 136.6 Zhe iang l IBRD/IDA 2.5 28.5 31.0 5.9 21.3 27.2 Domestic cont. 27.3 0.0 27.3 19.7 0.0 19.7 Subtotal 29.8 28.5 58.3 25.6 21.3 46.9 Total 115.0 102.0 217.0 115.0 68.5 183.5  - 32 - Table 9: ECONOMIC COSmS AND BENEF La Key Operating Indicators in Estimated Actual SAR/President's Report JIANGSU Shrimp production Shrimp ponds (new) FRR/ERR 13.8% / 37.8% <12% / <12% Shrimp ponds (improved) FRR/ERR 18.3% 144.5% <12% 1 <12% Eel production Enclosed/open ponds FRR/ERR 13.8% 1 29.9% < 12% / < 12% Laver production Culture fields FRR/ERR 15.0% / 36.5% 24% / 27% Agriculture Production: Grapes FRR/ERR 11.9% /18.0% 28% / 35% Chestnuts FRR/ERR 17.8% / 25.1% 29% / 39% Hawthomn FRR/ERR 13.2% / 18.4% 31% / 79% Orchards FRR/ERR 16.8% / 23.8% 59% / 62% Gingko FRR/ERR 12.8% / 16.1% 51% / 52% ... Continued  - 33 - Key Operating Indicators in Estimated Actual SAR/President's Report Animal Husbandry Production: Goats FRR/IRR 15.5% / 43.0% >100% / >100% Rabbits FRR/IRR 19.1% / 43.5% 26% / 56% Mink FRR/IRR 13.9% / 32.1% Dropped Ducks/fish FRR/IRR 12.4% 1 28.5% 49% / 63% Processing: Down factory (Yancheng) FRR Goat slaughterhouse - 23.3% FRR Dongtai tannery - Not operational FRR Duck slaughter - 25.4% FRR Meat canning - Not operational FRR Fur factory - Not operational FRR Feed mill (Sheyang) - 11.6% FRR Feed mill (Xiangshui) - 2.6% FRR Mink feed mill - Negative - Dropped ZHEJIANG Shrimp production Shrimp ponds (new) FRR/ERR 13.0% / 27.3% <12% <12% Shrimp ponds (improved) FRR/ERR - <12% <12% Eel production Enclosed/open ponds FRR/ERR 14.2% / 39.4% < 12% / 14% /a Calculations available in Asia Files. ... Coninued  Table 10: STATUS OF LEGAL COVENANTS Original Revised Covenant Fulfillment Fulfillment Agreement Section type Status Date Date Description of covenant Comments Loan 4.01 12 C - Additional events to cause cancellation or suspension: Deleted by amendment 12/03/90 Agreement amendment of charters of ADCs, dissolution, disestablish- I_________ ______ ________ ______ ___________ ment of ADCs or suspension of any of its operations Project 2.02 5 C - Provinces to maintain Provincial Coordinating Committees Agreement and Project Offices acceptable to Bank and IDA 2.06 2 CP - Interest rates at ABC's prevailing rates for similar loans for Interest rates fixed at time of similar purposes effectiveness; exception made for infrastructure by amendment 12/03/90 2.07 2 NC - Corporations to use net receipts due to differences in timing Deleted by amendment 12/03/90 between subloan receipts and repayments for financing l _________ ______ ________ __________ activities similar to those under project nilar_to_those_under_projec 3.01 9 C Annual Audit report to be fumished to Bank/IDA within six months Audit reports received for each l_____ ___________ of end-fiscal year year Sch 2, 10 CP - Agroprocessing facilities to be managed by competent staff Management generally satisfac- para 2 with experience and background acceptable to Bank/IDA tory, but IDA never consulted Sch 2, 10 CP - Training programs to be reviewed by Bank/IDA annually Only Zhejiang submitted for para 3 ____ Bank/IDA agreement Sch 2, 9 C Annual Semiannual progress reports to be sent to Bank/IDA within Reports always sent para 4 __2 months of close of period Sch 2, 9 NC Annual Plan for provision of fertilizer to be provided to Bank/IDA Plans never sent l_______ para 5 by November I Sch 2, 5 CP Establishment of working groups to study shrimp marketing Groups only functioned in early l_______ para 6 _ part of project Covenant types Present status: I Accounts/audits 7 Involuntary resettlement C covenant complied with 2 Financial performance/revenue generation from 8 Indigenous people CD complied with after delay beneficiaries 9 Monitoring, review and reporting CP complied with partially 3 Flow and utilization of project funds 10 Project implementation not covered by categories 1-9 NC not complied with 4 Counterpart funding 11 Sectoral or cross-sectoral budgetary or othcr resource allocation 5 Management aspects of the project or executing agency 12 Sectoral or cross-sectoral policy/regulatory/institutional action 6 Environmental covenants 13 Other  - 35 - Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS Statement number and title Describe and comment on lack of compliance NOT APPLICABLE I Table 12: BANK RESOURCES: STAFF INPUTS State of Project Cycle Planned Revised Actual Weeks $ Weeks $ Weeks $ lThrough appraisal 116.9 Appraisal to Board 8.7 = Board to Effectiveness Supervision 72.4 96.2 = Completion 12 14  Table 13: BANK RESOURCES: MISSIONS Stage of project Month/ Number of Days in Specialized staff skills Implementation Development cycle year persons field /a represented Rating Objectives Types of problems Preappraisal 02/87 7 20 Project Officer Economist Agriculturist Agroprocessing Aquaculturist Engineer Conservationist Appraisal 06/87 6 18 Project Officer Agroprocessing Aquaculturist Engineer Livestock Specialist Marketing Specialist _ Postappraisal 11/87 5 8 (J) Division Chief - Project Officer Agriculturist Agroprocessing _ Lawyer Supervision (1) 10/88 3 8 (Z) Project Officer Engineer Aquaculturist Supervision (2) 09/89 4 9 (1) Project Officer 1 1 9 (Z) Aquaculturist Credit Specialist ._____ Livestock Specialist l Supervision (3) 07/90 2 3 (Z) Project Officer 1 1 Aquaculturist  Stage of project Month/ Number of Days in Specialized staff skills Implementation Development cycle year persons field /a represented Rating Objectives Types of problems Supervision (4) 10/90 6 10 (J) Project Officer 3 3 Marine production, management Economist in Jiangsu Engineer Agroprocessing Livestock ___________ ____ _____Aquaculturist Supervision (5) 11/91 4 5 (J) Project Officer 2 2 Management 5 (Z) Aquaculturist Agricultual Economist Agroprocessing Supervision (6) 104/92 1 8 (Z) Engineer 2 2 Supervision (7) 10/92 3 5 (J) Project Officer 2 2 5 (Z) Aquaculturist _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~Engineer__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Supervision (8) 03/93 1 1 (J) Project Officer 3 2 Supervision (9) 11/93 2 8 (Z) Aquaculturist 2 2 _____________ ________ ~E ngineer_ _ _ _ _ _ __ _ _ __ _ _ _ _ _ _ _ _ _ _ _ Completion 10/94 5 9 (3) Project Officer - - 7 (Z) Aquaculturist Agroprocessing Agriculturl Economist Financial Analyst /a 'J' indicates Jiangsu, ZZ indicates Zhejiang.  - 38 - Appendix A COASTAL LANDS DEVELOPMENT PROJECT IMPLEMENTATION COMPLETION MISSION Aide Memoire 1. The mission visited Jiangsu and Zhejiang provinces between October 24 and November 7, 1994. In Jiangsu, the project, as appraised, had the following components in three participating municipalities (Lianyungang, Yancheng and Nantong): mariculture (shrimp--new and improved ponds, eel and laver with feed mills and cold stores); animal husbandry (goat, mink, rabbit, duck/fish and six processing plants); agriculture (hawthorn, gingko, chestnuts, fruit orchards, grapes and two processing plants) and agriculture technology (eight subprojects selected to take innovative technological advances to commercial production capacity). The project in Zhejiang had only mariculture (shrimp-- new ponds, and eel). 2. Attachment 1 compares the major project components completed with the appraisal estimate. As can be seen, significant changes were made in the scale of the individual sub-components during project implementation. These adjustments were made largely due to changes in the market situation, financial efficiency of the various technologies, and, to some extent, the degree of risk associated with the various sub-components. Jiangsu 3. The area of new shrimp ponds was reduced by almost half and the area of improved ponds was increased by a small portion. A significant adjustment was made in the area of laver culture--the completed area was four times the appraisal estimate; as evidence of the commercial success of this effort became apparent, all three cities eventually engaged in this activity, even though only two had planned to do so at appraisal. Imported laver processing equipment (34 sets) allowed this product to be accepted in the intemational market. For eel culture, the production technology shifted to enclosed greenhouses and the originally planned open (uncovered) ponds were cancelled. The total cost for aquaculture development was Y376.5 million or 94% of the SAR estimate of Y401.1 million (base cost plus physical contingencies) with shrimp culture representing about 60% and eel and laver culture about 20% each of the actual investment as compared to the appraisal proportion of 80% for shrimp, 16% for eel, and 4% for laver. 4. Mariculture Production: (a) Shrimp. For project ponds, annual shrimp yields increased from 2,100 t (average 1.2 t/ha) in 1988 to 9,200 t (1.4 t/ha) in 1992 after which significant early mortality resulted in substantially reduced yields of 0.5 tlha in 1993. Preliminary data for 1994 are showing a further decrease to about  - 39 - Appendix A 0.1 t/ha. The SAR shrimp production estimate of 1.95 t/ha/yr was considerably higher than the best yields achieved during implementation. (b) Eel. Eel yields have fluctuated throughout project implementation largely due to market forces. The yields peaked in 1991 at 851 t (73 t/ha) but dropped to 377 t (28 t/ha) in 1993. This drop in production was supplemented in part by the rearing and sale of elvers rising from 6.5 million in 1991 to 26.32 million in 1993 resulting in the reported conversion of estimated financial losses of Y2 million in 1991 to a profit of Y32 million in 1993. The SAR projections were 100 t/ha/yr for the enclosed ponds developed by the component. (c) Laver. Production generally increased throughout project implementation from about 2,700 t (14 t/ha) in 1989 to 10,500 t (10 t/ha) in 1993 as compared to the SAR estimate of 15 t/ha/yr. 5. Mariculture Issues: (a) Shrimp. The viability of shrimp culture in the project area has been seriously threatened as a result of high mortality early in the production cycle. In 1993 and 1994, shrimp mortalities were first observed in June with a majority of shrimp ponds affected by the end of August. The specific causal factors have yet to be identified. At present, efforts are underway to remedy the economic calamity, including (a) research on the identification and prevention of shrimp disease, (b) reduction in shrimp stocking densities and production targets, (c) polyculture of shrimp with crabs, finfish, and clams, and (d) diversification of affected farmers' employment options such as a switch to salt production. The research effort appears to be insufficiently funded at present and will require a more comprehensive and coordinated approach with other provinces and possibly international collaboration. The solution may require several years of systematic analytical work. Reduction in shrimp seed stocking densities, feed rates, and per unit area production targets has shown significant improvement in survival rates in the project area to date. The polyculture of marine species has been shown to be technically feasible and economically viable on a small scale; however, definite concerns remain over the strength of the market for the promising species and feasibility of widespread application of the technology. Similarly, there is a limit to the alternate employment options for affected farmers due to the constraints of the natural setting of shrimp farms. The current shortage of operating capital will lead to deterioration in the condition of shrimp ponds due to neglect of required annual pond maintenance. (b) Eel. The decline in total and average unit output appears to be due to weak financial performance of market eel production in the project area which has led to a shift to elver production in the latter years of project development.  - 40 - Appndix A This shift had dramatically improved profitability of eel farming. Nevertheless, the profit margin of elver and market eel production has been narrowing due to the rapidly escalating cost of wild caught seed (glass) eels in recent years. The price of glass eels has increased by about 11 fold (from about 30% to 60% of production costs) between 1988 and 1994 whereas the price for market eel has only increased 3.5 times, and the profit margin of producing elvers from glass eels has declined by about half over the same time period. If this trend continues, the financial viability of eel and elver farming may be seriously threatened in the project area. This is largely due to the lower production costs of market-size eels in southern provinces, particularly Guangdong. (c) Laver. Increasing market demand and higher unit prices for laver has resulted in a rapid expansion of the cultivated area and intensity of production. Concurrently, in some of the more developed areas, per unit area yields have declined, possibly due to insufficient nutrients for optimal growth and health of the plants. In comparison to laver culture in Lianyungang, where a production problem has not occurred, 2700 m2 of culture net is used per ha, whereas in Nantong, 3750 m2 of culture net is used per ha. Also in Nantong, where up to 60% mortality in some areas has occurred, the number of laver processing sets have increased from 3 to 63 (21 times) while the production area has only increased from 200 ha to 2000 ha (10 times) which could in part be the reason for the increased density. The problem of too high production density has been recognized by the provincial and municipal PMOs. In response, project authorities are developing policy guidelines to control production density, introducing superior species, and applying improved production technologies. It is also significant to note that a specific viral or bacterial disease has not been identified among the poor growing laver. Agroprocessing 6. Agroprocessing (in support of the agriculture and animal husbandry sectors): At appraisal, the following subprojects were envisaged: Animal Husbandry: Goats - establishment of a slaughterhouse at Dafeng and expansion and improvement of existing tannery (Dongtai); Ducks - establishment of a slaughter and down processing plant at Sheyang, improvement of a meat canning factory in Yancheng, and improvement of a down factory in Yancheng; Rabbits - expansion of a fur factory at Dafeng; Other - one feed mill expansion at Xiangshui and one feedmill establishment at Sheyang for livestock feed and one feedmill establishment for mink at Dongtai.  -41- Ap2n&A Agriculture: Grapes - construction of a juice plant at Donghai; Hawthorn - construction of a hawthorn processing plant in Ganyu County. 7. All subprojects except for the goat slaughterhouse (Dafeng) and mink feedmill (Dongtai) were implemented; all the implemented subprojects are in operation except the duck slaughter plant at Sheyang. While the rabbit fur factory at Dafeng and the meat canning factory are in operation, neither appear to be utilizing the equipment procured under the project. The mission visited all the implemented subprojects except the Xiangshui feedmill. In each case, the civil works were well executed and the equipment appeared to be as planned and to have been well installed. 8. In discussing possible solutions to bring about utilization of assets at the inoperative Sheyang duck slaughter plant and the Dafeng fur factory (which is not using the project equipment), enterprise managers expressed hope that the local governments would establish production bases for ducks and mink or to facilitate import of high value animal skins to support the processing activities. In the mission's view, it would be inappropriate for government to intervene with a centrally-planned solution without carefully examining the market conditions and alternative strategies for recovery. 9. Agriculture technology: At appraisal, the following subprojects were envisaged: two shrimp feed mills and a mink feed mill rapeseed processing sesbania planting and expansion of a gum powder plant improved barley production and construction of malt plant improved asparagus varieties and construction of processing plant production of serology test kits The shrimp feed mills became ordinary feedmills; the mink feed mill, rapeseed processing and serology test kit subprojects were dropped. The mission visited the barley malt and the asparagus processing plants, both of which appear to be successfully operating and generating revenues for their sponsors. 10. In general, enterprises have succeeded which have been able to adopt to their changing market and raw material supply circumstances. This adaptability has been not only a function of the perceptions and analytical skills of enterprise managers, but also the autonomy and resources that managers have been afforded to act on their analysis. Enterprises which are having difficulty will, without exception, need to be given this combination of market orientation and autonomous management if they are to recover or move successfully into a different line of activity that makes effective use of the assets they possess. 11. Agriculture and Animal Husbandry components: The mission did not visit the agriculture subprojects and still awaits data on the implementation of the gingko  - 42 - Apendix A subprojects in Xuzhou. Likewise, due to time constraints, the mission visited only one rabbit Al station, one specialized household, and a goat marketing station in Dongtai. Cost and production tables will be reviewed at headquarters. Zhejiang 12. The project as appraised comprised new shrimp ponds at five sites (Damutu, Kaomen, Dingshan, Shepan and Wumen) and an eel component. In contrast to Jiangsu, the Zhejiang shrimp sites required considerable reclamation works including construction of new seadikes and upgrading of existing dikes. In 1989, after a devastating typhoon, one subproject (Dingshan) dropped out of the project; at the same time, the eel market was determined to be unreliable and the eel component was reduced. Funds originally intended for these purposes were reallocated to two new subprojects which featured upgrading of existing shrimp ponds (Zhoushan and Dongtou); this was seen as a measure to earn quick economic returns to compensate for the lengthy construction period associated with seadike construction. A further adjustment was made to provide for reservoir cultivation of eels in net cages. The total investment was Y231.7 million--10% over the appraisal estimate of base cost plus physical contingencies or 97% of the appraisal estimate of total cost with both physical and price contingencies. Investments in shrimp ponds were 85 % of the total, with eel 15%, compared to the appraisal estimate of 61% for shrimp and 39% for eel. 13. Project works were essentially completed on all the subprojects except Zhoushan where only 358.3 ha has been completed out of the 1252.8 ha anticipated. While this indicates about 25% completion, this figure is somewhat misleading in that it represents the area completed to project standards. Work is in various stages at the remaining sites, and while the Zhoushan govemment had indicated earlier (June 1994) that the remaining work would be completed with domestic financing in the winter construction seasons of 1994 and 1995, it now proposes to delay further work until 1995 and 1996, and estimates that about Y8 million will be required for this purpose. 