China - Third Rural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14453 IMPLEMENTATION COMPLETION REPORT CHINA THIRD RURAL CREDIT PROJECT (CREDIT 1871-CHA) APRIL 21, 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 Currency Unit: Yuan (Y) Appraisal U.S.$1.00 = Y 3.7 1987 U.S.$1.00 = Y 3.7 1988 U.S.$1.00 = Y 3.7 1989 U.S.$1.00 = Y 4.7 1990 U.S.$1.00 = Y 5.2 1991 U.S.$1.00 = Y 5.3 1992 U.S.$1.00 = Y 5.7 1993 U.S.$1.00 = Y 5.7 1994 U.S.$1.00 = Y 8.5 WEIGHTS AND MEASURES 1 Meter (m) = 3.28 Feet (ft) 1 Kilometer = 0.62 Mile 1 Hectare (ha) = 2.47 Acres = l5mu 1 Kilogram (kg) = 2.2 Pounds (lb) 2 Chinese Jin FISCAL YEAR January 1 to December 31 GLOSSARY AND ABBREVIATIONS ABC - Agricultural Bank of China BOC - Bank of China PBC - People's Bank of China ERR - Economic Rate of Return FRR - Financial Rate of Return IDA - International Development Association IFAD - International Fund for Agricultural Development LIB - Limited International Bidding MOA - Ministry of Agriculture PMO - Project Management Office RC I - Rural Credit I Project (CR 1462-CHA) RC II - Rural Credit II Project (CR 1642-CHA) RC III - Rural Credit III Project (CR 1871-CHA) RC IV - Rural Credit IV Project (CR 2182-CHA; LN 3265-CHA) RBC - Rural Banking Commercialization Project TA - Technical Assistance RCCs - Rural Credit Cooperatives  FOR OFFICIAL USE ONLY CONTENTS Preface.i Evaluation Summary ........................................... ii PART 1: PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives .................1...................... B. Achievement of Project Objectives ............................. 2 C. Major Factors Affecting the Project ............................ 6 D. Project Sustainability ..................................... 8 E. IDA Performance ....................................... 9 F. Borrower Performance .................................... 10 G. Assessment of Outcome ................................... 11 H. Future Operation ........................................ 11 1. Key Lessons Learned ..................................... 11 PART II: STATISTICAL TABLES Table 1: Summary of Assessment ......... ..................... 14 Table 2: Related Bank Loans/Credits ....... ..................... 16 Table 3: Project Timetable . .................................. 17 Table 4 Credit Disbursements: Cumulative Estimated and Actual .... ...... 18 Table 5: Key Indicators for Project Implementation ................... 19 Table 6: Key Indicators for Project Operation ...... ................. 19 Table 7: Studies Included in Project ........ ..................... 20 Table 8a: Project Costs . .................................... 21 Table 8b: Project Financing . ................................... 21 Table 9: Economic Costs and Benefits ........................... 22 Table 10: Status of Legal Covenants ........ ..................... 23 Table 11: Compliance with Operational Manual Statements ............... 26 Table 12: Bank Resources: Staff Inputs ....... .................... 27 Table 13: Bank Resources: Missions ........ ..................... 28 APPENDICES A. Mission's Aide-Memoire . ................................... 29 B. Project Review from Borrower's Perspective ...................... 32 Maps: IBRD 20243 and 20244 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. I   - i - IMPLEMENTATION COMPLETION REPORT CHINA THIRD RURAL CREDIT PROJECT (CR. 1871-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Third Rural Credit Project in China, for which Credit 1871-CHA in the amount of $170 million/SDR 123.8 million was approved on January 26, 1988 and made effective on June 17, 1988. The credit was closed on June 30, 1994, 12 months beyond the date originally envisaged, June 30, 1993. It was fully disbursed, and the last disbursement took place on July 7, 1994. The ICR was prepared by Richard Scobey, China and Mongolia Agriculture Operations Division, East Asia and Pacific Region, and reviewed by Mr. Joseph Goldberg, Division Chief, and Mr. Yo Kimura, Project Advisor. The Borrower provided comments that are included as an appendix to the ICR. Preparation of this ICR was begun during the Bank's final supervision/completion mission, from November 7 to December 2, 1994. It is based on materials 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.  I I  - ii - IMPLEMENTATION COMPLETION REPORT CHINA THIRD RURAL CREDIT PROJECT (CR. 1871-CHA) EVALUATION SUNIMARY Introduction and Project Objectives 1. The Third Rural Credit Project (RC III) was formulated in 1986-87, after the Bank had financed more than fifteen projects in the agriculture sector, and four industrial credit projects and two rural credit projects in the finance sector. The First and Second Rural Credit Projects (RC I&II) provided funds to the Agricultural Bank of China (ABC) for medium-and long-term investment in three provinces and included a small amount of technical assistance to strengthen ABC's institutional capacity for sub-project appraisal. The objectives of RC III were: (a) to stimulate growth and diversification of agriculture by expanding the availability of medium- and long-term credit; and (b) to increase the operational efficiency of ABC through institutional development. The first objective was addressed through provision of investment funds for aquaculture, tree crops, livestock and agroprocessing in six provinces. The second objective was addressed through support for: (a) capacity building for ABC's three national staff colleges; (b) training of project staff, primarily in project appraisal, monitoring, and evaluation; (c) technical assistance to review and strengthen ABC policies and operations; and (d) a pilot program to introduce Rural Credit Cooperatives (RCCs) to longer-term lending. 2. The objectives were generally well designed, clearly spelled out in the project documentation, and supported by all the stakeholders. Similarly, they appropriately reflected the government implementation capacity and were consistent with both the Government's development strategy and the Bank's Country Assistance Strategy at the time of preparation. Consequently, there was no reason to revise the objectives during implementation. The only problem was that the objectives were slightly unrealistic about the pace of financial sector reform in China. The underlying assumption of the project was that the finance sector was rapidly changing and the project would support the critical financial and human resources required to reshape the rural banking system. As reviewed below, this expectation proved to be excessively optimistic. Implementation Experience and Results 3. The project substantially achieved the objective of agricultural growth and diversification. The on-lending program financed about 850 subprojects, which supported the establishment of 80,000 ha of tree crops, construction of 3,800 ha of fish ponds, the purchase of 3.6 million animals, and the development of hundreds of agro-processing factories. The total number of subprojects was somewhat less than the 1,200 projected in the Staff Appraisal Report (SAR), due to adjustments in the composition of investments arising from changing market and economic conditions. The sub-projects generally met their expected production targets and achieved good rates of return. The final estimates of financial rates of return (FRR) for the various sub-sectors are significantly higher than those projected in the SAR, and the overall project FRR of 31 percent significantly exceeds the SAR estimate of 20 percent. The sub- projects also generated good economic benefits, with a consolidated economic rate of return (ERR) estimated at 20 percent for the overall project (this level was slightly lower than the SAR projection due  - iii - to changes in the analytical assumptions used in the estimation of ERRs). Despite the overall strong performance, the on-lending program faced two problems. First, about 9 percent of all sub-projects failed to meet production objectives and expected benefits, primarily in the agro-processing sub-sector, due to technical and financial weaknesses in design and operation. Second, there was a very low level of technology transfer in most sub-projects, despite the fact that out-dated technology is one of the main contributors to low productivity and efficiency in the industrial sector in China. 4. The project only partially realized the objective of increasing the operational efficiency of ABC through institutional development. The upgrading of training colleges and the overall project training program were generally well implemented and made a moderate contribution to capacity building. The studies program, however, did not meet its objective of providing policy guidance for reshaping the role of ABC in the changing financial sector environment, as many of the studies were general and emphasized description rather than prescription. Similarly, the RCC pilot program did not meet the overall objective of establishing a model for longer-term lending to individual households by RCCs, as implementation was weak due to limited interest and commitment from ABC. 5. The following factors under the control of the Government and ABC substantially affected the achievement of project objectives. First, the government commitment to financial sector reform declined significantly during the early years of implementation, in response to the overheating of the economy in 1988-89 and the events of June 1989. This understandably dampened ABC's enthusiasm and ability to implement those elements of the project designed to support reform, such as the training, policy studies, and RCC pilot programs. Second, the macroeconomic framework changed significantly during the project, as a result of high domestic inflation rates, liberalization of commodity prices, and large devaluations of the exchange rate. This spurred a reorientation of the on-lending program towards higher value production, raised investment and operating costs for sub-projects, and led to a higher debt service burden for foreign currency denominated sub-loans. Third, while the review of technical aspects in sub- project appraisal was relatively strong, limited attention was paid to economic and marketina issues at the start of the project, particularly production size, economies of scale, the impact of input and output price changes on profitability, and changes in supply and demand conditions. Fourth, certain loan terms for some sub-projects were not structured in line with on-lending covenants. In some provinces, there was a wide variation in the application of interest rates on sub-loans at the start of the project, loan repayment and grace periods did not match the actual cashflow availability for many investments, and a few sub-borrowers were required to repay loans more quickly than agreed under the debt service schedules. Fifth, the financing plans for sub-projects often did not make adequate, if any, provision for workiny capital requirements, which led to insufficient operating capital to purchase raw materials. 6. The following factors under the control of the sub-borrower also affected the achievement of project objectives. First, technologv transfer was limited, which reflected unwillingness of sub-borrowers to assume foreign exchange risk for the purchase of imported equipment, the limited familiarity of Chinese design institutes with modern technologies, and an emphasis on upfront investment costs over long-term net benefits. Second, the design gualitv for agro-processing sub-projects was not high by international standards, including poor physical layout and inadequate compliance with health and safety standards. Third, many agro-processing sub-projects did not adequately comply with water pollution control regulations, particularly treatment of waste water prior to discharge. 7. The Bank's performance in identification, preparation and appraisal was satisfactory, although insufficient attention was paid to monitoring and evaluation requirements, analysis of project risks, and incentives for the transfer of new technologies and compliance with pollution control regulations. The Bank performance in supervision was highly satisfactory, as the nine missions identified key operational  - iv - problems and provided useful recommendations. ABC's performance in project preparation and implementation was also satisfactory. However, some aspects of ABC's performance were deficient and required intervention from Bank supervision missions, particularly the poor management information system, limited supervision from headquarters and provincial staff at the start of the project, and weak compliance with covenants related to on-lending terms, sub-project review, and procurement arrangements. 8. The project's outcome is viewed as satisfactory, since the first and most important objective of agricultural growth and diversification was achieved with a relatively high degree of sustainability. The project is not viewed as highly satisfactory because (a) the level of technology transfer in the lending program was minimal, and (b) the second objective of capacity building was only partially realized and its sustainability is uncertain. Summary of Findings, Future Operations, and Key Lessons Learned 9. The benefits generated by the on-lending program are likely to be sustained throughout the life of the project, as the sub-borrowers have strong financial incentives to continue to operate the sub- projects profitably, the macroeconomic framework is expected to remain relatively stable, and commodity price forecasts indicate no substantial changes in world supply and demand conditions for project production. Therefore, ABC will not be required to provide any additional technical or financial assistance for the operation of the sub-projects, and will instead focus on supervision of sub-projects with outstanding debt, particularly on financial performance, compliance with on-lending terms and conditions, and overdue debt service payments. However, the sustainability of the small number of problem projects is less certain. Most of these will require the development of restructuring plans, rescheduling of debt service, and close supervision by ABC and technical bureaus in order to become sustainable. The sustainability of the financial sector reform program is also uncertain, in view of the limited achievements during the project implementation period. However, some recent policy changes indicate that the Government has begun to reemphasize financial reform, particularly the transformation of the four specialized banks into autonomous commercial enterprises. The implementation of these new reform efforts will require extensive technical assistance. 