China - Animal Feed Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 24336 IMPLEMENTATION COMPLETION REPORT (SCL-400 10; TF-2069 1) ON A LOAN IN THE AMOUNT OF US$150 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN ANIMAL FEED PROJECT June 27, 2002 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2002) Currency Unit = Yuan Yl.0 = US$ 0.12 US$ 1.0 = Y8.3 FISCAL YEAR January 1 December 31 Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS ABC Agncultural Bank of China ADB Asian Development Bank CADTIC China Agribusiness Development Trust and Investment Company CAU China Agriculture University CIDA Canadian International Development Agency CU Capacity Utilization DCP Dicalcium Phosphate EAI Environmental Assessment Impact EPA Environmental Protection Agency FAO Food and Agriculture Organization of the United Nations FI Financial Intermediary ISO International Organization for Standardization MAFIC Ministry of Agriculture Feed Industry Center MoA Ministry of Agriculture MoF Ministry of Finance MTR Mid-term Review NFIO National Feed Industry Office PBC People's Bank of China (China's Central Bank) PMO Project Management Office PRC People's Republic of China QAG Quality Assurance Group SAR Staff Appraisal Report SC State Council SOE State-Owned Enterprise TCP Tricalcium Phosphate TIC Trust and Investment Corporation TPA Tons Per Annum TPH Tons Per Hour TVE Town and Village Enterprises Vice President: Jemal-ud-din Kassum, EAPVP Country Manager/Director: Yukon Huang, EACCF Sector Manager/Director: Mark D. Wilson, EASRD Task Team Leader/Task Manager: Qun Li, EASRD  CHINA ANIMAL FEED PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 6 6. Sustainability 8 7. Bank and Borrower Performance 8 8. Lessons Learned 10 9. Partner Comments 10 10. Additional Information 1I Annex 1. Key Performance Indicators/Log Frame Matrix 14 Annex 2. Project Costs and Financing 16 Annex 3. Economic Costs and Benefits 18 Annex 4. Bank Inputs 20 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 22 Annex 6. Ratings of Bank and Borrower Performance 23 Annex 7. List of Supporting Documents 24 Annex 8. ABC's Contribution to the ICR 25 Annex 9. Detailed Subproject Pipeline 29 Annex 10. The Ministry of Agriculture Fee Industry Center (MAFIC) 33   Project ID: P003563 Project Name: ANIMAL FEED Team Leader: Qun Li TL Unit. EASRD ICR Type: Core ICR Report Date: June 27, 2002 1. Project Data Name: ANIMAL FEED L/C/TFNumber. SCL-40010; TF-20691 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: AM - Agro-Industry & Marketing KEY DATES Original Revised/Actual PCD: 07/14/1993 Effective: 09/05/1996 09/05/1996 Appraisal: 02/15/1995 MTR: 09/15/1998 10/19/1999 Approval: 04/16/1996 Closing: 12/31/2002 12/31/2001 Borrower/Implementing Agency: PRC/MINISTRY OF AGRICULTURE Other Partners: STAFF Current At Appraisal Vice President- Jermal -ud-din Kassum Russell Cheetham Country Manager: Yukon Huang Nicholas Hope Sector Manager: Mark D. Wilson Joseph R. Goldberg Team Leader at ICR: Qun Li Brian (Abraham) Brandenburg ICR Primary Author: Xueming Liu (FAO/CP); Brian Brandenburg (Consultant) 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N-Neglhgible) Outcome: S Sustainability: L Institutional Development Impact: H Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Project's original objectives, as set out in the SAR, were to develop China's feed sector by (a) the alleviation of supply constraints of critical feed ingredients, (b) improving and expanding the utilization of agro-industrial byproducts for use as high-quality livestock feeds, (c) improving the organizational efficiency of the feed sector through specialization and integration, and (d) the restructuring of project enterprises to effect greater corporate efficiency and commercialization. These objectives were based on the findings of a major study on the animal feed sector that preceded project identification. The study was conducted and sponsored by the World Bank and the National Feed Industry Office (NFIO), the agency responsible for providing policy and investment guidance to the feed sector, under the Ministry of Agriculture (MoA). 3 2 Revised Objective: The original project objectives remained unchanged during project implementation despite the change of the implementing agency. However, during the MTR, the project activities were broadened in response to changing feed sector developments. In particular, the project scope was expanded to finance not only feed production but also procurement of livestock by vertically integrating project enterprises. As a result, vertically integrating project enterprises could now be financed under the project to link livestock production, processing and marketing. At project completion, five out of the fourteen enterprises were adopting vertical integration (see Annex 9). Assessment of Objectives: The original objectives were clear and continues to be responsive to the China's feed and livestock sectors' circumstances and the country's development priorities. In China, the average per capita consumption of meats and other livestock products continues to increase at a rapid clip, and so does the demand for animal feed. However, the project had overestimated the demand for high-quality livestock feeds by the livestock sector. At the time of the study of the animal feed sector and even at the onset of project preparation, modernization was expected to be based on Ministry of Agriculture initiatives. At appraisal, however, the path of feed sector modernization depended more on private sector judgments on demand for their output, and needed to be reflected in the loan size. The Asian financial crisis and its negative effect on Chinese livestock exports and price of feed imports exacerbated the demand situation. The revision in project scope at MTR addressed some of the needs of the growing private modem feed enterprises in China, for example, their need to be more vertically integrated because of input standardization issues. 3.3 Original Components: The seven components in the SAR included: (a) Integrated Feed and Livestock Production, (b) Feed Additives Manufacture, (c) Feed Processing Equipment, (d) Enhanced-Protein Feed Product Synthesis, (e). Integrated Protein Feed Crop Production, (f) Feed Commodity Wholesale Marketing, and (g) Feed-sector Strengthening. The first six components comprised a number of subprojects (financial intermediation of non-SOE enterprises in the six areas), while the last component supported the establishment of the Ministry of Agriculture Feed Industry Center (MAFIC) which was termed China Feed Industry Center in the SAR (see Annex 10). The China Agricultural Development Trust and Investment Company (CADTIC) was the financial intermediary. China Animal Feed Sector Study (Grey Cover Report No 19022-CHA), World Bank, June 24, 1993. The term non-SOE enterprises means companies which have a mmonty-state ownership. At the time of approval, there were few fully pnvate companies m the feed sector. -2 -  3.4 Revised Components: In January 1998, the State Council disbanded CADTIC for its "weak financial positions" (see MOF letter on file). However, at the time no project funds had been disbursed. A replacement financial intermediary, Agricultural Bank of China (ABC), was identified by the Bank and GOC, and the project was renegotiated in 1998. ABC developed a list of project enterprises, which was agreed with the Bank. The total project cost was re-estimated at US$60.7 million (see Annex 2, Table 2a.). The fourteen project enterprises were grouped into 3 components, namely (i) Vertically Integrated Feed and Livestock Production; (ii) Protein Concentrate Milling; and (iii) Feed Additives and Feed Mineral Production. Assessment of Design: Most importantly, the project design ushered private sector participation in the animal feed sector in China. This was a desirable path to bring innovation and sector modernization without burdening the government with capital investments and risks. A feed sector study that provided a set of priority investment guidelines for feed sector development indicated the priority areas under the project, and was technically appropriate. The enterprises financed under the project were to provide a leadership role in these priority areas. However, the project institutional aspects were developed in a hurry. Only at the project appraisal review, Bank management had instructed the Task Team to redesign the project from a directed-loan operation to a demand-driven financing operation, aimed at supporting non-SOE enterprises. This appropriately made it easier to focus project resources on viable units and help the industry become more commercially oriented. Rapid changes in institutional aspects were undertaken changing the implementing agency, the components, and the subproject pipeline, but many other features of the project, such as the loan size and review process of sub-borrower selection, were left unchanged. These weakened the project. What was appropriate for a directed-loan operation was possibly inadequate for a private sector development type of operation. The financial intermediary plays a central role in such an operation and the choice of CADTIC was unfortunate, because it was relatively new and possibly did not have the depth of resources required for such an innovative role in the sector. In 1998, many of these issues were redressed with ABC taking over as the financial intermediary. Its deeper understanding of the sector led to the support of those areas where commercial enterprises could flourish, and sub-borrowers who could benefit from dollar-denominated loan fmancing. 3.5 Quality at Entry: Quality at entry is rated unsatisfactory. The project did not receive a QAG review. As mentioned above, the technical aspects of the project were well prepared, and based on a feed sector study that provided a set of priority investment guidelines for feed sector development. However, the structure of the livestock sector, its pace of development, and, consequently, its demand for high-quality feed (particularly from the many individual/small scale entities) were not fully taken into account into the design at appraisal. In addition, because of the last minute changes, due diligence was inadequate in the choice of the financial intermediary jointly selected by the Bank and the GOC to implement the project. The switch from a directed loan operation by MOA to a financial intermediation operation by a relatively new institution CADTIC brought a different level of risky-ness to the operation. The loan size did not reflect the lack of demand for high-quality feed nor the risky-ness from switching to a financial intermediation operation. The market for the modem feed producers developed slowly and they found little reason to borrow dollar-denominated loans. The preparation effort failed to anticipate either of the developments. In 1998, the project institutional aspects were entirely recast. The new financial intermediary, ABC, appreciated the risk and chose sub-borrowers wisely reflecting both the demand and cost-of-financing (dollar versus local currency loans). Lastly, the institutional strengthening component, which supported the establishment of a self-financed feed sector development center, MAFIC, although not directly financed by the Bank, was well designed. -3 -  4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project outcome is rated satisfactory, despite the disbursement of only 15 percent of the original IBRD loan at SAR, and a much smaller project output than originally anticipated. The rating of the achievement