14. Production and issues: Zhejiang has also suffered production losses due to shrimp disease and issues mentioned above are applicable to this component of the project. Jiangsu and Zhejiang 15. Project management: Project offices were established at the provincial, municipal and county levels as envisaged in the SAR. In Jiangsu, the provincial PMO intends to propose to the provincial government that the office be maintained with the following functions: monitor production, carrying out market studies to help borrowers, coordinating training, and helping to insure repayment; they are recommending that the city and county project offices be maintained. In Zhejiang, the provincial PMO will be incorporated into the provincial Bureau of Aquatic Products (BAP), and the BAP will assume responsibility for trying to bring the project up to its production potential.  - 43 - Appendix A 16. Development Corporations (DCs): It was originally intended that DCs would have a major function in implementation of the project and also act as financial intermediaries. This was seen as a means of separating government's normal administrative and regulatory functions from developmental and commercial activities. During implementation, at MOF's directive, the onlending function of these entities was assigned to the respective bureaus of finance in both provinces. In Jiangsu, it was reported that a government directive called for abolishing the DCs, though the Lianyungang DC continues to exist and has been responsible for the spread of laver cultivation in the city-- the line of separation between the Lianyungang DC and the Lianyungang BAP is not clear. In Zhejiang, DCs are responsible for project implementation in six of the subprojects (eel production, Damutu, Dongtou,Shepan, Wumen and Kaomen) and in most cases are the end-users of the Bank loan. 17. Onlending rates: Bank funds were passed from the MOF to the provincial governments at an interest rate of 4.5% with repayment over 15 years, including a five year grace period. A covenant called for end-users to pay the same interest rate charged by ABC for similar projects. The Jiangsu Bureau of Finance (BOF) onlends to the cities at a fixed rate of 5.2%, the cities to the counties at 6.2% and the counties to end-users at 7.2%; the repayment period is the same as extended by MOF. The Zhejiang BOF onlends to the city, county or provincial bureau (BAP and Water Conservancy) at a fixed rate of 4.5%; from this point, the interest rate ranges from 5% (from Sanmen County to the DC) to 8.64% (from Dongtou County to participating township governments). The DCs are, in most cases, the end users; farmers pay contract fees for the use of ponds to the farm, which in turn hands these fees over to the DC. 18. Repayment: Jiangsu, estimating that about 40% of the project investment is not producing benefits, reported that it had asked MOF to postpone repayment. Within the province, the BOF has encouraged early repayment and the PMO reported that Nantong had already repaid 30% of the Bank loan/credit with proceeds from the 20% of beneficiaries who have already completely repaid their loans. Zhejiang, on the other hand, is about $2.77 million in arrears in its principal payments to MOF, having not paid in either 1993 or 1994. 19. Sustainability: The sustainability of the major component--shrimp production--is clearly dependent on finding a solution to the shrimp disease problem. While both provinces are making efforts in this direction, the major constraint is lack of funds for carrying out research. While the transition to a market economy is by no means complete, it has had a profound impact on project implementation and operation --with diminishing government direction on individual producers and managers, shortage of working capital, and market choices in the hands of producers instead of government agencies. Beijing November 10, 1994  - 44 - Apendix A COASTAL LANDS DEVELOPMENT PROJECT Project Costs and Quantities - SAR Estimate and Actual SAR Estimate - Actual Subproject Unit Quantity Invest.* Qtuntity % of SAR Invest. of SAR -Y min- (Y mh3 JIANGSU Shrimp: New ponds ha 3,958 2,095 53% Improved ponds ha 4,303 4,634 108% Feedmills no 12 0% Cold stores no 14 12 86% Hatcheries m 2 9,500 12,544 132% Subtotal 320.79 224.86 70% Eel: Enclosed M2 87,000 136,000 156% Open ha 32.7 0 0% Feedmill no 1 1 100% Subtotal 6427 76.10 118% Laver: Culture frames ha 273 1,107 405% Hatchery m2 3,600 9,100 253% Subtotal 16.041 75-50 471% Total Aauaculture 401101 376.46 94% ZHEJIANG Shrimp: New ponds ha 1,382 1,264.8 92% Improved ponds ha 0 464.6 Feedmills no 4 4 100% Cold stores no 5 4 80% Hatcheries m2 3,200 2,960 93% Technical Service no 1 1 Subtotal 128. 197.23 153% Eel: Warm water ha 42 2.8 7% Enclosed ha 2 Open ha 89 39.4 44% Net cages ha 0.3 Feedmill no 1 1 100% Roast eel plant no 1 0 0% Carton factory no 1 1 100% Eel transfer stn no 1 1 100% Subtotal 83444 42% Total Aauaculture 21157 23167 110% * Jiangsu - Base cost plus physical contingencies from SAR Annex 3, Table 6, 7 and 8 * Zhejiang - Base cost plus physical contingencies from SAR Annex 3, Tabls 14 - 20  - 45 - Appendix B COASTAL LANDS DEVELOPMENT PROJECT CR. 1887-CHA/LN. 2924-CHA IMPLEMENTATION COMPLETION REPORT I. Comments From Zhejiang Project Management Office On the Draft ICR 1. We are very glad to receive ICR (draft) from the World Bank mission. The ICR has very clearly reflected the real situations of the project implementation in Zhejiang province. We agree with the ICR. There are two points mentioned as follows for the mission's consideration. 2. On Annex 5 (p. 27), one carton factory was cancelled at the time of adjustment and actually was never put into construction. 