10. The key lessons learned from the project include the following. First, future operations should be based on a realistic assessment of Government capacity and commitment for sector reform. This would suggest a greater emphasis on gradualism and experimentation in the design of Bank finance sector reform projects in China. Second, the tight phasing of four ABC projects within seven years was not conducive to effective implementation of RC 111, as there was insufficient time to learn lessons from one operation and transfer them to the next. Third, ABC's institutional development requirements are much greater than the limited technical assistance program supported under RC III. Other priority areas include the development of new business activities, improved operating procedures, computerization, and a wide range of training and technical assistance requirements to strengthen human resource development. Some of these issues were addressed in the subsequent Fourth Rural Credit Project. Fourth, despite ABC's improved performance in the appraisal of sub-projects, additional capacity building is required in the area of economic and marketing issues. Fifth, future operations need to strengthen incentives for the transfer of new technologies and compliance with pollution control regulations in sub-project selection and design. Sixth, the development of an effective management information system is a high priority. Seventh, ABC's institutional capacity for supervision must be strengthened, including the appointment of additional staff.   IMPLEMENTATION COMPLETION REPORT CHINA THIRD RURAL CREDIT PROJECT (CR. 1871-CHA) PART !: PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives 1. When the project was formulated in 1986-87, China's agricultural sector had already undergone major policy changes and substantial reform. The control and management of agricultural land had largely been transferred to villages and families, and output prices and marketing arrangements for many farm products had been liberalized. Grain production dramatically increased in response to these reforms and, consequently, the Government's sectoral development strategy began to emphasize production of higher value goods, particularly horticulture, aquaculture, livestock, and agro-processing. The financial sector had also been partially reformed, with the restructuring of the People's Bank of China as a separate central bank and the transfer of sectoral investment lending to four specialized banks. This was accompanied by a greater emphasis on provision of credit for the non-state sector and medium-term investment, increased autonomy for banks in investment review and decision-making, and the development of new non-bank financial institutions. The Government's goal was to transform the banks from administrative agencies closely allied with local governments into independent, competitive enterprises. Nonetheless, at the time of project preparation, the financial sector remained largely oriented towards short-term lending, and heavily administered by the central government, which mandated aggregate credit ceilings, the interest rate structure, and personnel policies. 2. Previous World Bank Group operations had played an important role in supporting the Government's development strategy. In agriculture, the Bank had financed more than fifteen projects, with an emphasis on land and water resources development, agricultural support services, and specialized product sub-sectors. In finance, the Bank had supported four industrial credit projects and two rural credit projects. The First and Second Rural Credit Projects (RC I&II) provided funds to the Agricultural Bank of China (ABC) for medium- and long-term investment, primarily for tree crops, fisheries, livestock, and agroprocessing in three provinces. They also included a small amount of technical assistance to strengthen ABC's institutional capacity for sub-project appraisal. 3. The Third Rural Credit Project (RC III) was designed against this background of on-going sector reform and the implementation experience of the two previous rural credit operations. Its main objectives were: (a) to stimulate growth and diversification of agriculture by expanding the availability of medium- and long-term credit; and (b) to increase the operational efficiency of ABC through institutional development. The first objective was addressed through provision of investment funds for aquaculture, tree crops, livestock and agroprocessing in three provinces in the southwest (Guizhou, Sichuan, Yunnan) and three provinces in the north-central region (Anhui, Henan, Hubei). The second objective was addressed through support for: (a) capacity building for ABC's three national staff colleges, including teaching equipment and materials, local and overseas courses, and short-term training programs; (b) training of project staff, primarily in project appraisal, monitoring, and evaluation; (c) technical assistance to review and strengthen ABC policies and operations; and (d) a pilot program to introduce Rural Credit  - 2 - Cooperatives (RCCs) to longer-term lending.' It was intended that these activities would address policy reform and capacity building issues in greater detail than in RC I&II, in support of the rapidly changing sector environment. Although not cited as major objectives, the project also emphasized regional issues of poverty alleviation and a sectoral approach to stimulating growth of production and agroprocessing. 4. These original objectives were generally appropriate and well designed. They were clearly spelled out in the project documentation and supported by all the stakeholders, including the central and provincial governments, the ABC offices at all levels, and the enterprises that borrowed funds. Similarly, the objectives appropriately reflected the Government implementation capacity and were consistent with both the Government's development strategy and the Bank's Country Assistance Strategy at the time of preparation. Consequently, there was no reason to revise the objectives during implementation. The only problem with the original objectives is that they were slightly unrealistic about the pace of financial sector reform in China. The underlying assumption of the project was that the finance sector was rapidly changing and the project would support the critical financial and human resources required to reshape the rural banking system. As reviewed below, this expectation proved to be excessively optimistic. 5. The design of the project was also appropriate. ABC's existing credit structure had no difficulty absorbing the additional loan appraisal, administration, and monitoring work associated with the large number of sub-projects under the project, although, as noted in para. 36, ABC headquarters initially provided insufficient supervision of the on-lending program. In fact, the number of provinces that participated in the successor project, the Fourth Rural Credit Project (RC IV), was increased to eleven, in view of ABC's successful management of the six provinces in RC III. Similarly, the project was not unduly complex or risky, as it supported a limited number of activities related to lending and capacity building that were consistent with ABC experience and expertise. Finally, the project design included significant flexibility to adjust the selection of sub-projects in line with changing economic conditions and development priorities. B. Achievement of Objectives 6. As reviewed below, the project substantially achieved the objective of agricultural growth and diversification and partially achieved the objective of institutional capacity building. It made negligible progress on the secondary goals of poverty alleviation and improved sectoral planning. Agricultural Growth and Diversification Ohiective 7. The provision of medium- and long-term credit through the on-lending component made a significant contribution to stimulating growth and diversification of agriculture in China. The on-lending program financed about 850 subprojects, which supported the establishment of 80,000 ha of tree crops, construction of 3,800 ha of fish ponds, the purchase of 3.6 million animals, and the development of hundreds of agro-processing factories. The total number of subprojects was somewhat less than the 1,200 projected in the SAR, as a result of an increase in the number of large agroprocessing investments and a corresponding de--line in the number of small investments in tree crops, aquaculture, and livestock during project implementation. While the SAR estimated an investment share of 39 percent for agroprocessing and 34 percent for tree crops, the actual allocation amounted to 59 percent for agroprocessing and 20 percent for tree crops. The main reductions occurred in the production of gallnut, black wattle, and apple, where the actual establishment areas of 6,600, 1,900, and 4,400, respectively, I ABC until recently has been entrusted with holding reserves for and oversight of Rural Credit Cooperatives, which are financial institutions collectively owned by local farm communities.  - 3 - were significantly less than the SAR projections of 46,700, 6,000, and 5,700, respectively. As reviewed in para. 21, this adjustment in investment composition was appropriate in view of the changing market and economic conditions. 8. Despite some operational problems, the sub-projects generally met their expected production targets and achieved satisfactory rates of return. In fact, the final estimates of financial rates of return (FRR) for the various sub-sectors are significantly higher than those projected in the SAR.2 For example, the final estimate of the consolidated FRR for all tree crop investments is now estimated at 27 percent, which exceeds the indicative FRRs included in the SAR of 18 percent for rubber, 25 percent for litchi, and 17 percent for tea. Similarly, the final consolidated estimates of the FRRs for livestock, aquaculture, and agroprocessing (37, 30, and 31 percent, respectively) are all greater than the FRRs calculated for representative projects in the SAR, which ranged from 17 percent for lean pig production to 18 percent for fishponds and to 24 percent for cannery factories. As a result of the improved sub- sectoral performance, the overall project FRR of 31 percent significantly exceeds the SAR estimate of 20 percent. 9. This strong financial performance is due primarily to two factors. First, the actual output prices prevailing in project areas during implementation were significantly higher than the price projections used in the SAR, while input prices, primarily labor and raw materials, remained close to the SAR estimates. This change in output prices reflected the implementation of the Government price reform program in the early-1990s, when many prices were decontrolled and marketing arrangements liberalized. Second, the pace of sub-project review and approval and the speed of enterprise construction and commissioning were much quicker than anticipated in the SAR, which hastened the flow of benefits. For example, the loan was more than half disbursed by the second year of the project, when the SAR assumed disbursements of 18 percent, and three-quarters disbursed by the third year, when the SAR assumed disbursements of 41 percent. 10. The sub-projects also generated good economic benefits, with a consolidated economic rate of return (ERR) estimated at 18 percent for agroprocessing, 21 percent for tree crops and aquaculture, 30 percent for livestock, and 20 percent for the overall project. However, these ERRs are slightly lower than some of the indicative ERRs included in the SAR, which projected an overall ERR of 24 percent for the project. The difference between the expected and actual economic impact of the on-lending program is due more to changes in the analytical assumptions used in the estimation of ERRs than any real loss of economic benefits during project implementation. In particular, the extent of price distortions in the economy is much smaller today than at the time of appraisal, which leads to significantly lower conversion factors to adjust domestic prices to international levels in the ICR analysis. For example, the conversion factors of 0.57 for rural labor, 0.88 for electricity, and 1.09 for equipment that were used in the SAR analysis lead to a lower valuation of shadow-priced inputs, and correspondingly higher valuation of net benefits, than the corresponding factors of 0.97, 1.25, and 1.25 used in the ICR analysis. 11. The strong performance of the sub-projects contributed to a healthy financial position of ABC throughout project implementation. Overall, the project generated profits of Y4.9 million in 1990, Y21.3 million in 1991, Y16.7 million in 1992, and Y17.8 million in 1993. These high profit levels reflect: (a) 2 The SAR included FRR and ERR estimates for eight representative sub-projects, which were then extrapolated to estimate the overall project FRR and ERR. The ICR mission calculated FRRs and ERRs for the four major sub-sectors, based on actual cost and benefit data for 1989-1993 and projected data for 1994-2010 for all sub-projects in each sub-sector, which were then summed up to derive the overall project FRR and ERR.  - 4 - a healthy spread between ABC's cost of funds and on-lending rates, amounting to 1.54.0 percent over the life of the project; (b) relatively low operational costs, which amounted to less than one percent of total outstanding loans; and (c) timely debt-servicing from sub-borrowers, with overdue loan repayments amounting to 7 percent of total loans (however, overdue interest payments are slightly higher, amounting to 12 percent of total due interest, which largely reflects the excessively tight loan terms for some sub- projects, as reviewed in para. 23). 12. While the overall economic and financial performance of the on-lending program has been strong, a number of individual sub-projects have failed to meet production objectives and expected benefits. About 9 percent of all the sub-projects have been categorized by ABC as "problem projects" because of financial, technical, or managerial weaknesses, primarily in the agro-processing sub-sector. The main problem areas have been animal feed mills, slaughterhouses, edible oil mills, ramie processing factories, and coffee, citrus, and dairy farms. These investments faced three general types of problems, as reviewed in detail in the following section. First, the construction and commissioning of factories was delayed, as a result of shortages of local counterpart funds, problems with plant and equipment design standards, and equipment procurement delays. Second, capacity utilization levels were low due to problems in raw material procurement and shortage of working capital. Third, revenue performance and debt servicing were poor due to low production levels, problems with product quality, a decline in demand for some products, and inadequate loan repayment periods. 13. The total number of problem sub-projects is relatively small and by no means detracts from the overall achievement of agricultural diversification and growth. The only major problem with this objective was the very low level of technology transfer supported under the project. While the project did introduce some improved technical guidelines for tea rehabilitation, gallnut production, and sheep breeding, it did not promote the introduction of new technologies in the largest investment area of the project, agro-processing. This was particularly disappointing in view of the fact that out-dated technology is one of the main contributors to low productivity and efficiency in the industrial sector in China. As reviewed below, this reliance on existing, sub-optimal technologies reflects weaknesses in sub-project design standards, avoidance of international procurement and reliance on domestic equipment suppliers, and a limited review of economic and environmental issues in sub-project appraisal. Capacity Building Objective 14. The project only partially realized the objective of increasing the operational efficiency of ABC through institutional development. 