of objective is based on the project achieving the SAR qualitative objective of sector modernization and the quantitative targets made at MTR, which led to among other things partial loan cancellation. The project addressed priority objectives for the feed sector, as outlined in the SAR and followed throughout implementation, namely, (a) vertically integrated feed and livestock production, (b) protein concentrate and compound feed production, and (c) feed additives and feed mineral production, (d) enhanced-protein feed synthesis, and, (e) specialty (aquatic) feed production. The enterprises financed under the project are providing a leadership role in these project objectives. As envisaged in the SAR, the project ushered private sector participation in the animal feed sector in China. All project enterprises are privately-owned; operate under market-oriented corporate management; own state-of-the-art production equipment and facilities; practice stringent quality control; and have been developing strong marketing programs and demonstrated financial and economic viability except enterprises still under start-up production (see Sections 4.3 and 4.4). Several enterprises are preparing for ISO-9000 accreditation. In parallel with the qualitative structural change in the sector, the project has mainly achieved its output targets revised at MTR, based on the reduced project scope and investment plan. Apart from the financial intermediation targets, other targets achieved include: the incorporation of innovative technologies (135 percent of target), feed industry information exchange through MOA (145 percent of target), degree of vertical integration by project enterprise (54 percent of target), and feed production capacity building (91 percent of target). See detailed information in Annex 1. The project facilitated the development of regulatory and policy framework for the feed sector at the central level, and provided technical support to the sector through the national feed industry center. The project preparation contributed greatly to the priority of the sector investment needs. The project objectives were in line with the Fourth and Fifth 5-Year Plans (1990-1995 and 1996-2000) for livestock and feed sector development. Though no Bank loan was provided for the establishment of the Ministry of Agriculture Feed Industry Center (MAFIC), support was provided in the planning of MAFIC's as a financially sustainable agency, and arranging for bilateral assistance. MAFIC has developed intro an important animal feed sector support institution, providing technical services and training to the feed industry in China (See Annex 10). The project achieved significant benefits for both borrowing feed mills and farmers. The project directly benefited project enterprises by increasing and upgrading their output capacity, but also indirectly benefited livestock owners' access to improved feeds for livestock and aquaculture production. Furthermore, the project also contributed to poverty reduction. Although not a specific project objective, most of project enterprises are in poverty-designated county areas and contributing to rural poverty alleviation by means of rural employment generation through contract farming and feed mill employment of local workers. The project had provided 2,410 new job opportunities to the local farmers. 4.2 Outputs by components: The project has been generally successful in achieving its design capacities and expected output targets assigned during the MTR. The total incremental design capacity from project supported enterprises is at - 4 -  some 908,000 tpa (equivalent to 1% of the current national feed production), that comprised 529,000 tpa of protein concentrates, 275,000 tpa of compound and pelleted feeds, and 104,000 tpa of feed additives, and has been fully achieved at the project completion. Of the 14 project enterprises, 11 were at various stages of production by the project closing date of December 31, 2001, with three enterprises still under start-up production. The total incremental feed production from 14 enterprises was about 633,580 tpa at project completion, that had reached 70 percent of the designed capacity. Vertically Integrated Feed and Livestock Production (3 enterprises, total investment cost US$11.23 million, 21% of the total project costs). This component comprises vertically integrated enterprises engaged in compound and pelleted feed milling using fully automated feed formulation equipment. The enterprises are at various stages of vertical integration. Some units use their own products to feed enterprise-owned livestock (pigs, poultry, dairy cattle) for extra value-added. Others contract farmers living in the vicinity to raise their livestock, supported by company production inputs and services. This component reached 79 percent of capacity utilization at project closing date, that is well above the national average feed mill capacity utilization rate of 47 percent. In addition to above enterprises, two enterprises (Bayu Oil Plant and Shijiahu Feed Mill) under Protein Concentrates Component are also vertically integrated production. Protein Concentrate Production (9 subproject enterprises, total investment cost US$25.43 million, 49% of total project costs). This component is the largest component, and has played an important role in alleviating supply constraints in protein-rich animal feeds. The component outputs (compound and pelleted feed) have reached 100 percent design capacity completion and 59 percent capacity utilization. The end-products are used for poultry, pigs, ruminants and pond fish in the field. Protein concentrate production had responded to a serious national shortage of animal feed protein resources, and have been widely used by smaller livestock enterprises and farmers in the field. Feed Additives Production (2 enterprises, total investment cost US$16.07 million, 30% of the total project costs). Support was provided for enterprises engaged in micro-mix or premixes production for use in compound feed milling. Premix production requires micro-blending technology, which is still in its early stages in China. This component is particularly significant for its large DCP manufacturer, which provides a superior feed mineral product to the low-quality and often toxic 4 Tri-calcium phosphate (TCP), commonly used in livestock feeding in China. With a total design capacity of 104,000 tap, this component had reached 97 percent capacity utilization by project closing date. Project enterprises have eased certain critical supply shortages. At the farm-level, the 529,000 tons of protein concentrates produced by project enterprises are expanded five-fold with corn to make a total of 2.65 million tons of finished feed. This expansion increases the annual project output to a substantial 3 percent of the annual national feed mill output. In the case of DCP feed additive, project support to Mianzhu enterprise has increased its DCP share of the China market to 45 percent. The project has acted as a model for other domestic producers in terns of its quality products and corporate management, and two enterprises have been accredited with ISO-9001 status. Three subproject enterprises, Sanli Farm, Hengda and Youyou, were operating at low capacity rates at closing date, through no fault of their own. Hengda began production only one month prior to closing date, and Sanli Farm is developing 267 ha of ephedrine crops, a slow process that requires nursery development and seedling transfer. The third subproject, Youyou Biological, had been operating at full capacity since April 1999, producing enhanced-protein feed by converting regional abattoir wastes. The enterprise had to stop operations in 2000 due to a precautionary government ban of abattoir waste processing related to Mad Cow Disease outbreaks in Europe. Youyou is currently restructuring into a different feed product line. The output indicators are summarized in the table below, with enterprise profiles listed in Annex 9. - 5 -  4.3 Net Present Value/Economic rate of return: The prevailing financial prices of the inputs and outputs of feed mills adequately reflect economic prices, and in line with the practice of recent Bank projects in China, the Standard Conversion Factor is assumed to be one(l). The returns for the individual units, before tax and financing, adequately reflect the economic impact of the project. Separate economic analysis was conducted for all subprojects except Youyou in Henan Province (closed down due to Mad Cow Disease, see Section 4.2) and the project as a whole. The NPVs (OCC at 12%) for the 13 subprojects are all positive, with ERR ranging from 14% to 41%. The ERR for the project as a whole (the cost of Youyou included) is estimated at 28% (NPV at a 12% discount rate, estimated at Y 369.8 million), indicating the project as economically robust. No economic analysis was done at ABC's appraisal. Detailed analyses are presented in Annex 3. 4 4 Financial rate of return: Following the approach adopted at appraisal, the return on capital employed after taxes, which measures the benefits accrued to the enterprises, is used as the FRR. As with the economic analysis, the financial analyses were carried out for 13 sub-projects and the project as a whole. The financial rate of return of the project as a whole is estimated 16% (NPV at a 12% discount rate, estimated at Y 88.4 million), with FRRs for 13 individual sub-projects ranging from 13% to 21%, indicating that the project is financially viable. These returns are in general moderately lower than those at ABC appraisal. The main reason for the generally lower individual FRRs compared with those of ABC's appraisal is the higher capacity utilization rates assumed at appraisal. Detailed analyses are attached in Annex 3. 4.5 Institutional development impact: The project's institutional development impact on China's feed sector has been threefold: (a) facilitating the incorporation by MoA and NFIO of the main policy and sector investment priorities as outlined in the feed sector study, (b) contributing to the establishment of the national feed sector development center, MAFIC, to provide leadership in technical sector development'; and (c) further strengthening of ABC's long-term loan management, sub-project environmental assessment, and sub-project appraisal skills and risk mitigation in lending to the private sector. The significance of project impact was borne out by the steadfast commitment and support by Government and ABC to the objectives of the project. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Two interrelated external factors adversely affected the project during the early years of implementation and seriously depressed the feed industry's demand for investment and credit. Firstly, the Asian financial crisis in 1997 reduced the demand and capital investment in China's economy as a whole. National Feed Industry Office Annual Report, 2000. 4 TCP, in contrast to DCP, is poorly digestible and can contain up to 1.5% fluoride. The Center, with autonomous management and operating on a full cost recovery basis, plays an important role in feed sector strengthening. Although completed without Bank support, the Center was an integral part of project activities (See Section 10 C). -6 -  The livestock sector and high quality feed production in particular were hard hit. Secondly, in response to the crisis, the Government instituted a series of interest reductions to stimulate investment demand. In line with the credit agreement, the variable LIBOR-based US dollar single currency loans of the project were onlent by ABC with a margin of no less than 2.0%, resulting in a loan interest rate well above prevailing local rates. Moreover, the interest rates of LIBOR-based loans, according to the legal agreement, could be only adjusted twice a year. In an environment of falling interest rates, this created a situation where the project funds were more expensive than the local commercial loans of comparative terms and maturity (See Section 10, Table 10a). In addition, the outbreak of BSE (Mad Cow Disease) in Europe led the government to close down one sub-project (Youyou) as a precaution against the disease. 