3. The financial and economic returns of the project cannot be reliably assessed because the break out of shrimp disease and the escalating price of eel fry severely curtained the exploration of the project potential economic benefits. Some efforts have been made to rehabilitate shrimp and eel production, present shrimp disease, adopt suitable stocking density and polyculture system, stipulate pond maintenance, response to market conditions and adjust aquaculture structure. These efforts have already resulted in good economic benefits. The current preferential policy for agriculture and aquaculture, favorable domestic and world market conditions and a long operation duration period have created a very good condition for the full exploration of the potential economic benefit of the project. It is likely to recover shrimp output to 1000 kg/ha. We have confidence in the project future and the project is successful. 11. Summary on Coastal Lands Development Project in Zhejiang Province Project Implementation 4. The primary objective of the project was to develop coastal lands for aquaculture. With the rapid development of market economy, the requirement for lands is increasing. It is a long-term strategy for Zhejiang province which has less lands with more population to utilize abundant coastal lands for diversification and aquaculture. 5. The project was assisted by the World Bank. For the project, a loan in amount of $12.4 million and SDR13.6 million was effective on September 12, 1988. The loan was used to help reclamation of lands, construction of 1,380 ha. of shrimp ponds, 133 ha. of eel ponds and related support facilities. The project costs Yuan 239.29 million and lasted 5 years. During the period of implementation some parts of constructing sea dike were substantially damaged by No. 23 typhoon in 1989: unreliable wild eel fry resources and rapid escalating price of eel fry impacted the financial viability of eel production. In views of the above-mentioned, following adjustments were reported to the World Bank for approval: shifting Dingshan subproject which was severely damaged by the typhoon and some parts of eel ponds construction to the improvement of existing shrimp ponds in Zhoushan and the construction of new shrimp ponds in  - 46 - Appendix B Dongtou. The adjustment was confirmed by the World Bank, which made the project component structure more reasonable. The adjustment was proved to be successful. 6. The development corporations were established according to the appraisal projections. The development corporation played a positive role in both implementation and arrangement activities. However, it was premature for these development corporations to function as financial institutions for handling onlending activities. In order to guarantee the repayment, onlending through financial bureaus at different levels was more reliable and realizable. The development corporations became the end-users of the project funds, which separated government's administration from development corporations' developmental and commercial activities, broke the tradition of government grants for development and brought corporations into commercial arena. The experience was a very effective way to strengthen end-users' sense of responsibility. 7. The project implementation substantially progressed based on the appraisal estimate. In views of physical objectives, most of them were achieved. Although severe typhoon and technical complexity of soft-foundation treatment affected the construction, the construction quality was good and acceptable by the monitoring group. All completed facilities are going well after being put into operation. 8. We adhered to the ICB and LCB bidding procedures for procurement and introduced competition system. The system guaranteed the procured goods and construction with good quality and performance, reasonable price and lower project cost. The actual amount was $9,310,500.00. 9. The project cost was Y 231,670,000 or 97% of the appraisal estimate of Y 239.290,000. (Zhoushan subproject needs Y 8 million for the unfulfilled works). Total World Bank loan disbursed was SDR 13,600,000 and $9,162,332.12 (27,247,446.9 USD equivalent). The balance of $3,237,666.88 was cancelled. Due to recovery of typhoon-damaged seadike and partial adjustment, the construction of shrimp ponds and related support facilities delayed, which also delayed annual investment. Work Performance 10. The project implementation largely depended on the organizations and work efficiency. The organizations were established based on the appraisal projection. The project offices at different levels of province, municipality and county were staffed with competent personnel. There was clear responsibility between the coordinating group, project offices and related administrations. The organization operation was normal and effective. 11. The project management needed more technical and coordinating skills. A management operation guideline for the project identification, appraisal, procurement, financial affairs, quality control review and training was worked out based on the World Bank projection and local conditions. The guideline was adopted by project offices at different levels. As a result, the project investment was effectively controlled, progress promoted and quality guaranteed.  - 47 - Appendix B 12. Experts were invited to review and choose the designs of some complicated engineerings before construction. It was effective to optimize the design, save the cost, speed up the progress and avoid some contingency losses. During the construction, sustained quality control for the important engineering was carried out by entrusted quality control unit. A system of reviewing cost estimate before bidding and final account at acceptance was adopted. The practice was proved to be very effective to ensure quality, fair bidding, and lower cost. 13. Because of technically complicated reclamation at the early stage of the project, more attention was put on the construction management at the cost of neglecting production management and aquaculture technology, which resulted int he shortage of production, management and technology and affected the economic returns when the project was put into operation. 14. We were satisfactory and thankful to the World Bank staffs and experts for their excellent work performance during appraisal and implementation. Their responsible attitude, rigorous motivation and high efficiency are worthy our following. The project implementation did help our project staffs improve their management and technical skills. A number of competent staffs were built up through the project. 