15. The upgrading of training colleges and the overall project training program were generally well implemented and made a moderate contribution to capacity building: 168 core faculty from ABC training institutions attended short-term overseas courses; foreign education consultants assisted in the design of new course curricula and materials; new teaching equipment was procured, including projectors, language laboratory equipment, copying machines, and books; several dozen new courses were developed to train teachers in ABC's cadre and secondary vocational schools; and about 11,000 senior and mid-level ABC staff at the national, provincial, and county levels attended short-term domestic training programs in a variety of subjects. It is clear that these programs helped upgrade ABC staff skills in appraisal, monitoring, and evaluation, which is highlighted by the noticeable decline in references to inadequate appraisal by ABC of sub-project feasibility studies from RC II to RC III supervision reports. Nonetheless, the scope and scale of the training program was slightly smaller than envisioned at the time of appraisal and only one-half of the IDA credit earmarked for training was drawn down.  - 5 - 16. Although the studies program was completed on a timely basis, it did not meet its objective of providing policy guidance for reshaping the role of ABC in the changing financial sector environment. As reviewed in Table 7 of Part II, many of the studies were general and emphasized description rather than prescription. As a result, it is difficult to identify any significant changes in ABC operations that grew out of the studies. This outcome reflects three factors. First, while it was envisioned that ABC would draw on foreign consultants to gain an international perspective on policy questions, all the studies were done internally by ABC departments. Second, since several of the studies touched on sensitive policy issues under the control of the People's Bank of China (PBC) and the Ministry of Finance, ABC had very limited authority to highlight problems and propose changes to the existing policy framework. In this regard, the original terms-of-reference for the studies included in the SAR seem ambitious and unrealistic. Third, as reviewed in para. 21, the Government's overall economic reform program was significantly curtailed after 1989, which heavily discouraged detailed review and discussion of finance sector reform issues. 17. The RCC pilot program achieved mixed results. While it did succeed in introducing longer-term lending practices to selected RCCs in four provinces, it did not meet the overall objective of establishing a model for longer-term lending to individual households by RCCs. Despite strong interest by the RCCs themselves, some ABC branch offices viewed the additional training and supervision requirements related to RCC lending as an unwelcome administrative burden that distracted them from higher priority activities, notably the development of their own lending program. Similarly, RCCs were increasingly engaged in direct competition with ABC for deposits in rural areas, which no doubt dampened ABC's willingness to support the diversification and strengthening of RCCs. As a result, several branch offices lacked adequate interest and commitment, which led to delayed implementation of the program and weak compliance with covenants related to the RCC program. Implementation of the pilot program was eventually completed in line with the Project Agreement, after close monitoring by several supervision missions in 1991-93. However, ABC did not complete a review of the implementation experience of RCC lending that had been requested by Bank supervision missions, as it felt that the recent change in Government policy about RCC oversight responsibility obviated the need for any further monitoring or evaluation by ABC.3 The combination of weak implementation and insufficient monitoring and evaluation precluded the development of an effective model of long-term lending that could be replicated in other provinces. Poverty Alleviation and Sectoral Planning Objectives 18. Despite the stated concern for poverty alleviation and improved sectoral planning in the SAR, the project included no specific activities designed to support these objectives. While individual sub-projects may have contributed to income generation for some poor households, particularly in the poorer provinces of Guizhou and Yunnan, there was no systematic effort to identify or target poor beneficiaries in the on- lending program. Similarly, there was no increased attention given to a sectoral approach to stimulating growth of production and agroprocessing under the project. As with RC I&II, sub-projects were reviewed and approved solely on the basis of the merits of the individual feasibility studies, with little effort made to develop sectoral lending strategies or transfer lending experiences across different areas. ' ABC will no longer be responsible RCC oversight beginning in 1995. While no detailed transfer arrangements have been announced, it appears that RCCs will be administered initially by a specialized department within PBC.  C. Major Factors Affecting the Project 19. The main factors that substantially affected the achievement of project objectives are summarized below. Factors Subject to Government Control 20. Government Commitment to Reform. Despite the strong commitment to financial sector reform at the time of appraisal, the Government's sectoral development objectives changed dramatically during the early years of project implementation. In response to the overheating of the economy in 1988-89 and the events of June 1989, the Government announced a comprehensive new macroeconomic program in November 1989 that emphasized short-term stabilization over longer-term institutional reform throughout the economy. The stabilization program relied heavily on expanding the role of administrative control measures to manage aggregate demand, which stalled the development of market-based policy instruments for fiscal and monetary policy. Ir, the finance sector, the Government emphasized the need for banks to lend in conformance with the state industrial policy and credit plan, and strengthened the role of directed credit and administered interest rates in resource allocation. This unexpected change in the internal policy dialogue in China understandably dampened ABC's enthusiasm and ability to implement those elements of the project designed to spur financial sector reform, such as the training, policy studies, and RCC pilot programs. 21. Macroeconomic Policies. Project implementation was significantly affected by the following changes in the macroeconomic framework. First, demand pressures in the economy became pronounced in the early years of implementation, which led to rapid increase in domestic inflation. The change in relative prices spurred a reorientation of the on-lending program towards higher value production, as demonstrated by the shift of investment from tree crops to agro-processing. The change in absolute prices raised overall investment costs for sub-projects, which forced ABC to finance a smaller number of more expensive investments and created additional financing requirements that some sub-borrowers were unable to meet. Raw material costs were similarly affected, which undermined operational profitability and increased working capital requirements. Second, the Government enacted a new series of price reform measures for grain and energy in 1992-93, which affected the profitability of low margin sub-projects in agro-processing, such as feed mills, edible oil mills, and slaughterhouses. Third, the local currency experienced significant depreciation over the project implementation period, reflecting large devaluations of the official exchange rate in 1989-1990, the increasing depreciation of the swap rate in the Foreign Exchange Adjustment Centers in 1992-93, and the eventual unification of the dual exchange rate system at a market-clearing rate in 1994. The nominal official rate has more than doubled, from Y3.7 = $1 at the time of appraisal to Y8.5 = $1 at the time of the ICR. These exchange rate developments created cash-flow difficulties for many sub-borrowers, who faced an increased local currency financing requirement for imported capital goods and operating inputs, and a dramatically higher debt service burden for foreign currency denominated sub-loans. Factors Subiect to ABC Control 22. Apnraisal Process. ABC staff demonstrated relatively good competency in the review of sub- project feasibility studies, due in large part to the extensive training in appraisal methodology supported under RC l-lI. However, while the review of technical aspects was relatively strong, limited attention was paid to economic and marketing issues at the start of the project, particularly the optimal size of production to capitalize on economies of scale, the impact of input and output price changes on sub- project profitability, a detailed review of supply and demand conditions in product markets, and working  - 7 - capital requirements. This reflected the general lack of appreciation of economic analysis prevailing throughout China at the start of the project as well as ABC's weak institutional capacity for economic and marketing analysis and zeal to commit all the project funds quickly. These issues proved to be extremely important during the implementation of the project, particularly in view of the large changes in the macroeconomic framework, and a more rigorous review would have helped ABC weed out some of the problem sub-projects in the feed mill, slaughter, edible oil, and ramie sub-sectors. ABC received training in these issues during implementation, which contributed to an improved performance towards the end of the project. 23. Loan Terms. As with RC I&II, certain loan terms for some sub-projects were not structured in line with on-lending covenants. First, there was a fairly wide variation in the application of interest rates on sub-loans at the start of the project, with many above or below the levels prescribed by project covenants. Compliance with interest rates improved, however, towards the end of the project as a result of close monitoring by Bank supervision missions. Second, loan repayment and grace periods did not match the actual cashflow availability for some investments with long development periods. For example, the standard loan terms for tree crops, five years repayment with two years grace, required complete repayment before sub-projects had even reached full production. Third, a few county ABC offices requested that sub-borrowers repay loans more quickly than required under the agreed debt service schedules, in order to speed up the recycling of project funds and expand total lending amounts. Fourth, a few sub-projects ignored the requirement for sub-borrowers to finance 30 percent of project costs by including non-cash contributions as part of the overall project financing plan, such as land or existing assets. This led to an unhealthy debt/equity ratio and an excessively high debt service burden. 24. Procurement. As with RC I&TI, procurement procedures were not adequately followed in RC III, especially during the first three years of the project when the majority of agro-processing sub-projects were constructed. In several cases, equipment procurement was broken up into smaller contracts to avoid the $100,000 threshold for Limited International Bidding (LIB) procedures and ensure purchase from domestic suppliers. As a result, the LIB share in total procurement amounted to less than 5 percent, significantly below the SAR estimate of about 20 percent, which contributed to the following problems. First, little new technology was imported from abroad under the project and, consequently, an important opportunity for technology transfer was lost. Second, several sub-projects ended up buying incompatible equipment from different manufacturers as a result of their decision to split the procurement of manufacturing lines into smaller contracts. Third, many sub-projects did not procure the most modern and cost-efficient technology, which has hampered their ability to manufacture high quality products and compete effectively in domestic and export markets. Compliance with procurement procedures improved towards the middle of project, when ABC headquarters began to closely monitor provincial procurement actions in response to Bank supervision mission recommendations. 25. Working Capital. As with RC I&II, working capital was not appropriately treated under the project. First, the financing plans for sub-projects often did not make adequate, if any, provision for working capital requirements. As a result, many sub-projects, notably agro-processing enterprises, lacked sufficient operating capital to purchase raw materials, which contributed to low capacity utilization levels and poor financial performance. It became difficult to redress this problem during implementation, as the Government's macroeconomic stabilization program led to a severe tightening of all forms of credit. Second, ABC inappropriately extended working capital loans in several cases to cover debt service requirements or offset losses in problem projects.  - 8 - Factors Subject to Sub-Borrower Control 26. Technology Transfer. Many agro-processing sub-projects were based on familiar, existing technologies in China that were out-dated by international standards, which contributed to low operating efficiency and productivity. This reluctance to explore alternative technology and equipment options, particularly from abroad, reflected the following factors: unwillingness of sub-borrowers to assume foreign exchange risk for the purchase of imported equipment; the limited familiarity of Chinese design institutes with improved, modern technologies at the time of appraisal; and the traditional Chinese approach to technology selection, which focuses more on upfront investment costs than long-term net benefits. 27. Design Standards. The quality of design and construction for agro-processing sub-projects was not high by international standards, particularly for food processing and pharmaceutical enterprises. The physical design of many plants was poor, with inadequate attention given to process layouts, materials flows, and conveying. Many plant and office buildings were over-designed, with more floor space than is necessary for efficient operation. Similarly, few sub-projects incorporated any energy or water conservation measures, which contributed to unnecessarily high utility bills and consumption rates. Finally, health and safety aspects were routinely given minimal attention, with many factories operating with unguarded drives, inadequate dust control, high noise and heat levels, excessively steep and unguarded stairs, and insufficient health and safety equipment for equipment operators such as safety glasses. These weak design standards contributed to poor operating performance, higher maintenance costs, an unhealthy environment for workers, and poor product quality in many firms. 