5.2 Factors generally subject to government control: The factors under government control were generally positive for the project. The government has given priority to livestock sector and quality feed production as a means to increase farmers' income. Also, the market-oriented reform has facilitated the selection of non-SOEs under the project and imposed higher standards on corporate governance. However, the government, could have, together with the Bank, selected the right implementing agency earlier in the project design. The changes in the project's implementing agency, which required two revisions in the selection of units under the project (one during preparation and one during implementation), caused serious delays in project implementation and loan disbursements. 5.3 Factors generally subject to implementing agency control: The following three major factors, all under the control of ABC, have contributed positively to the project: (a) The size of the project loans (averaging US$1.6 million) on-lent by ABC to project enterprises proved to be a major competitive advantage, as such loans were far more responsive to the sub-borrowers' investment needs, and could be approved and disbursed by ABC more rapidly than domestic loans. Many project enterprises have confirmed that, in spite of their higher interest rates, Bank loans better met their financial needs, whereas domestic banks had to set severe limits on the loan amounts lent to borrowers, due to the prevailing credit crunch. Moreover, domestic loans are often lent only at short or medium maturity, whereas the project loans issued a long-term maturity. (b) ABC's prior experience in implementing four Bank-supported rural credit projects over a period of 10 years has been proven beneficial in terms of long-term loan management, procurement and disbursement, all of which were effectively carried out well by ABC's Head Office PMO and the provincial ABC branches; and (c) ABC has improved its loan appraisal and management. The sub-borrowers of the rural credit projects, which were implemented before the onset of enterprise reforms in China, were mainly financially weak SOEs. Due to their command-driven business operations, many such SOE sub-borrowers faced difficulties in servicing their loans. In onlending the Animal Feed project loan, ABC selected only non-SOEs with proven, viable track records. 5.4 Costs andfinancing: In the SAR, total project costs of the original pipeline prepared by CADTIC were estimated at US$310.3 million, including an IBRD loan of US$150 million. When the final implementing agency, ABC, was selected in 1998, the project was renegotiated. The final pipeline, developed by ABC, was much reduced in size and scope, due to two loan cancellations totaling US$127.5 million (see Section 10). As per ABC's appraisal, and further defined at MTR, the total project cost was US$60.7 million including an IBRD loan of US$25.2 million (see Annex 2). The actual total project cost is estimated at US$52.7 million with - 7 -  IBRD financing US$22.4 million (43% of the total project cost), ABC and beneficiaries financing US$7.46 million (14% of total cost) and US$22.83 million (43 % of total cost) respectively (see Annex 2). 6. Sustainability 6.1 Rationale for sustainability rating: Project sustainability is likely. The main reason for this rating is that the sub-project enterprises generally have solid financial and economic viability (see Sections 4.3 and 4.4), supported by sound corporate management, state-of-art production equipment and facilities, stringent quality control and strong efforts on brand building and product marketing. Government commitment to the development of the animal feed sector remains high, and many of the Feed Sector Study's recommendations have been drafted into the national feed sector development strategy. Government and ABC's commitmnent to promoting free market-based agribusiness development is very high, as evidenced by the loan portfolio of exclusively private sector project enterprises. Marketing has been clearly identified as a priority by all the enterprises, and efforts have focused on increasing market share through brand development, product promotion, and improving production efficiencies. In addition to its continued supervision inputs, ABC has provided start-up working capital to enterprises scaling up existing production. These combined efforts would increase the production capacity utilization and contribute to the project sustainability. The institutional strengthening component financed outside the project, but an inherent part of it, will also be sustainable. The feed sector institute, MAFIC, is financially self-supporting through.advisory, technical and production activities, and has already proven its sustainability by providing substantial institutional leadership supported financially by the feed industry (see Annex 10). ABC's central project management office has also been strengthened by implementation of the project. Skill development of the individual provincial branches responsible for subproject appraisal and loan management has been especially valuable to ABC. These skills are being transferred to other, non-project branches. 6.2 Transition arrangement to regular operations: The transition of project enterprises to post-project operational status is already assured, as these enterprises, from the beginning, have operated as fully commercial entities. MAFIC, with its integral cost recovery and shareholding structure and its active support from, and exposure to the feed industry, was designed from the beginning to operate as an autonomous, commercially sustainable entity. 7. Bank and Borrower Performance Bank 7.1 Lending: Lending performance by the Bank is rated unsatisfactory. The Bank could have recognized from the onset that the project, given its commercial nature, should have been prepared as a demand-driven loan operation, which would have prevented unnecessary implementation delays (see Section 3.5). However, the preparation of the Feed Sector Study prior to project identification was instrumental in securing the Govemment's commitment to the project and its objectives. The appraisal of a subproject pipeline of great technical variety and complexity, although costly in termns of technical consultant inputs and supervision, has been well executed, resulting in a good quality lending portfolio. 7.2 Supervision: Supervision quality is rated satisfactory. Project supervision by the Bank was generally regular and constructive to project implementation. Most importantly, when extemal factors delayed loan disbursement, - 8-  the Bank was timely in identifying these constraints, and used the supervision missions to restructure parts of the project and partially cancel the loan to reflect new realities. Supervision of technically sophisticated subprojects, such as DCP feed mineral production and protein synthesis, depended heavily on the participation of highly-specialized consultants, who were not always available when needed. Collaboration between ABC and NFIO, even though the latter was no longer directly involved in the project, continued throughout implementation. Given ABC's prior experience with Bank projects, procurement and disbursement did not pose any problems. The Bank's prior review of the first three NCB pipeline contracts, as required, was satisfactory, as were ABC's overall project management, its administration of the Special Account, and overall loan management. 7.3 Overall Bank performance: Overall Bank performance has generally been satisfactory. The overall project objectives remained clear and unchanged, and the Government remained supportive of the project throughout its implementation, as evident from its assistance in resolving the problems associated with the feed sector downturn and the changes in project implementing agency. The Bank's communications with ABC remained close throughout implementation so that problems could be identified and resolved at an early stage. Borrower 7.4 Preparation: Initial project preparation suffered from borrower's incomplete appreciation for a private sector oriented operation. But when in 1998, the project institutional aspects were recast, the performance of the borrower was quite satisfactory. ABC adopted a sustained and positive approach throughout project preparation, and displayed substantial project ownership, even though ABC was not the project's original sponsoring agency, and was requested to take over project management from CADTIC. ABC understood that its stake in developing a well-performing subproject pipeline was high, given the commercial nature of the project, and took many risk mitigation measures in selecting viable project enterprises. 7.5 Government implementation performance: Government implementation performance is rated satisfactory. The Government's commitment to the project has remained strong and sustained, in spite of several changes in project implementing agency and the economic downturn of the feed sector during and following the Asian financial crisis. Government's continued support for the establishment of MAFIC has been especially strong, and the grounds for MoA's decline to utilize the project loan earmarked for this purpose were purely financial. The government's commitment to feed sector development was better focused from the onset by the recommendations made in the Feed Sector Study that preceded project identification, which clarified the issues involved in modernizing the sector, and presented clear options for institutional and capacity building. This commitment ran parallel to the Government's equally strong commitment to the commercialization of the livestock sector, which depends on quality feed for its improvement. 7.6 Implementing Agency: The selection of a suitable project implementation agency was problematic, and required a shift from directed onlending to demand-driven lending. The mismatch of NFIO as a suitable implementing agency should have been recognized early in project identification. The performance of ABC, considering the extrinsic constraints it faced during implementation, has been satisfactory. ABC's performance in pipeline development, subproject appraisal, loan management, procurement, disbursement and administrative procedures has been satisfactory. 7.7 Overall Borrower performance: The overall performance of the Borrower has been satisfactory. The Borrower has been consistently supportive in assisting the Bank in resolving the issues faced during implementation, recognizing that the -9-  basic objectives of the project were sound and relevant. 