15. Based on friendly and learning attitude, a good cooperation relationship between the World Bank mission and us was established during the project implementation. In one side, we strictly adhered to the agreements and procedures; on the other side, the World Bank mission understood and help us to solve some difficulties. We really appreciated the pleasant cooperation. Outcome and Benefits 16. In views of physical construction, most of project objectives were achieved. The quality was good and cost was slightly lower compared to the appraisal estimate. There were no significant delays. The completed facilities have been put into operation and are going well. The project exploited 1,666 ha. of lands, constructed 1,264.8 ha. of shrimp ponds, 50 ha. of eel ponds and related support facilities such as cold storage, hatcheries and feedmill, and rehabilitate 464.6 ha. of shrimp ponds (894 ha. of shrimp ponds were partially improved). The physical construction was successful. 17. In terms of economic return currently there are still some problems, the production objectives were far behind that in the appraisal estimate and economic returns did not reach the estimate. Eel: Due to the impact of rapid escalating price of eel fry, a bigger risk and the narrow margin of profit, it was difficult to borrow sufficient working capital. Eel farmer's motivation was affected. At present, some eel ponds still leave to standstill. The economic potentiality of eel component has not been exploited. Shrimp: The economic return of shrimp culture from shrimp ponds under operation before 1992 was high. During the past two years from 1993, however, the outbreak of shrimp disease substantially decreased the shrimp output, severely impacted the financial viability of shrimp culture and entire vertically integrated industry.  - 48 - Appendix B Key Lessons Learned 18. A great attention of governments at different levels and establishment of powerful project coordinating group are the basic guarantee to implement project, and the establishment of project offices employed with industrious, competent staffs is an institutional guarantee to execute project smoothly. 19. The project implementation period was the period of government's deepening its reform. The project was designed in the context of a planned economy and was implemented under market economy. The shift from the traditional planned economy to the market economy brought in many new unexpected difficulties and problems. The borrowers did not fully prepare the changes and their motivation was thus affected. 20. The project management was a kind of job that needed its occupant have a good knowledge of policy and technology. Whether the project implementation was successful or not was largely dependent on the management. The diversification and geographic spread of project sites were not convenient to the normal project management and increased the difficulties. It was better not to spread project sites geographically. 21. The project implementation usually lasts for several years, particularly for agricultural projects which are likely affected by many uncertain natural factors. A greater attention, therefore, should be paid on the natural risks to ensure smooth implementation. 22. The project has been completed, which has paved a good foundation for potential production. The production period in the project area has been only for 2-3 years, the likely economic outcome of the project during its duration can not be reliably assessed, which largely depends on our efforts. During the future production period, the production management become more and more important and a great effort should be made to adjust shrimp and eel culture. We should do our best to continue to prevent shrimp disease, strengthen the maintenance of shrimp and eel ponds, elongate pond duration, adjust suitable stocking density, adopt polyculture and diversification, improve culture technology and respond to market. We also hope to get help from the World Bank. Borrower Contribution to the Implementation Completion Report m. Comments from Jiangsu Project Management Office on the Draft ICR 23. In general, Jiangsu Coastal Lands Development Project is successful. It has largely developed about 700,000 ha of coastal lands in Jiangsu Province for Fishery, Animal Husbandry, Forestry and Fruits. For over six years, with tremendous efforts of the provincial government, the World Bank project management and the people in the developing area, the project has achieved remarkable economic, social and ecological benefits. In the past 40 years, Jiangsu provincial govemment established many organizations for coastal lands, developing research, experiment and demonstration, and has accumulated a wealth of experiences and technological data. With the loans of the World Bank, the Jiangsu Coastal Lands development has been able to be carried out in much larger scale. The World Bank's treasurable experiences  - 49 - Appendix B in investment management is of great help to the development project. The success of the project not only led to a good economic benefit on the coastal lands, but also an encouraging and heartening influence to other areas. 24. The Draft ICR soundly sums up the achievements and experiences of the project, also points out the lessons learnt as well as the problems to be further studied. Jiangsu provincial government has decided to continue developing the coastal lands in larger scope. So it is no doubt that the experiences and lessons resulted from the World Bank project will be very useful in future. 25. During implementation of the project, the World Bank and China project management made several readjustments on the original plan in response to the actual situation of each subproject. This flexibility was necessary and had ensured the success of each subproject. For example, because of the change of the world market and the China economy (from plan-market to market-economy), Yancheng mink, cannery factory, and goat cold store subprojects had to be ceased). As those changes were not predictable at the beginning, so some realistic adjustments were necessary and important in fulfilling the project. Flexible readjustment is one of the important experiences of this project. 