28. Environmental Impact. Many agro-processing sub-projects did not adequately comply with provincial water pollution control regulations during their early years of operation. In particular, firms routinely failed to treat waste water prior to discharge, which created downstream pollution problems. This poor compliance reflects: (a) limited authority by county Environmental Protection Bureaus (EPBs) to enforce regulations, particularly when it comes to requiring firms to install pollution control equipment at the start of a project; (b) the lack of technical expertise in waste water management at design institutes, which led to insufficient mitigation measures being incorporated into the design of factories; and (c) inadequate monitoring and evaluation by ABC and EPB of sub-project compliance with regulations. D. Project Sustainability 29. The benefits generated by the on-lending program are likely to be sustained throughout the life of the project. The sub-projects are generally expected to maintain the current levels of production and profitability for the following reasons: the sub-borrowers have strong financial incentives to continue to operate the sub-projects as efficiently as possible, since their own remuneration is related to sub-project performance; the Government's price reform program is largely completed so there should be no more significant changes in the policy framework that would affect input and output pricing; the World Bank's forecast of commodity price trends indicates no substantial changes in world supply and demand conditions for the major project production over the next ten years; ABC's capacity to monitor and restructure problem projects has been strengthened under the follow-on project, RC IV; and, despite a few management problems at individual sub-projects, the overall institutional capacity in the on-lending program is adequate to ensure continued sound financial and technical management. The main risk that could threaten the overall sustainability of the on-lending program is a general reversal in the Government's sectoral and macroeconomic reform program and a return to administered control of the economy, which is not deemed to be likely.  -9- 30. The sustainability of the small number of problem projects reviewed in para. 12 is less certain. Government reforms in pricing and marketing have substantially eroded the profitability of several investments in feed mills, edible oil mills, and slaughterhouses, which were predicated on the assumption of continued state control of raw material prices. Similarly, the decline in world demand for ramie textiles has contributed to low capacity utilization levels in ramie mills, and domestic over-supply of citrus has affected the profitability of citrus sub-projects. Finally, technical or managerial problems continue to beset a number of coffee, livestock and dairy sub-projects. Most of these problem projects will require the development of restructuring plans, rescheduling of debt service, and close supervision by ABC and technical bureaus in order to become sustainable. 31. The sustainability of the financial sector reform program supported under the project is also uncertain, in view of the limited achievements during the project implementation period. However, some recent policy changes indicate that the Government has begun to reemphasize financial reform, particularly the transformation of the four specialized banks into autonomous commercial enterprises. Two key steps were taken in 1994. First, ABC's non-commercial functions, including the financing of staple crop purchases, grain storage, agricultural development, and poverty alleviation, have been transferred to the newly created Agricultural Development Bank. Second, ABC and the other specialized banks have introduced a number of new operating procedures to strengthen market-based intermediation, including a new accounting system based on international principles, new asset liability ratios that move away from strict reliance on administered credit plans in resource allocation, and improved risk analysis in credit appraisal and increased reliance on guarantees. If these reform efforts continue and deepen, the original financial sector reform objectives of the project will be achieved, albeit after a substantial delay. E. Bank Performance 32. The Bank's performance in identification, preparation and appraisal was satisfactory. This work was directly based on the Government's development strategy, the Bank's country assistance program, and recently completed Bank economic and sector work, particularly the 1987 China Finance and Investment Report. As a result, there was a fairly strong consensus between the Bank and the Government about the overall objectives and design of the operation as well as the conditions necessary to ensure successful project implementation. Nonetheless, some aspects of the Bank's work were weak. First, monitoring and evaluation requirements were not reviewed in detail and, as a result, there was no common understanding of what data should be collected by ABC and reported to the Bank at the start of the project. Second, the review of risks was very cursory and focussed primarily on ABC's institutional capacity and financial performance. It did not address several key factors that ended up playing a significant role in project implementation, such as the macroeconomic policy framework, Government commitment to financial sector reform and the institutional capacity of design institutes and sub-borrowers in technical design of sub-projects. Tnird, the appraisal phase did not adequately review and strengthen incentives for the transfer of new technologies and compliance with pollution control regulations in sub- project selection and design. Finally, the project promised more than it was designed to deliver in the areas of poverty alleviation and improved agricultural sector planning. 33. The Bank performance in supervision was highly satisfactory. The nine missions accurately reported implementation progress; identified the key operational problems and provided useful interventions and recommendations; paid close attention to the overall development impact of the project; and showed a high degree of flexibility in modifying project arrangements in response to changing implementation conditions. Supervision missions made particularly important contributions in the following areas: developing a common monitoring framework for problem projects and debt service arrears; strengthening the review of market conditions in ABC's appraisal of sub-project feasibility  - 10- studies; expanding the role of ABC headquarters in project supervision; enforcing compliance with covenants related to procurement, sub-loan terms, and free-limits; ensuring continued implementation of the RCC pilot program; and, most importantly, improving the technical design and operating efficiency of many individual sub-projects. The only deficiencies in supervision were inadequate enforcement of environmental protection covenants; limited review of the capacity building components, particularly the upgrading of the national staff colleges and the training program; and under-supervising of the project during the last two years. Project implementation involved no significant deviation from Bank policies and procedures. F. Borrower Performance 34. ABC's performance in project preparation was satisfactory, as it prepared a comprehensive feasibility study for the project that adequately covered technical, financial, economic, and institutional factors. ABC's overall performance in implementation was generally satisfactory. Project staff in the central, provincial, and county offices were committed to the project objectives; approached the selection and appraisal of sub-projects seriously; provided counterpart funds on a timely basis; responded effectively to changes in the macroeconomic and sectoral policy environment; generally monitored the financial viability of sub-projects and loan repayments; and generally took appropriate action to restructure problem projects, such as the rescheduling of loan terms and the calling of guarantees. Nonetheless, some aspects of ABC's performance were deficient and required intervention from Bank supervision missions, as follows. 35. First, some parts of ABC's monitoring and evaluation framework were not fully developed at the start of the project, including a unified management information system, common performance parameters for sub-projects, an agreed definition for "problem project," and a complete list of problem projects and overdue loans. As many of the provincial audit reports noted, the core of the problem was weak and inadequate record keeping, accounting, and reporting at the county branch level (in fact, Guizhou Province received qualified audits in 1990 and 1991 because of weaknesses in record keeping and management controls). As a result, there was often incomplete and conflicting data regarding sub-project investments amounts, loan terms, working capital financing, and loan repayment rates at the county sub- branch and provincial branch offices -- which made it difficult for ABC headquarters and Bank supervision missions to adequately assess portfolio quality and overall project implementation. 36. Second, the role and responsibilities of ABC headquarters in supervision was not clearly defined at the start of the project. This did not reflect any lack of commitment to the project but was instead due to (a) inadequate staffing in the World Bank Division of the International Department, where eleven people were responsible for managing five World Bank and IFAD projects totalling $620 million; and (b) the increasing emphasis in China on devolution of authority from the central government down to the provinces. Although the project included a legal covenant related to the appointment of ten additional staff members to strengthen project management at ABC headquarters, only two additional staff were appointed, which was insufficient for the work load. This pattern of limited supervision was repeated at the provincial level, where small project management offices lacked the necessary staff and financial resources for effective monitoring of county offices. 37. Third, compliance with covenants related to on-lending terms, sub-project review, and procurement arrangements was poor. The most glaring example was the evasion of the requirement for IDA review of sub-loans in excess of $3 million in the Gallnut Processing Project in Guizhou Province. Despite the warning of a June 1988 supervision mission to the county ABC sub-branch office not to split a large gallnut investment into smaller loans in order to avoid a review by ABC headquarters and the  - 11 - World Bank, the county office went ahead and approved a series of sub-loans totalling $6.3 million for this one sub-project without any prior approval. This violation was discovered by a November 1991 supervision mission, which led to the cancellation of the sub-project and the refunding of the amount of IDA funds disbursed to the sub-project. The cancellation of the sub-project prompted ABC headquarters to assume a more aggressive role in supervision. It convened a workshop in 1992 for RC III & IV project staff that highlighted the importance of compliance with Bank and headquarters guidelines, accurate statistical reporting, improved auditing, and increased emphasis on market and environmental analysis in the appraisal process. G. Assessment of Outcome 38. The project's outcome is viewed as satisfactory, since the first and most important objective of agricultural growth and diversification was achieved with a relatively high degree of sustainability. The FRR of 31 percent for the on-lending program significantly exceeds the SAR estimate of 20 percent and is particularly impressive in view of the dramatic change in the macroeconomic policy environment during implementation. The ERR of 20 percent is slightly lower than the SAR estimate of 24 percent, but nonetheless indicates a high level of economic benefits to society. Overall, the project had a fairly strong developmental impact through the provision of scarce investment funds for the expansion of agricultural production and value-added processing in underdeveloped rural areas in six provinces. The project is not viewed as highly satisfactory because (a) the level of technology transfer in the lending program was minimal, and (b) the second objective of capacity building was only partially realized and its sustainability is uncertain. H. Future Operation 39. The future operation of the sub-projects will generally not require any additional technical or financial assistance from ABC, as all of them have been commissioned and most are operating profitably (although a few may require additional amounts of working capital as they reach full production). ABC's main responsibility will be continued supervision of sub-projects with outstanding debt, particularly of financial performance, compliance with on-lending terms and conditions, and overdue debt service payments. This supervision will involve monthly visits by county ABC staff to sub-projects, monthly reports from county offices to provincial offices, and quarterly reports from provincial offices to ABC headquarters. The quarterly reports for ABC headquarters will include aggregate data on sub-projects (number approved, production capacity, total investment, loan amount), types of beneficiaries (state or non-state), loan performance (disbursements, repayments, overdues), and the use of recycled funds. However, the future operation of the small number of problem projects will require more involvement from ABC in project restructuring and debt rescheduling. 40. The future implementation of ABC's institutional reform program will require extensive technical assistance. RC IV, which was approved in 1990 and is scheduled to close in end-1995, has addressed some of the capacity building requirements. It has supported an upgrading of ABC financial management, development of longer-term lending strategies and programs, review of lending policies for major client groups, strengthening of the MIS, procurement of office technology and equipment, and development of new training programs. Other technical assistance requirements will be addressed under the proposed FY98 Rural Banking Commercialization Project (RBC), as reviewed below. 