8. Lessons Learned Lessons learned based on the review by the ICR mission are as follows: (a) Use Sector Studies with care: With the usual lag between a sector study and the Appraisal, some structural or institutional change in the sector is common. It is important to identify clearly sector constraints, and evaluate the suitability of implementing agency and the selection criteria for participating enterprises. On the business practice side, the participating enterprises must be willing to innovate, build a sound management team, and prepare a realistic business plan. (b) Evaluate competitiveness of foreign currency denominated loans for sub-borrowers: This is especially true when the major investment items (equipment and works) are locally available and major project outputs are destined for domestic market. Under such circumstances, foreign exchange risk and more competitive local currency loans tend to discourage the use of dollar denominated loans. Moreover, given the volatility of the financial market, project implementation delays may reduce project viability drastically. (c) Chose the financial intermediary based on their local knowledge and, if developing a new relationship, do your due-diligence: Due diligence should cover the intermediary's prior sector and regional experience. If possible, evaluate the quality of the staff in the intermediary who would be involved in selecting the sub-borrowers. Staff assigned for sub-borrower development may have excellent understanding in one sector but deficient in a specialized sector such as the animal feed sector. ABC's prior experience in implementing four Bank-supported rural credit projects and its improved loan appraisal criteria and risk management skills made the project viable after a disastrous start. 9. Partner Comments (a) Borrower/implementing agency: Comments from ABC We are satisfied with the ICR assessment of the project, which generally reflects the actual situation of the project design, implementation and reasonably forecasts the projects' future operation, and we appreciate very much the efforts made by the ICR team. We share the view in the ICR that the quality at entry could have been better in terms of project design, especially the selection of appropriate implementing agency at the early stage of project preparation. The ICR assessment on the achievement of project objectives and outputs are objective. We particularly agree with the conclusion that the project has demonstration effects in terms of quality product, state of art technology and corporate governance. The project has further benefited not only farmers buying feed for livestock and aquaculture production but also those producing crops as raw materials for feed industry. We are also satisfied with the assessment on economic and financial rates of return in ICR. The financial rates of returns of the subprojects are generally lower than those at appraisal and the main reason was, as clearly identified in the ICR, the different assumptions made on capacity utilization between ICR and appraisal. - 10 -  The lessons learned in the ICR are highly relevant and useful for ABC's future feed industry and agribusiness loan appraisal, as well as for its future cooperation with the World Bank. (b) Cofinanciers: There were no co-financiers for this project. (c) Other partners (NGOs/private sector): No direct partners were involved, although CIDA participated in the institutional strengthening activity by assisting in the establishment of the feed industry center, MAFIC. However, no project funds were used for MAFIC. 10. Additional Information Changes in Project Implementing Agency Three changes in project implementing agency, from NFIO to CADTIC to ABC, have hampered the timely implementation of project activities, and caused the project to miss an important window of opportunity during which the animal feed sector's investment rate in capacity building was high. The National Feed Industry Office, NFIO, is the national agency under MoA responsible for regulatory and sector development aspects of China's animal feed sector. NFIO has a network of provincial and county branch offices, and its connections with the feed industry were primarily directed to SOEs operating in the feed industry. Privately owned agro-enterprises were somewhat outside NFIO's scope, however. MoA, the project's original line ministry, assigned NFIO to assist the Bank in preparing the Feed Sector Study, from which the basic project objectives and investment priorities were identified. The original subproject pipeline developed by NFIO contained 31 SOE-managed subprojects in six components related to feed sector capacity building, to be financed with a US$150 million IBRD loan. Given the commercial nature of the proposed project and its concern with the viability of SOE-led subprojects, Bank management requested the Task Team at pre-appraisal to prepare an issues paper on how the ongoing enterprise reform in China would impact on the project. Subject to this paper, Bank management directed the Task Team at the appraisal review meeting to change the project design from a directed loan operation involving SOEs to a market-oriented, demand-driven operation with non-SOE enterprises. This change over was effected during the March 1995 appraisal mission. The identification and appraisal of the project financial intermediary CADTIC delayed project negotiations for a 10-month period, until February 1996. The China Agribusiness Development Trust and Investment Co., CADTIC, was established in 1988 and was originally under the administrative supervision of the State Planning Commission (SPC), which was transferred in 1994 to MoA. CADTIC was set up with Bank assistance to serve as a financial intermediary for channeling rural credit funds to China's rapidly developing TVE subsector. Although CADTIC reported to the Minister for Agriculture, it operated under autonomous management and was incorporated as a shareholding Trust and Investment Corporation (TIC). In 1988, CADTIC became the implementing agency of a long term US$300 million Bank loan allocated for China's Rural Sector Adjustment Credit. CADTIC also gained operational on-lending experience with ADB loans, and loans from Credit Suisse. The Task Team appraised CADTIC in June 1995 as the implementing agency for the Animal Feed Project, with its Intemational Finance Department as the PMO (see CADTIC Appraisal Report in the Project Files). The appraisal found CADTIC's in-house loan portfolio and operating procedures satisfactory and recommended an institutional strengthening program to further bolster its loan management expertise. This program included, (a) reorganization of on-lending operations from three separate divisions into a single Credit Department, (b) strengthening risk management by establishing a Credit Review Department, (c) - 1 1 -  improving the management information system, and (d) providing additional PLO staff training in lending operations and risk management. These measures were accepted by CADTIC and technical assistance was identified to oversee and carry out these measures. CADTIC proceeded to identify its own subproject pipeline, consisting entirely of privately owned agro-enterprises engaged directly or indirectly in the feed industry. At the early stages of pipeline development, CADTIC did not adhere sufficiently closely to the project objectives when selecting enterprises, which resulted in an Highly Unsatisfactory project objectives rating at the November 1996 supervision mission. The rating was upgraded to Satisfactory at the following supervision. In January 1997, before CADTIC had committed or disbursed any of the project loan, the State Council closed CADTIC. Bank management decided not to terminate the project in accordance with Article V (b) of the Loan Agreement (June 1996); a decision based on strong representation by NFIO and MoA concerning the importance of financing feed sector development. A hiatus of nine months followed, during which the replacement financial intermediary, ABC, was identified. The Agricultural Bank of China (ABC). The project was renegotiated with ABC in Beijing in October 1997 and presented to the Board on a No Objection basis in February 1998. An amount of US$200,000 of the loan was earmarked for ABC project management office strengthening. In March 1998 ABC resumed project implementation. ABC is China's large state-owned financial institution, with over 2,000 branches and near 400,000 employees nationwide. Its original agricultural loan portfolio has shifted from agriculture to other sectors in recent years. When ABC was requested by PBC (the cental bank) to take over the Animal Feed Project, it had already accumulated substantial experience with Bank projects. Between 1984 and 1990, ABC implemented four rural credit projects for a total amount of US$585 million-equivalent in blended IBRD/IDA loans/credits. These loans/credits increased in amount from US$50 million IBRD/IDA (the first project in 1985) to US$275 million IBRD/IDA (the fourth project in 1990). These loans were principally onlent to SOEs and TVEs, with varying success, given that many such sub-borrowers were technically, structurally and financially weak. ABC assumed project implementation in the early stages of the Asian financial crisis, which had begun in mid-1997. In 1997 and 1998, the Government instituted a series of interest rate reductions to stimulate the economy, which had slowed as a result of the Asian financial crisis. As a consequence, the Bank loan, onlent by MoF to ABC in variable LIBOR-based US dollar currency, became increasingly noncompetitive compared to domestic commercial loans of similar maturity. Two extrinsic factors; depressed capital investment, and the Bank loan's widening interest rate gap, contributed to a rapidly declining demand for the Bank loan. ABC had also become extremely cautious in approving sub-loans as the result of tightened banking regulations in response to deteriorating economic conditions. As a result, ABC faced increasing difficulties in finding suitable enterprises prepared to take on the project loan, and, in order to reduce its commitment fee exposure, requested the Bank for two successive loan cancellations; the first in April 2000 of US$95 million, followed by a second cancellation of US$32.5 million in December 2000. This left US$22.5 million of the loan active, or 15 percent of the original US$150 million loan. During the midterm review mission in October 1999, three measures were taken to make the project more responsive to prevailing conditions in the feed industry, which had slumped as the result of the Asian financial crisis. First, a US$10 million working capital facility was earmarked from the project loan to assist project enterprises with difficulties borrowing sufficient working capital. These loans had a maturity of 6 months with a 1% interest per month penalty for late repayment. Second, a decision was made to cancel part of the loan to ease ABC's exposure to the commitment fee. Third, the project objective was broadened to provide project loans for livestock purchases for enterprises wishing to undertake vertical feed and livestock integration. Therefore, loans had only been designate for feed-related investments. However, the extrinsic effect of the widening interest rate gap could not be controlled. With the Loan cancellations, the project was closed on December 31, 2001, one year before it's scheduled closing date. - 12 -  Interest Rates of IBRD Loans Spread Against Domestic Currency Loans (Annual Percentage) Table lOa Dates I Dec-991 Jun.001 Dec-00 I Jun-01 I Dec-01 I Jun-02 I Dec-02 IBRD Loan Interest Rate 1 7.071 5.191 5.471 6.241 7.161 6.631 4.06 ABC On-lending Rate | 9.071 7.471 7.471 8.241 9.161 8.631 6.06 Local Currency Loan Rate | 7.561 621 6.211 6.211 6.211 6.211 5.8 10 9 8 78 IBRD Loan Interest 6 Rate 5 \ ABC On-lending 5 ~~~~~~~~~~~Rate 4 Local Curency Loan 3 Rate(5 