26. The Draft ICR indicates that a major readjustment should be made for the Shrimp Culture subproject so that to extricate the Shrimp Farming from the current strait. We fully agree to this point. The big flood calamity in 1991 and the serious outbreak of shrimp disease in 1993/94 have made the shrimp culture into a very difficult position. For the flood, it was Force Majeure and could not be predicted. It rarely happened in the past 20 years. For shrimp disease, since 1993, Chinese government has organized to seek solution against the shrimp disease. And we had used the mixed culture of shrimp, shellfish, fish and clam to prevent the problem, though the real effective method is not found yet. Nevertheless, we still believe that with out constant efforts, the shrimp disease will be overcome eventually and the future of China shrimp culture is bright. Coastal Lands Fishery is a systematic project, we are maling more and more efforts to set up a long-term and efficient fishery system for a harmonious combination of economic, social and ecological benefit. 27. We feel sorry with the para. 21 of the ICR. As indicated by the ICR in many paragraphs, the implementation of Animal Husbandry subprojects are satisfactory with even extra production output and remarkable benefit. However, the World Bank cancelled the one year extension of the closing date without sufficient reasons. Because the Bank insisted on the original closing date, we were not able to use the USD4,374,321.00 (6.5 percent of total cost). This action led to a big loss to Dongtai, Ganyu Juice Plants and Lianyungang Laver processing subprojects. At that time we had already finished all work international biddings for purchase of juice equipment, laver processing machines and excavators. 28. On the para. 31 of the ICR, there is a worry about the profitability of Eel Farming because of the rising cost of seed (glass) eels. We do not think it is necessary to worry about that. The fact is that we have introduced European seed eels since 1994, and successfully cultured them. The price of European glass eels is only 5 percent of that of Chinese eels. The prices of seed eels in 1995 are going down. So there should be no problem with the resource of  - 50 - Appendix B seed eels in China. Considering the above situation, we feel that China eel farming is promising and the profitability is getting better than ever. 29. On Part "G" (para. 50) of the ICR, our opinion would be: Eel farming subproject has been satisfactory and has a brilliant future. Shrimp subproject is meeting a temporary difficulty (shrimp disease). Chinese government and the concerned farmers are taking steps to solve it by adopting new technology, using new shrimp breeds. Therefore the future of the shrimp farming is also promising. 30. We would make three corrections on the ICR as below: (a) On para. 29, bottom line, it says, "In fact, management standards in China's shrimp farm are fairly high by international standards...." But on para. 30, top line, it says that "....Shrimp Farming in China-as in most other countries-is primitive, depend upon the capture of wild animals, unsophisticated breeding practice....". These two assessment are obviously contradictory. As a matter of fact, our shrimp breeding is carried out indoor over winter season instead of dependent upon capture of wild animals. (b) In Box 1, last three lines: The fact is that, China laver not only exports to Japan, and not only transferred by Hong-Kong based companies. (c) Para. 19 of ICR, line 8, it says, ".... Yancheng meat canning was never put into operation....". The reason for that is because this subprojects stopped according to the Bank's instruction right after the construction being finished. 31. Page. 22 Summary of Assessments. Part "E"-Assessment of Outcome, it gives "Deficient", while our opinion is "Satisfactory", the same of assessment on "the Bank Performance". IV. Summary on Coastal Lands Development Project in Jiangsu Province (Abstract) La Project hnplementation 32. Implementation Timetable. The People's Republic of China signed the Loans Agreement with the IDA on September 16, 1988. Then Jiangsu Provincial Government signed the Agreement of Transferring Loans with four cities of Nantong, Yancheng, Lianyungang and Xuzhou on August 1st, 1989. The coastal lands development project was actually carried out  - 51 - Appendix B starting from July 1st, 1987. By the end of 1991 the aquatic products, animal husbandry, fruits, dried fruits and all the processing facilities have been completed within three years, ahead of the schedule, except the Fruit-juice plants of Dongtai and Ganyu counties and the cold store of Jiangsu Provincial Fishery Company. 33. Quality of the Project Work. After the completion of the project, the governments of provincial, municipal and county levels organized some specialists to accept the project. The results showed that all the subprojects had reached the project standard and quality requirements stipulated in the appraisal report. 34. Goods Purchase for the Project. All the goods purchasing were through ICB. The CMC is the international trade agent, the domestic purchases are through Jiangsu Provincial Bureau of Complete Set of Equipment ICB. 35. Implementation of Technical Training (a) Local Training. Since implementing this project 15 training classes have been held in which 2,500 members of technical and operational staff trained, and short time trainings and training in rotation for 15,000 project management staff and specialized families have been held. (b) Overseas Investigation and Training. Totally four delegations were sent to the United States of America, Canada, France, Spain, Japan, Thailand and Hong-Kong for investigation and training in Marketing knowledge and aquatic technology. Also one group of consultant specialists from the U.S. and Canada were invited to China to give lectures, more than 98 personnels of management were trained. Utilization of Project Funds 36. By the end of 1993, the investment totalled RMB 567,000,000. Yuan in which the loan from the World Bank is USD62,523,000. 