41. The Bank will continue to monitor the operation of the RC III activities in conjunction with the supervision of RC IV and the preparation of RBC. It is recommended that OED conduct an impact  - 12 - evaluation report of RC II-IV (an audit report for RC I was prepared in 1992) in FY96-97, which would provide useful input into the design and appraisal of the RBC Project. I. Lessons Learned 42. The key lessons learned from the project are summarized below. * Future operations should be based on a realistic assessment of Government capacity and commitment for finance sector reform. This would suggest a greater emphasis on gradualism and experimentation in the design of Bank finance sector projects, and avoidance of comprehensive blueprints or large, one-time policy actions. * The tight phasing of four ABC projects within seven years was not conducive to effective implementation of RC III: there was insufficient time to learn lessons from one operation and transfer them to the next; both ABC and Bank staff tended to focus more on preparation of new projects instead of supervision of existing ones; and the cumulative requirements of a large and complicated portfolio over-stretched the limited capacity of ABC's small International Department. * ABC's institutional development requirements are much greater than the limited technical assistance program supported under RC III. Other priority areas include the development of new business activities, improved operating procedures, computerization, and a wide range of training and technical assistance requirements to strengthen human resource development. * Despite ABC's improved performance in the appraisal of sub-projects, additional capacity building is required in the area of economic and marketing issues. Key topics include the optimal size of production to capitalize on economies of scale, the impact of input and output price changes on sub-project profitability, a detailed review of supply and demand conditions in product markets, and working capital requirements. * While the on-lending program generally supported viable enterprises with good economic benefits, the level of technology transfer and environmental protection in sub-projects was low. Future operations need to strengthen incentives for the transfer of new technologies and compliance with pollution control regulations in sub-project selection and design. * ABC does not have an adequate management information system, which impedes effective monitoring of ABC's financial position and portfolio quality. This reflects weaknesses in (a) human resources, especially financial management and accounting skills at the county level, and monitoring and evaluation skills at the provincial and headquarter levels; and (b) operating systems, particularly incompatibility problems between various hardware systems throughout the country, outdated equipment in many branch and sub-branch offices, and poorly designed software packages. * Limited supervision by ABC headquarters and provincial staff at the start of the project exacerbated many of the implementation problems in the project, such as weak compliance with project covenants, low level of technology transfer, and insufficient appraisal of economic and marketing issues in the review of sub-projects. ABC's institutional capacity for supervision still requires additional strengthening, including the appointment of additional staff.  - 13 - 43. Many of these lessons were incorporated into the preparation of RC IV and all of them are being addressed under the proposed RBC Project, as follows. First, the project reflects the Government's phased approach to financial sector reform, with an emphasis on the high priority institutional development requirements of ABC instead of on broad macroeconomic or sectoral policy changes. Second, the timing of the new project has been set to ensure that preparation work does not divert ABC staff from supervision of the on-going portfolio, as preparation work will start a few months before RC IV is scheduled to close. Third, the project will encompass a wider range of capacity building programs. These include: (a) new business activities, including preparation of business plans for new financial products and services being introduced and detailed operating guidelines for implementation; (b) improved operating procedures, particularly in the areas of accounting, financial statement reporting, portfolio classification, risk management, and asset and liability management; (c) restructuring of the branch office network, through closure of unprofitable offices and opening of new offices in priority markets; and (d) computerization, through preparation of an updated five-year computer masterplan, provision of hardware and software, and training. Fourth, the project will strengthen ABC's institutional capacitv for monitoring and evaluation, through development of an improved management information system and increased emphasis on headquarter and provincial supervision of branch and sub-branch activities. Finally, the project will emphasize technology transfer and environmental protection, through (a) technology upgrading to improve production quality and capitalize on economies of scale in township and village enterprises; (b) improved compliance with national health, safety, and environmental standards; and (c) preparation of detailed technical criteria for several high priority investment areas to enhance technology transfer.  - 14 - PART II: STATISTICAL TABLES Table 1: SUMMARY OF ASSESSMENTS Achievement of Objectives Not Substantial Partial Negligible applicable 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 Project Sustainability Likely Unlikely Uncertain x Bank Performance Highly satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X  - 15 - Borrower Performance Highly satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance x Operation x Assessment of Outcome Highly satisfactory Satisfactory Unsatisfactory Highly unsatisfactory x  - 16 - Table 2: RELATFD BANK LOANS/CREDITS Year of Loan/credit title Purpose approval Status Preceding Operations: Rural Credit I (Cr. 1462-CHA) Provision of medium- and long-term FY84 Completed loans in Guangxi for investment in aquaculture, orchards, agroprocessing, livestock and TA. Rural Credit II (Cr. 1642-CHA) Provision of medium- and long-term FY86 Completed loans in Fujian and Hunan for investment in aquaculture, orchards, agroprocessing, livestock, and TA. Following Operations: Rural Credit IV (Cr. 2182-CHA/ Ln. Provision of medium- and long-term FY91 Under 3265-CHA) loans in nine provinces of Jilin, Implementat Liaoning, Shaanxi, Jiangxi, Guangdong, ion Inner Mongolia, Hunan, Guangxi, H4ebei and Beijing Municipality for investment in tree crops, livestock, aquaculture, agroprocessing, and also for institutional development of ABC.  - 17 - Table 3: PROJEcr TIMETABLE Steps in project cycle Date planned Date actual/latest estimate Identification 09/10/86 09/10/86 Preparation 12/13/86 12/13/86 Appraisal 04/15/87 05/07/87 Negotiations 10/01/87 12/11/87 Board presentation 11/17/87 01/26/88 Signing 01/03/88 02/29/88 Effectiveness 04/01/88 06/17/88 Project Completion 12/31/92 06/30/94 Loan closing 06/30/93 06/30/94  - 18 - Table 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ Million) FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 Appraisal estimate 14.0 30.0 70.0 120.0 160.0 170.0 Actual 13.6 91.9 125.4 148.7 147.8 158.1 163.8 163.9 Actual as % of estimate 97.1 306.3 179.1 123.9 92.4 93.0 .. Date of final disbursement: July 7, 1994  - 19 - Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION (Not Applicable) Table 6: KEY INDICATORS FOR PROJECT OPERATION (Not Applicable)  - 20 - Table 7: STUDIFS INCLUDED IN PROJECT Purpose as defined at Status Impact of study Study appraisal/redefined Banking Review ABC's credit plan, interest Completed. The study provided a good summary Management and rate structure, working capital of ABC procedures, which increased Credit Policy financing arrangements, long-term the transparency of ABC operations. lending arrangements, and loan However, it was of limited impact procedures since most of the policy issues that were reviewed were not under the control of ABC (PBC and MOF, which have the mandate for these issues, did not participate in the study). Loan Recovery Review ABC's loan recovery Completed The study provided some useful Policy procedures and bad-debt provision recommendations to ABC policy. management about how to strengthen loan recovery, which have generally been implemented. However, the review of bad debt provisions had no impact, in view of ABC's reluctance to write-off bad debts. ABC Operational Analyze the cost of ABC transactions Completed The study helped quantify the costs Costs in order to reduce overhead and of ABC operations, which provided improve efficiency. some background support for the recent separation of commercial and policy based lending. Rural Financing Review ABC policies and procedures Completed While the study provided an related to rural intermediation. interesting overview of rural finance issues, it was very general and did not provide any specific or useful recommendations. Enterprise Review ABC policies and procedures Completed The report was fairly short and Financing related to enterprise financing. cursory. Rural Credit Review RCC institutional structure Completed This report was of limited impact, as Cooperatives and identify measures to strengthen it was very general and did not Reform operational independence from ABC. provide any useful policy guidance to assist in the transfer of RCCs from ABC to PBC.  - 21 - Table 8a: PROJECT COSTS Item Appraisal estimate ($ M) Actual/latest ($ M) Local Foreign Total Local Foreign Total A. ABC Subloans Tree Crops 103.4 11.5 114.9 76.5 8.5 85.0 Livestock 44.4 11.0 55.4 44.0 11.0 55.0 Aquaculture 30.8 2.7 33.5 25.8 2.2 28.0 Agro-processing 79.4 52.8 132.2 171.9 58.6 230.5 Sub-Total 258.0 78.0 336.0 318.2 80.3 398.5 B. Technical Assistance 2.5 1.5 4.0 2.6 1.4 4.0 Total 260.5 79.5 340.0 320.8 81.7 402.5 Table 8b: PRoJEcT FINANCING Source Appraisal estimate ($ M) Actual ($ M) Local Foreign Total Local Foreign Total IDA 90.5 79.5 170.0 82.2 81.7 163.9 ABC 69.2 0.0 69.2 81.8 0.0 81.8 Sub-Borrowers 100.8 0.0 100.8 156.8 0.0 156.8 Total 260.5 79.5 340Q0 320.8 81.7 402.5  - 22 - Table 9: EcONONMIC COSTS AND BENEFITS Appraisal Estimate Actual/latest Estimate FRR ERR NPV FRR ERR NPV Activity (%) (%) (Y M) (%) (%) (Y M) Tree Crops 17-25 19-38 27 22 192 Livestock 17-22 15-39 37 30 155 Aquaculture 18 30 30 21 40 Agro-processing 20-24 16-20 31 18 409 Total Project 20 24 1,283 31 20 796  - 23 - Table 10: SrATUS OF LEGAL COVFNANTS Agree Section Covenant Present Original Revised Description of covenant Comments ment type status fulfillment fulfillment date date DCA 2.02 5 CP Free-limit subloan defined as not flhe Guhdou Gallmnit Proainu exceeding $3 million subloanexceeded the fiee-limit; IDA requested the return of the subloan to project account Sch. 1, 5 CP ABC to approve and present each Abxxt 20 & vee expd Para subloan to IDA for approval or, in to be submitted to IDA for 3(2) the case of free-limit subloans, for appovl at the irme ol appradid; authorization to withdraw from the none were submitted durin2 Credit Account implementation 3.01 3 C Terms of onlending to ABC: repayment of principal within 20 years, including 5 years grace, in RMB withdrawn and SDR equivalent of foreign currency withdrawn; interest at rate of 4.5% 3.02 3 C ABC to receive an interest rate Average spread during spread of not less than 2% implementation was ?.5 % 3.05 5 C Project provinces to maintain Project Management Committees with acceptable composition and functions 3.06 5 C Government and IDA to exchange views on interest rates charged on subloans 3.07 5 C Government to ensure that Yunnan Improved clonal material Province cooperates with ABC in developed under the pmjet and carrying out Tea Rehabilitation widely used Program acceptable to IDA 3.08 9 CP 12/31/89 Guizhou to complete a review of Swdieswere ofpoorquality bLt progress in implementation of uee r es ad by IDA galinut, pasture development, and since ABC indicated that no sheep breeding programs and furtherlending wouldoccurin consult with IDA i ars. Houever, xiition d gallnut lending did occur  - 24 - Agree Section Covenant Present Original Revised Description of covenant Comnwnts ment type status fulfillment fulfillment date date 3.09 6 CP Investment projects to be Many agio.pnx J) pMrXt; implemented in conformity with cdd not k,bw prr ld polluion appropriate environmental regulaticns regarding WsAtewwater guidelines treatment PA 2.01 (b) 5 C ABC to carry out the Project in accordance with arrangements in Part A of Schedule to PA 2.10 (a) 5 CP ABC to carry out a pilot program Implementation was slow and of RCC subloans %c due t ABCs hU of iri and commitment 2.10 (b) 9 NC 12130/89 ABC to complete a review with Review was not don- on timely IDA of progress in implementation basis andwas &n diurppd, as a of RCC program and extend result of unexpected ovement program to other provinces decision to separate RCCs frnm ABC 4.01 1 C 6/30 Financial covenants, including Annually submission of certified copies of audited accounts and financial statements and audit reports of project and branch accounts Sch, 5 CP ABC to appoint 10 new staff ABC cny appinrd : additionl Part A, members to its Foreign Capital two staff members Para 3 Division (c) Sch, 5 C ABC to carry out staff training Part A, under Part B.2 of Project under Para 4 training program agreed between IDA and ABC annually Sch, 9 C ABC to furnish semi-annual Part A, progress reports within 60 days of Para 5 end of each semester Sch, 12 C ABC to carry out studies under Part A, Part B.3 of the Project in Para 6 accordance with TOR and timing agreed with IDA and furnish results to IDA for review and comment  - 25 - Agree Section Covenant Present Original Revised Description of covenant Comments ment type status fulfillment fulfillment date date Sch, 5 C ABC/RCCs to appraise investment Part B, projects in accordance with Para 1 procedures and criteria set out in project appraisal manual Sch, 5 NC ABC to furnish design and Plans never submitted for tea Part B specifications of typical rubber and Requirement for rubber wa~ Pan 5 tea processing plants before first dropped since project neve: subloan was approved by ABC financed new processing plan Sch, 4 CP Sub-borrowers to contribute not Overal contnbution was abou Part C, less than 309S of total cost of 40%, although some individu Para 1 investment project s sfjie l ed to pyzk:e 30F Sch, 3 CP Sub-borrowers to pay interest at There was a wide variation ir Part C, ABC's or RCC's prevailing rate interestratelevelsatthestarto Para 2 for similar loans for similar ltb project, which was co;nte purposes during implementation Sch, 3 C ABC to hold repayments from Part D, RCCs in separate account at Para 4 provincial branches and use for further lending to RCCs Sch, 5 CP Procurement procedures: Shopping There ere several violations oi Part E, Procurement based on three price LIB produres at the start of the Pam quotations for equipment estimated project 1&2 to cost less than $100,000 and for livestock; LIB Procurement for equipment estimated to cost more than $100,000 Sch, 5 C Prior IDA review of invitations to Part E, bid, proposed awards, and final Pan 4 contracts for goods and services estimated to cost $500,000 or more  - 26 - Table 11: COMPLIANCE WITII OPERATIONAL