years) 2 I 0- Dec- Jun- Dec- Jun- Dec- Jun- Dec- 98 99 99 00 00 01 01 - 13-  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome/Impact Indicators:/' Revised at MTR Actual/Latest Estimate Project agro-enterprises apply 65% of enterprises 36% of enterprises vertically integrated management Feed Industry Information 50% of subprojects reached by 95% of subprojects reached by exchange by Ministry of MAFIC MAFIC Agriculture Feed Industry Center Feed Industry Center (MAFIC) Full effective Fully effective provides sector leadership Compliance with eligibility 85% compliance 100% compliance criteria for subproject participation ABC central PMO and Rating: Highly Satisfactory Rating: Highly Satisfactory provincial branch appraisal quality 1a These indicators were retrofitted during the MTR and do not reflect those presented in the SAR Output Indicators Revised at MTR Actual/Latest Estimate Indicator/Matrix:__ Feed industry personnel training 100 trainees 450 trainees (No.) Enterprises with 15 enterprises I 1 enterprises enhanced-protein and feed additives production Enterprises introducing 65% of enterprises 100% of enterprises innovative conversion technologies Total capacity building output 1.0 rnillion tpa 905,000 tpa (91% of target) ,by project These indicators were retrofitted during the MTR and do not reflect those presented in the SAR - 14 -  Output Indicators Design Capacity Capacity Capacity Onset of Utilization Utilization (tpa) at Production Project Enterprise Closing Date Target Actual tpa % Date Component A. Vertically Integrated Feed and Livestock Production Total Component 257,000 257,000 203,500 79% -- l.Baoto Qishi Feed Industry 7,000 7,000 3,500 50 12/01 2.Beixu Feedmill 100,000 100,000 65,000 65 07/01 3.Shiyang Feedmill Co. 150,000 150,000 135,000 90 06/01 Component B. Protein Concentrate Production Total Component 547,000 547,000 323,900 59 -- 4.Bayu Oil Plant 70,000 70,000 63,000 90 08/01 5.Danong Sci &Tech. 70,000 70,000 0 0 02/02 6.Linying Agriculture 50.000 50.000 25,000 50 08/00 7.Ningxia Feed Company 50,000 50,000 27,500 55 09/01 8.Shuijiahu Feedmill 60,000 60,000 42,000 70 10/99 9.Zhengxing Feedmill 33,000 33,000 26,400 80 02/01 10.Zhengtai Feed Technology 120,000 120,000 120,000 100 05/99 I I.Youyou Biological 14,000 14,000 0 0 04/99 12. Hengda Feedmill 80,000 80,000 20,000 25 11/01 Component C. Feed Additives and Feed Mineral Production Total Component 104,000 104,000 100,880 97 -- 13.Longmang DCP Plant 100,000 100,000 100,000 100 12/97 14.Sanli Farm 4,000 4,000 880 22 07/01 Total Project Capacity 908,000 908,000 633,580 70 Project Capacity completion -- 100% - 70% and Utilization -15 -  Annex 2. Project Costs and Financing Proect Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million A. Integrated Feed & Livestock Production 11.25 11.23 99.8 B. Protein Concentrate Production 29.10 25.43 80 C. Feed Additives and Mineral Production 14.91 16.07 108 Total Baseline Cost 55.26 52.73 Physical Contingencies 3.27 Price Contingencies 2.19 Total Project Costs 60.72 52.73 Total Financing Required 60.72 52.73 Note These figures were presented at ABCs appraisal (revised at MTR) and do not reflect those presented In the SAR Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Procurement Method Expenditure Category ICB NCB N.B.F. Total Cost NCB ~~Other' 1. Works 0.00 5.93 3.05 6.29 15.27 (0.00) (5.93) (3.05) (0.00) (8.98) 2. Goods 0.00 11.72 2.98 0.27 14.97 (0.00) (11.72) (2.98) (0.00) (14.70) 3. Services 0.00 0.00 0.00 0.02 0.02 Training (0.00) (0.00) (0.00) (0.00) (0.00) 4. Land Requisition 0.00 0.00 0.00 0.17 0.17 (0.00) (0.00) (0.00) (0.00) (0.00) S. Working Capitial 0.00 0.00 0.71 27.78 28.49 (0.00) (0.00) (0.71) (0.00) (0.71) 6. Other 0.00 0.82 0.02 0.96 1.80 (0.00) (0.82) (0.02) (0.00) (0.84) Total 0.00 18.47 6.76 35.49 60.72 (0.00) (18.47) (6.76) (0.00) (25.23) Note These figures were presented at ABCs appraisal (revised at MTR) and do not reflect those presented In the SAR. - 16 -  Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other' N.B.F. Total Cost 1. Works 0.00 5.32 3.02 8.36 16.70 (0.00) (5.32) (3.02) (0.00) (8.34) 2. Goods 0.00 10.81 2.71 1.48 15.00 (0.00) (10.81) (2.71) (0.00) (13.52) 3. Services 0.00 0.00 0.00 0.24 0.24 Training (0.00) (0.00) (0.00) (0.00) (0.00) 4. Land Requisition 0.00 0.00 0.00 0.30 0.30 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Working Capitial 0.00 0.00 0.04 19.68 19.72 (0.00) (0.00) (0.04) (0.00) (0.04) 6. Other 0.00 0.00 0.52 0.25 0.77 (0.00) (0.00) (0.52) (0.00) (0.52) Total 0.00 16.13 6.29 30.31 52.73 ________________________ (0.00) (16.13) (6.29) (0.00) (22.42) Note. These figures were presented at ABCs appraisal (revised at MTR) and do not reflect those presented m the SAR. "Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 21Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in US$ million equivalent) I | Percentage of Aopraisal Component :A'ppraisal Estimate Actual/Latest Estimate [ *; A, I Bank-' Govt. CoF. Bank Go'L CoF. Bank GoiL CoF. A. Integrated Feed and 5.29 2.06 5.04 6.15 0.98 4.10 116.3 47.6 81.3 Livestock Product B. Protein Concentrate 14.04 1.55 16.35 10.49 4.32 10.62 74.7 278.7 65.0 Production C. Feed Additives and 5.90 3.00 7.48 5.78 2.17 8.12 98.0 72.3 108.6 Mineral Total 25.23 6.61 28.88 22.42 7.47 22.84 88.9 113.0 79.1 Note: These figures were presented at ABCs appraisal (revised at MTR) and do not reflect those presented in the SAR. - 17 -  Annex 3. Economic Costs and Benefits This Annex covers the reassessment of the financial and economic rates of return of the sub-projects implemented by ABC. The analysis was conducted for all subprojects except Youyou in Henan Province (only 6% of the total project, which was closed down by Government due to Mad Cow Disease, so that data are not available for its future operation (Section 4.2 ). Detailed sub-project descriptions are provided in Main text of ICR (Annex 9). Major assumptions for financial analysis are: (1) Project life: In line with the prevailing practice in the animal feed sector, the project life is assumed to be 15 years; (2) Investment costs and residual value of fixed assets: The investment costs employed in the analysis are based on actual costs incurred, including procurement and installation of equipment, land acquisition (user rights fees), and training. The residual value of the fixed assets is estimated at 5 percent of their book value, and is treated as cash in-flow at the end of the project life; (3) The revenues and operating costs. The revenues are derived from sales generated from operating capacity achieved from past years and projected values for the future. Detailed data concerning the amounts and prices of products sold, amounts and costs of raw materials, labor, utilities, marketing and administrative expenses were provided by each of the 13 factories; (4) Incremental working capital, depending on the capacity utilization, and management of current assets and liabilities, is projected by factory management and is included in the analysis separately; (5) Taxes: The feed sector has a preferential VAT of 13% as against 17% in general, with the amount payable to the supplier's recoverable. It also enjoys corporate income tax holidays for the first three years of operation, after which the corporate income tax is 33% of taxable income. The straight-line method was used to calculate the depreciation as income tax shield; and (6). Capacity utilization: actual capacity utilization for the number of years in operation, future projections were provided. Direct operating costs vary approximately in proportion to the plant capacity utilization. Based on the approach adopted at appraisal, the after tax IRR, which reflects the returns of factory gains, is treated as the financial IRR of the factories. The cash flow analysis is conducted in 2001 prices (no inflation adjustment made to the investment costs, given the fact that CPI remained virtually unchanged during the project implementation). The financial rate of return of the project as a whole is estimated 16% with IRRs for 13 individual sub-projects ranging from 13% to 21%, indicating that the project is financially viable. The IRRs by factory at ICR and at appraisal (estimated by ABC) are listed in the attached table. Detailed cash flow analyses are available from the project files. The Economic analysis was carried out individually for each project enterprise. The methodology of the analysis follows that of financial analysis with adjustment of prices and elimination of the impact of the transfer payment (tax liabilities). In line with the Bank's recent analysis of agricultural projects of similar nature, a SCF of I has been used in the analysis, which implies that no adjustment is needed in converting financial prices for non-tradable to economic prices. As for tradable, parity prices were used as economic prices. However, due to (1) the large number of diverse end products and raw materials; (2) the uniqueness in certain areas of a certain or raw materials; and (3) the absence of internationally comparable commodity prices for most of the products and raw materials; financial prices were used as proxies for economic prices. As such, the IRR before tax and financing, which measures the return on the total resources engaged, was taken as ERR for the project enterprise. The NPVs (OCC at 12%) for the 13 subprojects were positive, with ERRs ranging from 14% to 41%. The ERR for the project as whole (derived from the weighted ERR average of all project enterprises, including the cost of Youyou) is estimated at 28%, indicating the project is economically robust. The noticeable difference between the ERR and FIRR for each plant is caused mainly by the fairly high tax liabilities (VAT at 13% and corporate tax at 33%). - 18 -  Sub-project IRRs and ERRs at ICR and Appraisal** FRR at ICR FRR at ABC's ERR at ICR ERR at ABC's Appraisal Appraisal 1. Baotou Qishi Feed Industry Co. 17% 17% 32% N.A. 2. Beixu Group Co.Linying Dahe Feedmill 21% 23% 35% N.A. 3. Shiyang Co. 19% 27% 36% N.A. 4. Bayu Oil Plant 13% 23% _7% N.A. 5. Xijing Danong Science & Tech Vegetable 19% 25% 33% N.A. Oil Plant 6. Linying Dahe Feedmill 15% 21% 26% N.A. 7. Ningxia Xinghuo Feed Company 15% 16% 27% N.A. 8. Shuijiahu Zhengtai Feed Mill 16% 29% 32% N.A. 9. Zhengxing Zhimi Feed Mill 23% 30% 41% N.A. 10.Zhengtai Feed Technology Co. Ltd. 18% 28% 29% N.A. I I.Heng Da Aquatic Feed Factory 16% 18% 28% N.A. 12.Longmang DCP Plant 20% 29% 31% N.A. 13.Sanli Farm 13% 18% 14% N.A. Project as a whole 16%N.A. 28% [N.A. (**Spreadsheet calculations of IRR/ERR and NPV at ICR are available in Project files) -19 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective I denti ficati on/P rep aratio n 04/93 5 TTL, EC, NR, AB, FF 10/93 9 TTK, BD, AE, ID, FT, FA, NB, IO, AN 03/94 9 TTL, BD, AE, OD, FT, FA, MB, OP, AN 09/94 11 TTL, AB, MB, AO, OA, OP, RS, AN (2), EC, AQ 10/94 12 TTL, AB, PM, AO, AN, AE, EA, HR, AT, FF, FA, DB Appraisal/Negotiation 04/95 14 TTL, AB, EA, FP, FA (3), Fl, AM, PP, IF, AO, EC, AN 02/96 7 TTL, CL, DO, PS, FP, FA, AB, CB 11/96 12 TTL, AB, PM, AO, AN, AE, EA, HR, AT, FF, FA, DB Supervision 10/97 3 TTL, AB, PA HU S 03/98 2 TTL, PA S S 12/98 2 TTL, PA S S 06/99 1 TTL S S 10/99(MTR) 3 TTL, EC, PS U U 04/00 1 TTL U S 12/00 2 TTL, FA U S 03/01 2 TTL S S 12/01 2 TTL S S ICR 6/00 1 FA S S 4/02 3 TTL, FA, EC S S AB = Agribusiness Specialist, AE = Agricultural Economist; AN = Animal Nutntionist; AO = Agriculture Operations; AQ = Aquaculture Specialist; AT = Agncultural Training Specialist, BD = Business Development Specialist, CB - Credit and Banking Specialist; CL = Country