37. The special account for coastal lands project was closed on June 30th, 1993. A total of USD67,371,224.29 was drawn from the World Bank. With the deduction of USD4,847,760.13 taken back by the World Bank. So a total of USD62,523,464.16 has been actually used, accounting for 83.50 percent of the total loan of USD69,000,000.00 in the project agreement. That of USD6,476,535.84 has not been used, including the soft credit of USD30,400,000, which is equivalent to USD39,297,785. We lost USD2,102,214.70 because of the fluctuation between SDR and USD exchange rate. The loan comes to USD27,600,000. A total of USD4,374,321.14 has been cancelled because of the adjustment in the middle and later stage of the project. 38. Among the loans of the World Bank actually used, the special part undertaken by the World Bank by ICB is USD13,470,280.30. A total of USD6,322,171.15 has been made up through special account in the purchase quota of ICB. A total of USD2,951,365.11 has been made up through the special account by ICB. The cumulative amount of purchase through  - 52 - Appendix B tender has reached USD22,743,816.60. The sum of local expenses comes to USD39,779,647.56. 39. Totally USD62,567,990.21 had been transferred to the lower levels by the end of 1993. There was USD44,526.05 exceeded which came from the interest incomes. The rate of the loan transfer in overseas training cost is 100 percent. Results and Benefits of the Project 40. Characteristics of the Project (a) Jiangsu Province has several million mu of coastal lands shallow water areas. For many years, we had been intending to make use of them. The World Bank Project has successfully developed 100,000 mu of prawn pools, 136,000 square meters of eel greenhouses, 15,000 mu of layer bred in shallow water. Now besides the project, we have developed another 160,000 mu of prawn pools, 500,000 sq. meters of eels pools, 80,000 mu of laver farmland and 100 sets laver processing equipment. (b) A large scale comprehensive system of production, service and marketing has been set up. A base of fisher, shrimp, scallop, aquatic plants with multi-functions has been established. The prawn pools have been built up with high quality feedmills equipped with cars and machines. The establishment of technical training center enables the production of shrimp, fish, scallop and aquatic plants become a whole system in the project. 41. After the project being put into production, the output increased in successive years. ------------------------------ (Units/tons)---------------------------- 1988 1989 1990 1991 1992 1993 Total a. Prawn output 2,143.79 3,440.49 4,156.45 7,642.93 9,174.21 3,171.82 29,729.63 b. Eel output 260.82 336.88 401.19 851.49 530.32 377.20 2,757.90 c. Laver output - 2,702.00 4,063.55 3,768.84 5,656.65 10,574.30 26,724.79 Total 2,404.61 6,479.37 8,620.64 12,263.26 15,361.18 14,123.32 59.252.89 42. Economic Benefit of the Project After the project in operation, laver, eel, animal husbandry and forestry/fruits had a good benefit. But the shrimp subproject suffered big loss in 1993/1994 except the good harvest in 1992: ---------------------(Unit Y10,000 RMB)------------------------------- 1988 1989 1990 1991 1992 1993 Total a. Prawn output 3,300.45 4,808.59 6,759.41 12,558.18 21,494.50 5,874.84 54,795.97 Benefit 550.10 -1,125.63 -1,557.28 960.80 4,374.41 -2,244.34 958.06 b. Eels output 2,087.44 5,129.68 2,109.32 4,494.18 7,700.82 26,430.78 47,952.22 Benefit 407.65 142.27 -571.63 -204.28 759.89 3207.85 3740.84 c. Laver output 1441.17 2347.75 3003.29 4184.89 11802.79 22826.89 Benefit 546.12 680.93 440.63 521.21 2672.65 4861.54  - 53 - Appendix B d. Animal husbandry output 1,034.77 2,333.35 3,553.50 10,101.00 19,149.60 26,789.00 62,961.22 Benefit 201.74 512.03 799.89 2,094.25 3,759.22 3,690.62 11,057.35 e. Forestry/Fruits output 15,000.00 Benefit 2,005.10 f. Technology output 995.30 1,123.61 1,675.76 1,768.34 1,976.60 2,256.70 9,796.31 Benefit 20.49 -5.6 -229.23 31.89 -66.10 27.28 -221.00 g. Total Province output 213,332.61 Benefit 22,407.89 43. The effect of the Projects to the Development to the Rural Economy. The project has provided 30,000 employment chances in the coastal area. The average income per capita of the peasants in prawn and laver farming has reached 1,500 yuan annually, which is two times the income before the project. The number of animal husbandry households is 3,500 yuan. 44. Prediction. The life time of the project can last 15 years. Two or three years ago the project was put into operation. We are optimistic about the future in its life time. The reasons are: (a) The market prices of the project products are tuming up. (b) The national micro-adjusting policy is getting favorable for agriculture and aquatic production industry. (c) Optimistic technological risks. After the project being put into effect, we have paid full attention to technological problems. For instances, the standard of prawn pools mostly have been reached or ever exceeded that planned. The unit area yield of two thirds prawn pools have exceeded 125 kg, etc. (d) The development of product processing is helpful to improve the economic profit of the project. Achievement of the World Bank 45. The World Bank's methods for preparation appraisal, implementation and supervision of the project are feasible and effective, which have promoted the smooth implementation of the project. Experiences and Lessons 46. The Major Experiences (a) We have successfully made full use of the World Bank loans, and promoted the aquatic production in coastal lands, the animal husbandry, the production of the forestry and fruits, developed the processing industry of agricultural products. (b) We have made full use of the limited national lands to bring benefit to the people.  - 54 - Appendix B (c) The advanced foreign processing machinery and equipment have been successfully introduced. Also the advanced management and technology have been introduced and used. 47. Lessons Because of the unexpected difficulties, some subprojects have been forced to be ceased on middle way, which resulted in slow progress of the implementation of the project and some economic losses in certain degrees.  MAP SECTION   IBRD 20260 17 2i I' 1230 121' 12 123' SHANDONG Soy 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ f Fengoon Ps Oar J / L;-n9-g C H I N A r - Lou01to 9 COASTAL LANDS DEVELOPMENT PROJECT - o n ghol 0 -<15 i JIANGSU PROVINCE 'pexvv ~~~~~~~~~~~~~~~~~~~~~~*sPr-pevis __g ) ) / Pei Xi.n