MANUAI, STATEMENTS (Not Applicable)  - 27 - Table 12: BANK RESOURCES: STAFF INPUTS Stage of project cycle Planned Revised Actual Weeks $ Weeks $ Weeks $ Through appraisal na na na na 104.2 227.8 Appraisal-board na na na na 82.9 165.2 Board-effectiveness na na na na 6.4 18.5 Supervision na na na na 136.9 312.9 Completion na na na na 11.0 20.2 Total 341.4 744.7  Table 13: BANK RESOURCES: MISSIONS Stage of Number of Days Specialized staff Types project cycle Month/year persons in field skills represented Performance ratine of problems Implementation Development status objectives Through appraisal 09/86 11/86 10 35 Finance/Economics/ Agriculture/Aquaculture/ Livestock/Procurement/ Agroprocessing/ Human Resource Development Appraisal through 04/87 8 25 Finance/Economics/ Board approval Agriculture/ Livestock/Agroprocessing/ Human Resource Development 09/87 1 14 Finance Supervision 07/88 6 30 Finance/Economics/ HS NR Agriculture/Agroprocessing 03/89 3 10 Finance/Economics/ HS NR Agriculture/Agroprocessing 10/89 1 7 Finance HS NR 11/90 7 20 Finance/Economics/ HS NR Agriculture/Agroprocessing/ Aquaculture 11/91 7 20 Finance/Economics/ HU NR Proc/TA/Env/ Agriculture/Agroprocessing/ Proj Mgmt/ Aquaculture Tech/Training 11/92 6 15 Finance/Economics/ U NR Proc/Tech/Env/ Agriculture/Agroprocessing/ Tech/Proj Mgmt Livestock U NR Env/Technical 08/93 2 15 Environment/Agroprocessing U NR Technical 05/94 1 7 Finance S NR Completion 11/94 3 14 Finance/Economics/ S S Agroprocessing  - 29 - Appendix A IMPLEMENTATION COMPLETION REPORT CHINA THIRD RURAL CREDIT PROJECT (CR. 1871-CHA) MISSION AIDE-MEMOIRE 1. A World Bank mission comprising Rick Scobey, Brian Argyle, and Basil Wakelin visited China from November 8 to December 2, 1994 to review the implementation of the Third Rural Credit Project (RC III) as background for the preparation of the Implementation Completion Report (ICR). The work included discussions in Beijing and field visits in Guizhou, Sichuan, and Yunnan Provinces. The mission would like to thank all the ABC Head Office and provincial staff that participated in the visit for the open and comprehensive discussions, the warm hospitality, and the well organized field visits. The findings of the mission are summarized below. .i. Obiective 2. The objectives of RC III were: (a) to stimulate growth and diversification of agriculture by expanding the availability of medium- and long-term credit; and (b) to increase the operational efficiency of ABC through institutional development. The first objective was addressed through provision of investment funds for aquaculture, tree crops, livestock and agroprocessing in six provinces. The second objective was addressed through support for: (a) capacity building for ABC's three national staff colleges; (b) training of project staff, primarily in project appraisal, monitoring, and evaluation; (c) technical assistance to review and strengthen ABC policies and operations; and (d) a pilot program to introduce Rural Credit Cooperatives (RCCs) to longer-term lending. These objectives were generally well designed and clearly spelled out in the project documentation. Similarly, they appropriately reflected the government implementation capacity and were consistent with both the Government's development strategy and the Bank's Country Assistance Strategy. Consequently, there was no reason to revise the objectives during implementation. The only problem was that the objectives were slightly unrealistic about the pace of financial sector reform in China. B. Implementation Experience 3. The project substantially achieved the objective of agricultural growth and diversification. The on-lending program financed about 850 subprojects, which supported the establishment of 80,000 ha of tree crops, construction of 3,800 ha of fish ponds, the purchase of 3.6 million animals, and the development of hundreds of agro-processing factories. The total number of subprojects was somewhat less than the 1,200 projected in the Staff Appraisal Report (SAR), due to adjustments in the composition of investments arising from changing market and economic conditions. The sub-projects generally met their expected production targets and achieved good rates of return. Despite the overall strong performance, the on-lending program faced two problems. First, about 9 percent of all sub- projects failed to meet production objectives and expected benefits, primarily in the agro-processing sub-sector, due to technical and financial weaknesses in design and operation. Second, there was a  - 30 - Appendix A very low level of technology transfer in most sub-projects, despite the fact that out-dated technology is one of the main contributors to low productivity and efficiency in the industrial sector in China. 4. The project only partially realized the objective of increasing the operational efficiency of ABC through institutional development. The upgrading of training colleges and the overall project training program were generally well implemented and made a moderate contribution to capacity building. The studies program, however, did not meet its objective of providing policy guidance for reshaping the role of AEtC in the changing financial sector environment, as many of the studies were general and emphasized description rather than prescription. Similarly, the RCC pilot program did not meet the overall objective of establishing a model for longer-term lending to individual households by RCCs, as implementation was weak due to limited interest and commitment from ABC. 5. The following factors under the control of the Government and ABC substantially affected the achievement of project objectives. First, the government commitment to financial sector reform declined significantly during the early years of implementation, in response to the overheating of the economy in 1988-89 and the events of June 1989. Second, the macroeconomic framework changed significantly during the project, as a result of high domestic inflation rates, liberalization of commodity prices, and large devaluations of the exchange rate. This spurred a reorientation of the on-lending program towards higher value production, raised investment and operating costs for sub- projects, and led to a higher debt service burden for foreign currency denominated sub-loans. Third, while the review of technical aspects in sub-project appraisal was relatively strong, ABC continued to pay insufficient attention to economic and marketing issues, particularly production size, economies of scale, the impact of input and output price changes on profitability, and changes in supply and demand conditions. Fourth, loan terms for sub-projects were often not structured in line with on- lending covenants. There was a fairly wide variation in the application of interest rates on sub-loans at the start of the project, loan repayment and grace periods did not match the actual cashflow availability for many investments, and some sub-borrowers were required to repay loans more quickly than agreed under the debt service schedules. 6. The following factors under the control of the sub-borrower also affected the achievement of project objectives. First, technology transfer was limited, which reflected unwillingness of sub- borrowers to assume foreign exchange risk for the purchase of imported equipment, the limited familiarity of Chinese design institutes with modern technologies, and an emphasis on upfront investment costs over long-term net benefits. Second, the design quality for agro-processing sub- projects was not high by international standards, including poor physical layout and inadequate compliance with health and safety standards. Third, many agro-processing sub-projects did not adequately comply with pollution control regulations, particularly treatment of waste water prior to discharge. C. Project Outcome 7. The project's outcome is viewed as satisfactory, since the first and most important objective of agricultural growth and diversification was achieved with a relatively high degree of sustainability. The project is not viewed as highly satisfactory because (a) the level of technology transfer in the lending program was minimal, and (b) the second objective of capacity building was only partially realized and its sustainability is uncertain. The benefits generated by the on-lending program are likely to be sustained throughout the life of the project, as the sub-borrowers have strong financial incentives to continue to operate the sub-projects profitably, the macroeconomic framework is  - 31 - App2endix A expected to remain relatively stable, and commodity price forecasts indicate no substantial changes in world supply and demand conditions for project production. D. Lessons Learned 8. The key lessons learned from the project include the following. First, future operations should be based on a realistic assessment of Government capacity and commitment for sector reform. This would suggest a greater emphasis on gradualism and experimentation in the design of Bank finance sector reform projects in China. Second, the tight phasing of four ABC projects within seven years was not conducive to effective implementation of RC III, as there was insufficient time to learn lessons from one operation and transfer them to the next. Third, ABC's institutional development requirements are much greater than the limited technical assistance program supported under RC III. Fourth, despite ABC's improved performance in the appraisal of sub-projects, additional capacity building is required in the area of economic and marketing issues. Fifth, future operations need to strengthen incentives for the transfer of new technologies and compliance with pollution control regulations in sub-project selection and design. Sixth, the development of an effective management information system is a high priority. Seventh, ABC's institutional capacity for supervision must be strengthened, including the appointment of additional staff and the issuance of clear guidelines on the roles, responsibilities, and frequency of supervision.  - 32 - Appendix B IMPLEMENTATION COMPLETION REPORT CHNA THIRD RURAL CREDIT PROJECT (CR. 1871-CHA) PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. Background 1. The Agricultural Bank of China (ABC) came into contact with the World Bank in 1981. In 1984, ABC introduced the World Bank's First Rural Credit Project of SDR 47.2 million (US$50 million equivalent), and after that, the Second Rural Credit Project of SDR 84 million (US$90 million equivalent) in 1986. 2. The implementation of the two projects had made a great contributions to the development of the rural economy in the project areas, to the creation of the farmer's employment opportunities, poverty alleviation, adding of the value of agricultural outputs, increasing of production efficiency and the supplements of agricultural products to the market and the quality of products, meanwhile helping ABC to increase its capabilities for preparation, appraisal, execution and supervision of the rural credit projects. Therefore, the Government of China had requested an IDA Credit of SDR 123.8 million (US$170 million equivalent) to finance ABC a Third Rural Credit Project. The project funds has been channeled through ABC in the form of medium and long term loans to farm households and enterprises for the development of fruits, livestock aquaculture and agroprocessing. The project would finance investments in a few projects through rural credit cooperatives (RCC). The project would provide technical assistance to strengthen ABC's in-house training capabilities, and to help improve ABC's operational systems and procedures in line with the ongoing banking system reforms at that time. 3. Agriculture in China, including crops, livestock, forestry and fisheries, is a major source of income for some 190 million "arm families, and accounts for about 35 percent of the country's GDP at appraisal. Only about 137 million of China's 960 million ha are arable. Foodgrains occupy about 70 percent of the crops land and account for about one-third of total agricultural outputs. Farming systems of China are intensive, with large inputs of labor, chemical and organic fertilizer and water. This intensive system of production has allowed China to meet the basic food requirements of its population (about 22 percent of the world's total) from less than 8 percent of the world's arable land. 4. Major revisions in China's farm policies since 1979, most importantly, a shift from communal to family farming and major increases in farm prices, have led to rapid growth and diversification in agricultural production with the implementation of the system of family contracting production. Production increased by 10 percent per year over the period 1980-85 compared with an average of 3 percent per year in the preceding 23 years. Grain output reached a record of 407 million tons in 1984, 34 percent greater than in 1987. In 1985, the Government began a new phase of reform, replacing compulsory procurement quotas with voluntary contracts, adjusting procurement prices and greatly enlarging the role of the market. All these measures have led to stimulate the development of rural economy.  - 33 - Appendix B 5. The Government's long-term objectives in the agricultural sector are (a) increase and diversify the production of food, feed and industrial crops to meet requirements created by population and income growth, and (b) to raise employment opportunities and income in rural areas. Given China's shortage of arable land, emphasis must be placed on diversification increasing the productivity of existing cropped areas and developing efficiently the remaining unutilized land. Steps are also being taken to increase production and quality of grain, livestock, fruit, fish, and industrial crops, and to expand agroprocessing activities so as to raise value-added in the rural sector. 6. China's rural financial strategy has been to support the Government's efforts as outlined above. So the Government of China has made great inputs in the rural sector through rural financial institutions, and paid more attention to the introduction of foreign capital. A lot of rural projects has been introduced from the World Bank of finance the agricultural development. The project, one of them, has been disbursed through the rural financial intermediate. 7. The project is the third of the four rural credit projects financed by the World Bank to ABC. The First Rural Credit was completed in June 1988 ahead of schedule. The Second Rural Credit Project in the provinces of Hunan and Fujian was completed in September 1991 ahead of schedule. The Fourth Rural Credit Project is, approved by the Board of the World Bank, now underway. Now ABC is making an application to the World Bank for a new project with a purpose to stimulate ABC's commercialization. However, the new project, compared with the previous four rural credit projects, has a great leap whether in form or in content. B. Realization of Project Objective 8. The main objectives of the Third Rural Credit Project would be to stimulate growth and diversification of agriculture by expanding the availability of medium- and long-term credit of ABC (and RCC), and to increase ABC's operational efficiency through institutional development. The project has been mainly stretched in three provinces in Southwest China (Guizhou, Sichuan and Yunan) and three provinces in the North Central Region (Anhui, Henan and Hubei). 