Counsel, WB Legal Dept; DB = Data Base Management Specialist, DO = Disbursement Officer, EA = Environmental Assessment Specialist; EC = Economist; FA = Financial Analyst; Fl = Financial Institution Analyst; FF = Feed Formulation Specialist, FP = Fmancial Policy Analyst, FT = Feed Millmg Technology Specialist; HR = Human Resource Development Specialist; EI = Ingation Engineer, MB = Microbiologist; OA - Oilseed Agronomist; OD = Organizational Development Specialist, OP = Oilseed Processing Specialist; PA = Project Analyst; PC = Principal Counsel Operations, WB Legal Dept, PM = Project Management Specialist; PP = Poultry Production Specialist; PS = Procurement Specialist; NR = Natural Resource Economist, SA = Soybean Agronomist; TTL = Task Team Leader. - 20 -  (7) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 880.4 801.6 AppraisaVNegotiation 411.9 344.8 Supervision 197.4 197.8 ICR 4.5 28.0 Total 633.7 1372.20 - 21 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating L Macro policies OH O SU OM O N * NA Q Sector Policies O H *SUOM O N O NA a Physical O H O SU @ M O N O NA l Financial O H *SUOM O N O NA a Institutional Development 0 H 0 SU 0 M 0 N 0 NA El Environmental O H *SUOM O N O NA Social OIPoverty Reduction O H OSUOM O N * NA O Gender O H OSUOM O N * NA OiOther (Please specify) O H OSUOM O N * NA El Private sector development * H O SU O M 0 N 0 NA Li Public sector management 0 H 0 SU 0 M 0 N 0 NA El Other (Please specify) O H OSUOM O N * NA - 22 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bankperformance Rating Ol Lending OHS OS *U OHU OI Supervision OHS OS OU O HU O Overall OHS OS OU OHU 6.2 Borrower performance Rating LI Preparation OHS OS O U O HU OI Government implementation performance 0 HS * S 0 U 0 HU LI Implementation agency performance 0 HS 0 S 0 U 0 HU OL Overall OHS OS O U O HU - 23 -  Annex 7. List of Supporting Documents Number Title and Author Date 1. China Feed Sector Study, Grey Cover No. 10922-CHA, World Bank June 1993 2. Feed Industry Project Component Identification, Brown (consultant) June 1993 3 Subproject Proposal Assessment Report I, Agriteam Canada April 1994 4. Subproject Proposal Assessment Report II, Agriteam Canada October 1994 5. Feed Additives Technical Evaluation Report, Agritear Canada December 1994 6. Preappraisal Report, Agriteam Canada (2 Vol.) October 1994 7. Auditor's Report for CADTIC 1994 8. Appraisal Mission Report, Agriteam Canada July 1995 9. Project Proposal for the Establishment of the China Feed Industry Centre April 1995 (later renamed Ministry of Agriculture Feed Industry Center), CIDA, Hull, Canada 10. Enterprise Reform Report, Agriteam Canada May 1995 11. Environmental Assessment Summary, Agriteam Canada June 1995 12. Environmental Impact Assessment, Agriteam Canada June 1995 13. Project Appraisal Report, Agriteam Canada July 1995 14. Appraisal of CADTIC, Resource Industries Ltd. July 1995 15. Basic Report for CADTIC, by CADTIC International Finance 1995 Department 16. Study on Changeover from Traditional Rapeseed to Canola, Agriteam August 1995 Canada 17. Project Implementation Plan August 1995 18. Vertically Integrated Agribusiness Management Study, (2 Vol.), Hassall March 1997 & Associates Pty Ltd 19. Technical Assistance to CADTIC, Report by R. Neiss, Banking/Credit July 1996 Consultant) 20. China Beef Cattle Development, Agriteam Canada September 1996 21. Agribusiness Management Study, Hassall & Associates December 1998 22. China National Feed Research and Training Centre, Bameveld College, August 1988 Netherlands (reference material) 23. Aquaculture Production Mitigation and Monitoring Study, Hassall & March 1997 Associates 24. Integrated Soybean and Canola Production and Processing Study, Hassall March 1997 & Associates 25. Individual Subproject Pipeline Technical and Financial Proposal Reports Various Dates (14) (Summary in English) 26. Corporate Brochure, MAFIC 2001 27. ICR Spreadsheet Caluclation of ERR/IRR May 2002 - 24 -  Additional Annex 8. ABC's Contribution To The ICR A. Background The Animal feed Project (the Project) was originally proposed by the Ministry of Agriculture, and latter onlent by China Agribusiness Development Trust and Investment Corporation (CADTIC). In January 1997, CADTIC was closed down according to related laws and regulations. Agricultural Bank of China (ABC) was designated by the Government to take over the implementation of the Project. In March 1998, after negotiations among the Bank, Ministry and Finance (MoF) and ABC and through necessary legal procedure, three agreements, namely, Agreement Amending Loan Agreement, Project agreement, and Project Onlending Agreement, were signed respectively between the Bank and MOF, the Bank and ABC, MOF and ABC. ABC started to implement the Project as financial intermediary. B. Project Implementation Adjustment to the Project The original IBRD loan amount is US$150 million. Though ABC had made a lot of efforts to facilitate the Project, selection of subprojects still tumed out to be very difficult under the current market situation, particularly due to the loss of competition of the Bank's lending rate in contrast to the prevailing domestic banking rate. Besides, in order to reduce its commitment fee exposure, based on the subprojects pipeline, ABC requested to cancel US$95 million of the loan in February 2000, and again applied for cancellation of US$32.5 million in December 2000. With the Bank's approval, the loan amount was reduced to US$22.5 million. Based on the above, ABC determined that the project closing date was advanced to December 31, 2001, one year earlier than the original closing date. By the end of 2001, the project loan has all been approved by the Bank to be disbursed to the subprojects. C. Achievement of Objectives and Outputs Outcome/ Achievement of objective: The implementation of the subprojects greatly increased the added value of the agricultural products by utilizing the local resources, and improved the quality of the feed products and promoted the development of livestock breeding. On the other hand, the Project provided about 2410 new working opportunities to the local people, which brought about good social effect. As of December 2001, 11 out of the 14 subprojects were completed and opened to commercial operation, and the rest 3 has finished civil works construction and equipment installation and will start test-run in 2002. Most of the subprojects performed quite well and has achieved satisfactory financial earning. The accumulated sales of the 11 subprojects amounted to RMB 1,204 million which profits RMB 98 million. It is expected that the rest 3 subproject will see good profit when they become operational. The Loan effectively supplemented ABC's shortage for long-term foreign exchange existed in Midwest branches. Financed by the loan, ABC had effectively supported a number of good customers. ABC's fix asset lending capacity was strengthened by adopting international practices through technical assistance and the Bank-funded project implementation. Leamed from the practices in international banks, - 25 -  ABC applied the lending processing in its operations, including project identification, appraisal, review, approval, underwriting, monitoring, collection and post evaluation, which were critical for ABC to improve its credit policy and project management. Outputs by Component Fourteen subprojects were financed by the bank until the loan account was closed on 31 December, 2001, with total loan disbursement of US$22.42 million. The total actual investment of the 14 subprojects is RMB 438 million, of which 42% is Bank loan. The 14 subprojects are located in 8 provinces, most of which in Midwest area. They are Sichuan, Henan, Hunan, Fujian, Anhui, Shaanxi provinces and Ningxia, Inner Mongolia Municipalities. Among the 14 subprojects, 4 subprojects are integrated feed and livestock components, 2 are feed additives and feed mineral production component, 6 are compound, pelleted, concentrated feedmilling components, and 2 enhanced-protein synthesis components. After the subprojects are all completed, the production capacity of various feed products will be: compound, concentrated and pelleted feed products 802,000 tons, DCP I000,000 tons, ephedrine feed 4000 tons. The actual production capacity of each subprojects is almost same as the appraised. D. Main Factors Influencing the Projects The Project was in line with the state sector development plan in increasing the added value of the agricultural products and improving the deficiency in feed enterprise of small scale, low quality and backward technology. The subproject got support from local government in many aspects, such as tax reduction and exemption. All levels of ABC have done a lot of work in implementation of the Project, including market research, production design for the enterprise and loan disbursement. E. Problems and Issues Encountered in Implementation During the implementation, the central bank adjusted the foreign currency loan interest rates from 7.81% at January of 1998 to 5.56% at September of 2001. While for the Renminbi long-term (five years above) loan, the interest rate declined from 10.35% at March, 1998 to 6.21% at June, 1999, then 5.76% at February 2002. The advantages of using the Bank Loan, which were considered as longer, term and lower interests, were no longer existed. The Bank loan at this regard was less attractive to the borrower, which brought the inefficient utilization of the funds. Negatively affected by the Asian Financial Crisis, the exportation of the livestock products sharply decreased. And the domestic demand for the meat products are also declining, besides, the competition in local feed market has been very fierce since many new feed mill founded in recent years. All the above factors led to the demand and the price of feed products decreased. F. Sustainability of the Project The project seems likely sustain in the future. As most subprojects put into operation in 2000 and 2001 and still operated at early stage, they have not yet reached their original production capacity. And some subprojects have faced fierce competition since they started operation. Both ABC Head Office and branches cooperated actively with the subprojects to develop the market strategy and make financing plan. The - 26 -  subproject Youyou, which was allowed to manufacture protein feed grade meat meal, using animal wastes, is presently restructuring into different feed production lines, and will restart operation in 2002. Followed the project completion, ABC would continue to concentrate on project monitoring and follow up management. Special attention would be given to the sub-projects, which did not reach full capacity utilization, to help and encourage them to take measures to improve the operations, management and efficiencies to ensure the pay back of the loans and interests. As agriculture is the most important fundamental sector in China, the government has always put great attention to its development. With China's entry into WTO, stockbreeding has been framed as the priority industry, which will bring along the development of the feed industry. The project will see good potential market in the near future. G. ABC Performance Based on the Project Agreement, Amending Loan Agreement, the Bank's Guidelines for Disbursement, and Procurement and related policies issued, and in order to effectively implement the project, ABC Head Office developed "The Project Management Regulations for Animal Feed Project" and requested all the project branches executed the projects in line with the regulation. The