9. The project began to be prepared in 1987, to be appraised in September 1987. The agreement was signed in February and became effective in June 1987. The withdrawals was to be completed on June 1, 1994. With the assistance of the World Bank, the project had been implemented by ABC with its careful organizing and hard work in six years and basically reached the designed objectives. The implementation of the project was successful. The project is divided into five detailed categories as follows: (A) Tree crops: to develop fruit, vegetables, rubber, shellac, tea, mulberry, coffee, gallant, grape, medicine materials, Yangtao, etc. through the establishment of new sites and rehabilitate the old planting sites (see table); (B) Aquaculture: mainly to utilize the current surface water of lakes and rivers, and to establish and rehabilitate to grow fry and commercial fish (see table); (C) Poultry and livestock: mainly to grow pigs, chickens, ducks and cattle (see table); (D) Agroprocessing: newly-built and rehabilitated meat processing plants, meat and vegetable facilities for cold storage, starch processing plant, leather, feed, cotton silk fiber, wood, vegetable oil and food processing plants; and  - 34 - Appendix B (E) ABC's institution developed: through the technical assistance of the World Bank, ABC's institution development has been promoted, and ABC had made a positive and significant research on six targets such as credit policy, operational cost and level of interest rates; and purchasing and rehabilitating some necessary modern office equipment; 588 courses of project appraisal, project management, financial accounting, auditing and training have been held at home and abroad and a total number of 11,245 persons of ABC's project managers and credit staff have been trained; a network of consultants employed has been formed. Through the implementation of the project, the business quality of ABC project managers and the project management level and the working efficiency have improved to lay a foundation for the successful implementation and the transformation of ABC into a commercial bank lately. C. Project Design and Organization 10. Project Design and Planning. According to the provisions specified in the Credit Agreement and Project Agreement signed between the World Bank and the Government of China and ABC, the project funds have been used in five categories of tree crops, aquaculture, poultry and livestock, agroprocessing and ABC institutional development. During the selection of projects, the projects have been conscientiously and carefully selected with the consideration of favoring the project units with a strong technical force, strong capability of self-raising funds, conform to the State and provincial overall development policies, achieve rational utilization of natural and manpower resources, make the most of local conditions, bring local advantages in to full play, then, the needs of the markets in principle and an overall plan of the project can be guaranteed. For example, Yunnan was, according to its local geographic conditions, to develop the plantation of tropical plants such as rubber, shellac, coffee, but Guizhou was to develop the plantation of gallant, sheep and cattle raising, due to its geographical features characterized by many mountains. And, Sichuan was to use the advantages of big pig population to greatly develop the meat processing projects, etc. 11. The projects were to be wholly organized and coordinated, and to be carried out and implemented by the six ABC project provincial branches. During the examination and approval of projects, the provisions of the Credit Agreement and Project Agreement were strictly followed. A Project Leading Group, which was formed at ABC HQ, has been chaired by a vice president, who is responsible for the overall project planning and coordination. A rural credit project office (i.e. World Bank Loan Division), under the International Department of ABC HQ, was set up to be responsible for liaison, coordination, policy directions and day-to-day management of the project. Similar offices were set up in 310 ABC at municipal level in 50 cities, each province for the actual execution. A project consultant committee was, comprising experts hired from each society (such as livestock, aquaculture, township enterprise and market) at each level of ABC, to be responsible for consultant on the project technical, economic, financial and market issues. 12. For the insurance of the normal implementation, ABC HQ has formulated more than 20 project management regulations and measures, and each ABC provincial branch has, according to these regulations and measures, laid down relevant enforcement regulations. All these formulations are timely, effective, and to ensure the sound development of the project.  - 35 - Appendix B D. Project Implementation 13. In general, the implementation of actual subprojects is less than the appraisal estimate in terms of physical scales. A total of 834 sub-branches was approved in the six project provinces, but estimated number of subproject to be appraised would be about 1,200. The main reason is that the small-scale projects of tree crops, aquaculture, etc., were reduced, and the relatively large processing projects in the size and amount of the loan have been increased. The execution of projects were generally successful. The progress of the execution was normal. Some provinces, such as Henan and Hubei, had basically completed the implementation of the project. 14. The completed date of the project was delayed for one year because of the cancellation of a gallnut project in Guizhou and the devaluation of RMB rate. For the result of the project implementation, the one-year delaying doesn't cause any damages, and no influence on the scheduled repayment on time. 15. During the project implementation, RMB was devalued several times from an exchange rate of RMB3.7 to US$1 at appraisal, to RMB4.7 to US$1 in 1989, to RMB5.7 to US$1 in 1991 and to RMB8.7 to US$1 at the time of completion (but little loan of RMB8.7 rate was actually used). During the same period, the ratio of the USS to SDR totally maintained in the level of SDR1 to US$1.37 at negotiations. The rate has been changed, but it always floated up or down at this level, the World Bank contribution increased from RMB610 million at appraisal (negotiations) to RMB970 million, the ration increased by 10%. The total project investment went up from RMB1.22 billion at appraisal to RMB1.66 billion. All these were leading to a substantial expansion physical scale of major component. 16. At appraisal, the project was estimated the establishment or improvement of 16,700 ha of tea orchards which at completion had decreased to 13,566 ha, down 19%; estimated 11,500 ha of pastures for sheep and cattle; freshwater fish ponds, estimated at 3,000 ha at appraisal, completed 3,828 ha, increased by 28%. The investment for agroprocessing increased from an estimated RMB851.42 million at appraisal to RMB 1,024.56 million increased by 20%. The total investment for livestock increased from RMB777.83 million to 917.57 million, up to 18%. The investment for aquaculture reduced from RMB131.44 million to RMB117.64 million, down 10%. The investment for the tree crops project reduced from RMB363.75 million to RMB351.33 million, down 3%. 17. During implementation, substantial changes occurred in the distribution of investment among components. Appraisal Forecast Actual Disbursement (%) (%) Tree crops 23 20 Aquaculture 8 7 Livestock 14 13 Agroprocessing 55 60 18. Project adjustment, mainly including the adjustments of project content, project investment and project scale. 19. During the project implementation, more contents of the project had been adjusted in comparison with the previous two rural credit projects. The reason was that during the implementation, the domestic economic situation in China has been changed, and the rapid growth of the economic development was relatively over, the Government, for fastening the steps of reforms and opening out to the outside world,  - 36 - Appendix B has put forward a series of economic adjustment policies, such as tax policies, price reform policies, funds adjustment and controlling, the changes in the market, and a large devaluation of RMB to US$; and for the longer implementation period, the conditions of some projects have been changed during the project implementation; and some issues have occurred in ABC's implementation of the project, like the gallnut project in Guizhou, those changes lead to a large-scale project adjustment. The project adjustment is reflected on three sides, (1) increasing investment, (2) reducing investment, and (3) canceling project. For example, in Yunnan Province, 21 subprojects had been canceled, the total investment of the project canceled, the total investment of the project canceled was RMB33.373 million, of which, 20 projects of tree crops were canceled, and adjustment investment was RMB31.423 million, and one processing project with an investment of RMBI.95 million; the adjusted project investment reach to 11.85 million. The pollution problems and the price-rising of raw materials are successfully addressed: 3,879 mu of tree crops were adjusted. The adjustment is also technically needed as some of the technical standards was not reached during some project implementation. 20. The main reason for the changes in the project investment were that the working capital of the project was not included in the total investment, the implementation of most projects just catch the peak period of price-rising of building materials, the investment costs were rising up; some appraisals were not correct and the estimation of the investment was insufficient. 21. The reasons for the changes in the project scope were mainly the technical demand was not met during the implementation of some tree crops, and its scale had been adjusted; the price was rising during the construction and the project didn't have enough funds, so the adjustment of the project was made by project unit itself; some substitute goods of the project were growing up, and the whole construction of the proposed project was affected (such as shellac); some particular project was affected by the weakened market for the time being, and not likely to be completed as the proposed scope was required. 22. During the implementation, ABC adjusted the content, investment, and scale of the project on time according to the actual situations and market changes. The result of the adjustment shows that the adjustments during the project implementation is necessary, and a rich experience was gained. E. Project Results 23. From the implementation of the projects in the past few years, most projects were implemented well, the projects had made a significant contribution to the local poverty alleviation and raising employment opportunities with a better economic, financial and social benefit. 24. The tree crops component, accounting from 20.32% of the total investment, most subprojects have reached a initial scope and desired targets. So far, many kinds of fruits and economic forestry have grown to realize over one billion Yuan of output value (see table). With the coming of the loan maturity, the output value would be very considerable. According to the actual calculations, the FRR of the tree crops is relatively high. 25. The aquaculture component was mainly the freshwater fisheries. The period of the project was not so long. For the increased output and a good market, all the fish components have been very successful. The aquaculture component was the best in all sectors of the project, reflecting on the largest ratio of benefit and cost, the shortest recovery period of investment, the lowest risks of the project. 26. The livestock and poultry component mainly support the large-scale units of chicken, cattle, sheep, pig and rabbit. With the establishment of all kinds of deep meat processing enterprises and a  - 37 - Appendix B strong demand for meat, the market of livestock and poultry would be good. The implementation of the livestock and poultry component would make rich foods for the urban residents, and to solve the Vegetable Basket demands and play a positive role stabilizing in price. The project supported a production of 2 million, egg and chicken with the effective social benefits is remarkable. The cost such as feeds was raised, the benefit of the project was lower than at appraisal. The FRR and ERR of the project reached 31% and 20 % respectively. 27. The agroprocessing component accounts for 60.29 % with a large portion in the investment of the whole project. 90% of the project units were township and village enterprises. In general, the implementation of the project is successful. The agroprocessing projects had played a great role in the effective transformation of local agricultural products, the adjustment of rural industrial structures, the diversification of ownership in rural economy. In the agroprocessing sector, the demand of using resources, and market promotion was basically met. By the end of 1993, the total output value of the agroprocessing reached RMB4.4 billion, accounting for 63% of the total output value. The implementation of agroprocessing was more complex than tree crops, aquaculture and livestock. The project may be affected by market, technology and management. Now the benefits of meat processing and silk fiber were not as good as at appraisal. The reason was the influence of price and market, along with the old technology and facilities in some processing project which, in turn, affected the quality of products, failed to penetrate in the market, because the changing demand of market, the rehabilitation and improvement of technology are very fast, but as a whole the feasibility of high benefits of the project is also very great. 28. According to the current market, the best benefit of the sectors supported by the project is aquaculture, next is agroprocessing, livestock and tree crops. 29. The technical assistance component (Part B) was SDR1.45 million, accounting for a little more than I % of the total investment. It was mainly used in the purchasing of modern office equipment, staff training at home and abroad, investigation and hiring of consultants. Generally, the project was successfully implemented. With the smallest part of the funds, but the influence of the project was great. Through the implementation, ABC educated a lot of managers, who would play an important part in ABC's institutional development in the financial sector reform. 30. The implementation of RCIII also gave birth to the RCC's involvement in the World Bank's project. In the previous two rural credit projects, all the loans had been channeled through ABC without RCC participating. Generally, the implementation of the RCC project was satisfactory, but the quality of RCC staff is not as satisfactory as ABC's, so there is some difficulty for RCC to manage the project to the full satisfactory. 