regulations included the Project objectives, loan lending scope, subborrower's qualification, the projects appraisal and approval procedure, and supervision requirement. All the subprojects should get clearance of the local Environment Protection Bureau before their submission to ABC for approval. With the strict supervision by ABC, procurements of equipment under the Project were fully complied with the Project Agreement and the Bank's Guidelines for Procurement. NCB and direct shopping at least with three suppliers was used for all subproject procurements. Apart from the quality, price, technical functions of equipment, more attention were paid to the delivery, parts supply, maintenance, and after services in evaluation and selection of suppliers to ensure that equipment procured was technically advanced, reasonable for price and convenient to maintain after services. To ensure that the Bank loan was disbursed in line with the eligible criteria stipulated in the Project Agreement, all disbursements had been made after careful review of related materials and invoices. ABC has conducted on-site visits and off-site supervisions for all sub-projects. The monitoring scheduled covered: project funds resources and its implementation, the implementation of environmental measures, civil work processing progress, equipment procurement, equipment installation and operations, business operations after production, borrowers' financial situation, loan repayment schedule, as well as problems and suggestions. H. Bank performance During the Project implementation, to push the Project forward smoothly, the World Bank rendered great assistance in such aspects as establishing a revolving working capital fund, expanding the lending scope, etc. The supervision missions provided good advice on project management and technical aspects, which greatly improved the subborrowers' management. - 27 -  I. Main Experience and Lessons The useful experience worthy to be summed up for this project are mainly in the following aspects: (a) The local governments attached great importance to all the subprojects. (b) ABC's prudent credit principal ensured the qualified project was selected, which brought satisfactory financial and economic benefit to the subprojects and the local government. The lessons drawn from the project implementation are mainly in the following aspects: (a) Major project investment costs are spent in local currency and major outputs are sold in domestic market. In this case, the subborrowers was discouraged both by the foreign exchange risk and interest rate risk. (b) During the implementation period, the interest rate of the Bank loan to the subborrower ( after plus interest rate spread) was much higher than that of the local currency loan, which made the Bank loan less competitive. (c) ABC should reinforce the ability to make market research and forecasting in long-term project appraisal. - 28 -  Additional Annex 9. Detailed Subproject Pipeline Component A. Vertically Integrated Feed and Livestock Production 1. Baotou Oishi Feed Industry Co. is a privately-owned shareholding agro-enterprise, owned by a parent company engaged in vertically integrated dairy production and milk processing in the Inner Mongolia Autonomous Region. To provide high quality feed for its diary farm, the project financed Qishi to construct a new feedmill with a production capacity of 7,000 tpa of concentrated dairy cattle feed, and to plant 5,000 mu (333 ha) of corn for use as corn silage. The feedmill construction was completed in early 2002. Qishi will operate as an integrated feed and diary production enterprise, with the feed mill company serving as the nucleus farm, providing feed and services to surrounding dairy smallholders. This subproject is the result of the broadened project objective, introduced at MTR, to include project support for livestock production in addition to feedmill capacity building for vertically integrating enterprises. Qishi is located in a poverty-designated county, thereby providing income generation for local farmers in return for tax concessions. 2. Beixu Feedmill is a vertically integrated, privately-owned agro-enterprise in Henan province, producing compound feeds for pigs and poultry. Its parent company, Beixu Group Co., is located in a major pig production area in Henan, to which the new project mill will supply compound feed. Beixu received a project loan to establish a feedmill with a design capacity of 100,000 tpa, producing compound feeds, formulated from the abundant com and soybean in the area. Construction was completed in July 2001 and will reach full production by end-2002 with a current CU of 65 percent. Management, marketing and markets are good and the project is highly likely to achieve long-term sustainability. Beixu aims to be a major pig feed producer and pig producer integrator in Henan province. 3. Shivang Feedmill Co. is a privately owned, shareholding subsidiary located in Shaanxi province, belonging to the Shiyang Group. Shiyang Group is a leading oilseed agro-enterprise conglomerate operating in Northwest China, and owns 14 subsidiary oilseed extraction and feed milling enterprises in different provinces. The Shiyang Group has eight years of experience in feedmilling, and has diversified from oilseed extraction into value-added animal feed product milling, utilizing the soybean and oilseed cake byproducts generated by its oilseed extraction plants. Shiyang Feedmill plans to market 90 percent of its feeds in Shaanxi province, where only 50% of animal feed is presently mechanically compounded. The feedmill received a project loan to expand its operation with two fully computerized feed production lines with a design capacity of 150,000 tpa. The entire equipment package was procured by NCB contract. The mill began operating the two new feed lines in June 2001. After 10 months of operation, feed output has reached 90% of planned CU, and comprises over 100 types of compound and pelleted pig, poultry and cattle feeds. The feedmill operates a large sales force and promotes a life-cycle feeding program, marketing protein concentrates and fully compounded feeds to smaller and more commercialized clients respectively. (In addition to above three enterpriese, two enterprises under (Bayu oil plant and Sherjiahu Feed Mill) protein concentrates component are also integrating) Component B. Protein Concentrate, Compound and Pelleted Feed Milling 1. Bavu Oil Plant is a privately owned as well as subsidiary owned by the Shaanxi Bayu Group, engaged in oil and feed production in Shaanxi province. The Bayu Group has five years of feed industry experience, and is located in a cotton producing area, which provides sufficient cotton seed cake from its oilseed extraction operations to convert into value-added protein concentrate. Bayu Oil Plant received a project loan to construct a protein concentrate feed line with a design capacity of 70,000 tpa. Construction - 29 -  began in August 2000 and the mill was commissioned in June 2001. By end-2001, the mill was operating at 90% capacity. Full production is projected by end-2002. The new production line's formulation and cottonseed cake detoxification technologies are advanced. Currently, the mill has a market share of 20 per cent in Shaanxi Province, and the subproject has good long-term sustainability, as most feed products used in Shaanxi province are purchased from other provinces at prices higher then local commodities. By utilizing locally produced commodities, the enterprise is therefore very competitive in terms of price and product quality. 2. Danong Science & Technoloev Feedmill Co. Ltd is a privately-owned shareholding company located in Shaanxi province, owned by its parent company Xijing Co. Ltd. with five years of feed industry experience, Danong is a leading agro-enterprise in Northwest China. The subproject comprises a fully automated, computerized state-of-the-art feedmill with a design capacity of 70,000 tpa, constructed under a turnkey contract awarded by NCB. The enterprise is market oriented, has a good management team and is in a stable financial position. The new mill has four feed compounding lines with a combined production output of over 100 types of granulated, pelleted and compound feeds for pigs, poultry, and carp. Commercial production began in February 2002 and is projected to reach 35,000 tpa (50% capacity utilization (CU)) by end-2002; and full production in 2-3 years The enterprise has already obtained ISO-9002 accreditation for operating procedures, and is engaged in a long term scientific exchange program with Northwestern University in Xian, under which the latter provides feed formulation services and new product development, in return for use of the feedmill for student training and scientific research in its crop and animal husbandry programs. Danong's future expansion plans include restructuring into integrated feed and livestock production. 3. Linvin-' Agariculture Material Supply and Sales Coop is a collectively-owned limited corporation with five years of experience in the feed industry in Henan province. The feedmill utilizes local corn and soybean resources to produce compound feed and protein concentrate for the large pig population in the area. The enterprise received a project loan to expand its feed production by adding a fully automated feed production line with a design capacity of 50,000 tpa. The entire equipment package was procured by NCB. The expanded mill began operations in August 2000 and its current CU is at around 50%. It has embarked on a strong product promotion program to increase sales and it is expected to reach full capacity in 2005. 4. Ningxia Xinghuo Feed Companv is a private enterprise with nine years experience in feed industry. The enterprise has been engaged in the production of feed additives and protein concentrate, and is the biggest protein concentrate mill in west-northem China. The project established compound feed/concentrates producti9n line of 50,000 tpa, utilizing feed ingredients from local sources. The production line is currently running at 55% percent design capacity and, as the result of strong market competition, is converting into integrated feed and fish production. The feedmill's product quality is high and a major advantage in increasing its market share. The enterprise has a strong product and sales promotion staff, which are gradually improving market shares for its products. It is expected to reach 100% CU in 2 - 3 years. 5. ShuUiiahu Zhengatai Feed Mill is a limited corporation, owned by an integrated feed and livestock enterprise mainly engaged in farming, feed processing and chicken and pigs breeding. To utilize the corn and soybeans produced by its own farms, Zhengtai ensures value-added by cycling part of its high quality feeds through the enterprise's own pig and chicken farms, and marketing the remainder in the provinces of Shandong, Henan , Jiangsu and Jiangxi. Zhengtai's products include more than 50 types of compound feeds for fish, pigs and chickens. The enterprise received a project loan to expand it feed output with a fully automated production line for protein concentrates, with a design capacity of 60,000 tpa, procured by NCB. In 1999, construction was completed and commissioned. Because of the fierce competition in the feed market, utilization capacity has reached 50% of design capacity, and the enterprise is strengthening its - 30 -  marketing networks and concentrate on new product development. The enterprise reaches 70% production in 200, with full production in 2-3 years. 6. Zhengxing Zhimi Feed Mill is a private enterprise with seven years of feed industry experience. The mill used a project loan to meet increased demand by constructing two production lines to increase its original production capacity from 17,000 tons of compound feed and protein concentrate by an incremental 33,000 tpa, for a projected output of 50,000 tpa. The mill has a long-term scientific exchange relationship with the feed industry center, MAFIC, which provides feed formulation services, new product development, and training for mill workers. The mill presently operates at 80% capacity and is performing quite well, as its products are well received. The negative impact of the Asian financial crisis and the resulting depressed domestic market, has stimulated the mill's management to develop new feed products and to increase its product promotion with assistance from MAFIC. 7. Zhengtai Feed TechnoloLv Co. is a shareholding company located in Hunan province, engaging mainly in feed and feed additives production. The company has nine years of feed industry experience. The enterprise received project loan to expand its existed production capacity by 120,000 tpa, from 80,000 tpa to 200,000 tpa. Construction was completed in 1999. In 2001, the project reached full production. Its products include compound and protein concentrates for pigs, fish and poultry. The enterprise has achieved ISO-9002 operating accreditation, and is engaged in a long-term scientific exchange program for new product development with a local university. In spite of strong competition, Zhengtai has increased its domestic market and integrated by purchasing a Grain Company in IMAR, to lower its commodity costs for soybean cake and rapeseed cake. The mill has set up an integrated production chain comprising commodities, feed processing, and marketing, which has enlarged its business scope through lower product prices, high-quality products, and improved marketing. 8. Youvou Biological Engaineering Co. Ltd.. located in Henan province, is a privately owned shareholding company, established for the purpose of manufacturing high-protein feed grade meat meal, using animal wastes from regional slaughterhouses, thereby resolving an important waste disposal problem by converting low value slaughter wastes into high value feed protein. The plant with a design capacity of 14,000 tpa began operations in April 1999 but was closed down in 2000 due to circumstances beyond its control, when the Government placed a nation-wide ban on the manufacture of livestock feeds using animal wastes as the result of the outbreaks of bovine spongiform encephalopathy (Mad Cow Disease) in the United Kingdom and other European countries. The company is presently restructuring into different production lines, but has experienced substantial losses. 9. Hengda Aquatic Feed Mill is a shareholding company located in Anhui province, one of eight subsidiary feed processing, breeding and beverage plants owned by the Hengda Group Company, an agro-enterprise with seven years of feed industry experience. The Hengda Group is a leading feed processing company in Anhui Province. Its feed products include compound and protein concentrate feeds for pigs, fish, chickens and ducks. Hengda received a project loan to expand its production into aquatic feeds, with construction of a feed processing line with a design capacity of 80,000 tpa. Equipment and civil works were procured by NCB. Construction was completed in the last quarter of 2001, and the mill is presently operating at 25 percent CU (test runs). Hengda's entry into the aquatic feed market has faced strong competition, which it aims to overcome with high-quality feed products and marketing. Business from other subsidiaries will assist final financing and commissioning of the project. The production of aquatic feeds is highly technical and requires innovative feed formulation and processing. Component C. Feed Additives and Feed Mineral Production Component 1. Mianzhu Longman DCP Plant, located in Sichuan province, is a newly constructed, privately - 31 -  owned shareholding subsidiary of a parent company, Sichuan Longman Group, with 13 years of feed additives experience, operating eight mineral processing and chemical plants. The project enterprise is engaged in the extraction and purification of rock phosphate into dicalcium phosphate (DCP), an essential mineral for livestock feeding. DCP is nutritionally far superior to tricalcium phosphate (TCP), which is commonly used in China. The enterprise replaces a defunct plant on land owned by the company in Mianzhu County, with resources of 15 billion tons reserve of rock phosphate. The plant was commissioned in December 1997 and is at full production at 100,000 tpa of feed grade DCP. A byproduct, 50,000 tpa of mono-ammonium phosphate fertilizer, is also produced. Plant equipment was procured by NCB. The plant has received IS09002 operating certification. This subproject, which is engaged in surface mining, received an environmental A rating, and a comprehensive environmental assessment was carried out. Environmental certification was issued by the local Environmental Protection Agency (EPA), subject to the implementation of a comprehensive environmental mitigation plan by the company. The plant is extremely profitable. A thematic Bank supervision in 2001 found the plant's environmnental mitigation program satisfactory. 2. Sanli Farm is a private farm owned by a parent company in the Inner Mongolia Autonomous Region (IMAR), engaged in agricultural commodity trading. The farm received a project loan to develop a 4000 mu (267 ha) of ephedra plantation, with a planned output of 4000 tpa of Ephedra feed additive. The product is marketed as an organic metabolic stimulant, for use in feed rations to promote growth rates. This subproject has an ecological objective is addition to its commercial objective. In its effort to combat desertification, the IMAR government has recommended Ephedra as the vegetation of choice in large areas of Inner Mongolia. Ephedra is typically transplanted to the field from nursery seedlings, with onset of production three years after transplanting. To date, land preparation and civil works have been completed, and 18 ha nursery is in operation and 60 ha of Ephedra (22% of target) have been planted. Sanli Farm has engaged a technical specialist to head up the project. Full production is projected for 2004. - 32 -  Additional Annex 10. The Ministry of Agriculture Feed Industry Center (MAFIC) As evidenced by the sustained and increasing demand for its products, services, quality assurance programs, and applied research training programs, MAFIC is well on its way to fully achieve its objective to provide national leadership to China's young, growing feed industry. The Center represented the Project's Feed Sector Strengthening Component, and was designated for Bank support under Schedule 1, part B of the Loan Agreement for a loan of US$2.3 million, together with a US$2.4 million bilateral grant from CIDA, with the balance to be financed by MoA. Because of its institutional nature and longer start-up phase, the loan's maturity was set at 15 years, including a 5-year grace period. However, the Asian financial crisis caused the loan's interest rate to become increasingly uncompetitive as compared to domestic loans of similar maturity. As a consequence, MoA, MAFIC's implementing agency, declined the Bank loan and arranged for alternative' less costly financing. Nevertheless, MAFIC has more than fulfilled its role in of animal feed sector strengthening, in substantial part due to the efforts by the Bank and MoA teams involved in the planning and preparation of MAFIC's physical and human resources, combined with implementation support from CIDA. CIDA supported seven years of technical assistance to MAFIC in the form of long term consultancies in feed processing technology, industrial training, extension, research and agribusiness management, and MAFIC became fully operational in 2000. MAFIC's objectives are to provide institutional and technical leadership at the national level to China's growing feed industry, which, in terms of output capacity at 85 million tpa of manufactured feed, has become the world's second largest after the United States (125 million tpa). The industry began to commercialize only 20 years ago, and at present between 50-70 percent of China's animal feed is scientifically formulated in modern mills. The industry's institutional infrastructure is multi-agency and complex, with much duplication of effort, which has hampered the clarity and timeliness of the sector's earliest development plans. MAFIC, as the sole national technical institute devoted entirely to the feed industry, is therefore fulfilling a much needed role in coordinating and implementing feed sector development objectives, especially where MAFIC is fully industry-supported and has thereby gained substantial credibility with the animal feed industry. All of MAFIC's laboratory equipment, office furniture, computers and other internal furnishings were donated by members of the feed industry; civil works were financed by MoA, and CIDA supported the technical assistance. The Center operates research and feed analysis laboratories, a large reference library and information technology unit, an experimental feedmill for research, training and new product development, and several animal facilities for bioassay of feeds and feed additives; the first such facilities operational in China. MAFIC also owns a commercial feedmill with a 5,000 tpa output of commercial premixes, for sale to the feed industry. In 2000, the Center acquired IS09001 operational status; the first such institute in China to reach this standard. In 2001, MAFIC received accreditation from the State Commission for Science and Technology as a National Center of Excellence, another first. MAFIC is financially and managerially fully autonomous and generates its own operating and staffing funds from the sale of its commercial product sales, contract research and advisory services. MAFIC is located on the campus of China Agricultural University in Beijing and has six Departments: Education and Research, Information Technology, Laboratory Services, Commercial Feedmill, Training and Extension, and International Cooperation. MAFIC has a core scientific staff of 20 persons, and has scientific exchanges with several countries. It receives sustained financial support from China's feed industry enterprises in return for contract service work and product development. MAFIC operates two websites from its Information Technology Department, which, since their beginning in April 2001, have received 700,000 hits. The Center produces and sells software packages for use in feed fornulation, feedmill training and management, livestock disease diagnosis, sales and marketing management, and feed - 33 -  commodity market pricing. Its laboratories harbor a full array of diagnostic and research instrumentation utilized for applied research, quality control, and product development of feed ingredients and feedstuffs. Each year, MAFIC conducts hands-on vocational training courses for several hundred feed industry workers and managers. MAFIC issues an annual report and an annual science report, containing information on its applied research programs and progress. Animal science and nutrition undergraduate and graduate students from China Agricultural University take feed formulation technology courses and carry out graduate research work at the Center. - 34 -      IMAGING I Report No.: 24336 C Type: ICR