31. ABC has taken maturity management to the project in the aspect of clarifying grace period and determining a clear period of repayment based on the cash flow of the project. The period of the project is generally three to five years, at least not acceding eight years. The rate of interest of the loan would be determined according to the rate of interest specified by the People's Bank of China (PBC), and also adjust the rate when PBC does. 32. The overdue loan could be found in each project province. Generally, the overdue rate of the whole project was not so high. 33. Management of the recovered funds for relending. According to the project lending contract and receipt, a lot of projects have been entered into the period of repayment of the principal, the project has  - 38 - Appendix B the recovered funds for other uses. ABC's management on the project recovered funds for lending would be carried out in accordance with the management of the World Bank loan. F. Sustainability 34. From the present supervision of the project, the product market of most of the subproject were wide and sustaining with a good future. Considering crops as an example, 70% were tree crops, with a shortage of long growth period and slow effectiveness, but meanwhile, we could see the advantages of the stable growth and longer beneficial time of crops; under the lower impression on the future product market on the crops, the crops project would play a more important role in the future development, for the agricultural supplements are limited, the demand is growing gradually, the trend of price is upward and the market risk faced by the project was not large. It should be also noted that the sustaining support from banks was needed because of its long growth period and lower effectiveness, large input of funds needed, insufficient working capital generally existed, limited resources of other funds; the rapid development of the supporting processing industry was also needed. 35. The processing component was mainly supporting the agricultural products and byproducts, the resources of raw materials were relatively stable and reliable as the processing industry of green plants, the future produce market was good, the future development was wide, good economic and social benefits could be achieved. But the future of the processing project was not always bright, a lot of projects with lower technical content, lower starting point, lower value-added of products, technical transformation urgently to be made, some project had already entered into a period of full production, the scale of the old project and product structure could not meet the needs for development, the expansion of the scale urgently needed, to make a deep processing to the products, such as leather sector, develop from the past production of finished leather to the production of leather products, more inputs of funds were needed to ensure the expansion of project scale and the replacement of products. 36. The aquaculture component could become effective fast in general, and the project benefits relatively higher. It could play a great role in the future for a rather long period of time. The project was largely effected by natural disasters (floods) and the control measures were not enough. 37. The future of livestock component seems quite excellent, especially the production of pig, cattle and sheep. With the increase of living standard of Chinese people and the changes of food structure, the demand of meats would be doubly increased and the price would be upwards. The current issue faced was the rising of feed price and the increasing of labor cost, increasing of production efficiency and improvement of breeds was urgently to be made. 38. With the implementation of the project, the quality of ABC staff were quite good. The quality and efficiency of ABC staff were furthermore increased through the training and equipment provided by the Part B lending of the project. But with the gradual development and expansion of the project, the project management of later stage was put in front of ABC staff as an important task. A new task is how to reach the quality and level required by a commercial bank, to operate and manage the project with the actions of a commercial bank. So the training courses should be further made to the ABC project managers, especially the project management of latter stage, such as the training on project operation and management, market analysis and forecast, information collection and treatment. 39. The future risk of the project comes from the operation and management of the person responsible for the project and the quality of the whole enterprises, the introduction of specialists of the enterprise  - 39 - Appendix B and the fully play of their capabilities, sensitivity to the market changes and the suitable capability, the improvement of products and expansion of production scale, etc. G. Project Impact 40. The project mainly concentrated on the undeveloped south middle part and poorer west part of China. The implementation of the project had made a great change to local economic and social aspects in project area, 170,000 households got a direct benefit from the project implementation, the local natural and human resources had been fully utilized, the employment opportunities created (only in Yunnan, 138,700 full-time jobs were created, 163,300 full-time jobs would be created during the estimated full period), to make a great significant contribution to the poverty alleviation. 41. While introducing the World Bank loans, advanced technologies and processing skills were introduced not only to ensure the high starting point and high efficiency of the project construction, but also to make a role of demonstration and radiation to local sectors, a new wave occurred in crops (planting) and aquaculture project, the agroprocessing played a model role on scientific management and standards of the same trade or occupation. 42. Intelligence investment increased, all kinds and levels of skill training developed, putting forward the activities of learning technologies of project units and individuals, a lot of technical key members appeared, all these to make a contribution to the development of rural market economy. 43. The input of the project increased the social products, effectively related the conflict between supply and demand of the partial market commodities, increased the country's tax resources and incomes of exchanges. 44. Through the Part B lending of the World Bank, ABC managers mastered the acknowledge of project appraisal, management, supervision and evaluation, actual operational measures and financial management, which were used in the management of ABC domestic lending and plays a promotion role on the transforming into a commercial bank. H. Execution of Laws and Documentation 45. ABC had strictly acted in accordance with all the terms of the documents in the strict sense. 46. According to the Credit Agreement and Project Agreement between the Government of China, ABC and the World Bank, the loan rate of the project loan would be executed with the domestic loan rate of the same kind at the same level. In the execution, ABC didn't make any problem on the interest rates. 47. According to the provisions of documents, ABC makes a review and approval of projects due to the amount at different level, the amount of the loan above US$3 million shall be reviewed and approved by the World Bank; the amount between RMB8 million and US$2 million by ABC HQ; the amount below RMB8 million by ABC project provincial branch. From the execution of the project, except for the gallnut project in Guizhou, any issue has not been occurred even now. 48. Project Procurement. Before 1990, for the reason of different understand, etc., the project units and ABC project provincial branches kept away from "Limited international bidding" purposely or accidentally, mostly adopting the procuring methods of comparing three suppliers before purchasing, a  - 40 - Appendix B lot of issues appeared during the project procurement. In April 1991, ABC HQ held a special meeting to pay more attention again to the project procurement and the procurement management measures had been re-edited. Special professional training courses on procurements had been held three times. Since then, the project procurement began to be put on the right track. 1. World Bank's Performance 49. The project, which had got succeeded, cannot be separated from the positive performance of the World Bank in the implementation, the World Bank's management on the project was effective and positive and helpful to the ABC and project units. 50. The World Bank's supervision mission came to China each time, except for the overall discussion held in Beijing with ABC HQ, and making a field supervision to the project site, reviewing the project contracts and files, making a selective check of the receipt and contract of the project, inspecting the implementation of the processing and the agricultural component of the project and the environment protection. After each supervision, they exchanged views with officials from local ABC and project units, and they provided a comprehensive memorandum to ABC lately. 51. The World Bank had also employed market research experts, project supervision specialists, project procurement experts and project financial disbursement officers to hold short-time training courses for the ABC project managers to provide new methods and ideas for ABC persons. These courses had played an important role to increase the quality of the ABC project managers. These training courses were welcomed at each level of ABC. J. ABC's Performance 52. ABC is the organizer and executor of the project. During the implementation of the project, ABC had made a great deal of efforts and once again had been proved to be competent and its effect also. The high quality of ABC staff and their correct attitudes towards working had been proved in the past few years. 53. ABC has set up a project consultant committee. For the consulting on financial affairs, technology and market. An improved effect had been made in the implementation. The staff quality and allocation of professional specialists were needed to be increased. 54. ABC also has made its own separate field supervision on the project two to three times a year to solve the problems discovered in the implementation and ensure the smooth execution of the project effectively while taking concerted action with the project supervision of the World Bank. 55. Another thing needed to be mentioned was that after the procurement issue of the World Bank lending appeared, ABC had actively taken concerted action with the World Bank to readjust the procurement guideline of the project in 1991, which had been accepted by the World Bank, and effectively ensure the efficient implementation of the procurement in the latter stage of the project. 56. The performance of ABC has been excellent on the coordination with the supervision missions of the World Bank, which were really recorded in the End of Mission's Supervision of the World Bank. 57. At present, ABC is facing a challenge of transforming from a state specialized bank into a state- owned commercial bank. For ABC has experienced a cooperation with the World Bank, Asia  - 41 - Appendix B Development Bank and foreign commercial banks for a long time, so the period of transforming would not be so long. Right now, ABC is making an application for a new World Bank loan, one of the objectives is to help the progress of commercialization. K. Experience and Lessons 58. Project Orientation. In the previous three rural credit projects, the project was mainly focused on crops planting, aquaculture and agroprocessing, with a lower starting point, lower technical content and a long recovery period, for the limitation of sectors, the selective leeway (space) was too small, all these bring more unfavorable influence on the project quality, seriously restricted the effective loan recovery and ABC's conscious activities on the management of the project. In the forthcoming Fifth Rural Credit Project, we'll do our best to improve the problem areas. 59. Project Scale. In general, the loan size of the Third Rural Credit Project is relatively small, with more components overstretched in many areas, all these brought a hard difficulty to the management, meanwhile, the over small projects also effected the effective execution and the project procurement. 60. Project Procurement. The required amount for procurement specified in Credit Agreement and Project Agreement is very low, giving too much preferences to international bidding. 61. For there is no working capital allowed to, except the initial working capital, be allocated to the project, ;soon most of the projects get into difficulties of lack of working capital after entering into production, affecting the production and normal implementation of the project. So recommendations are: the management on the working capital should be flexible in the latter implementation period to ensure the desired achievement of the project benefits. 62. Product Marketing and Market Research and Development. Because of most of the subprojects scattered in the areas where the economy is less developed and far from developed markets, the lower quality of the project unit, insufficient information on products and lack of market concept, which are leading to an unready market of a lot of projects (especially agroprocessing projects) and heavily affecting the existing and development of the project. 63. The adjustment of the project at the mid-term is very necessary. The World Bank should guarantee more flexibility to the borrower (ABC) to adjust the content and scale of the project so as to realize the objectives of the project faster, better and more correctly in accordance with the borrower's industrial policies and market changes. 64. Training and Management of the Project. The advanced management experience and methodologies of the World Bank loans have been used to train a lot of more excellent managers for ABC. For a long time, the World Bank kept silent in approving new project, so many experienced managers left the World Bank loan management positions, and some new-hands were replaced to continue the project management works, as the newcomers are not rich in World Bank loan management experience, so their weak managerial skills affected the implementation of the project. So the training of the project managers should be strengthened to ensure the smooth execution of the project.     IBRD 20243 M0O4GOLIA . l;mg_DEM PEOPLES C H0 1 N Aa r REP OF raREA '- ' 'REP THO IRD RURAL CREDIT PROJECT h Sh,,d, KOREA PROJECT PROVINCES: Gxxdb= -=n,u JAPAN GUIZHOU, SICHUAN, YUNNAN PROPOSED SUBPROJECTS SxChx H.g Tree Crops Roads J _g, _ Livestock Railroads .0') -\\ Hon FuAquaculiure Rivers A Agro-Processing Prefecture Boundaries , xx i, -- . - -HONG KONG U K Province Boundaries : j o-,jVET NAH - CAO,PORT 34= Internotional Boundaries 34- -'< LAC ) _4 -- -*~ THI PHILIPPINES 1 0 50 100 150 200 s ~ !