China - Second Red Soils Area Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 23736 IMPLEMENTATION COMPLETION REPORT (IDA-25630) ONA CREDIT IN THE AMOUNT OP SDR 108.4 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND RED SOILS AREA DEVELOPMENT PROJECT March 21, 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 February 2002) Cunrency Unit = Renniinbi (RMB3) Yuan (Y) Yl.0 = US$ 0.12 US$ 1.0 = Y8.3 FISCAL YEAR January I December 31 ABBREVIATIONS AND ACRONYMS ABC Agricultural Bank of China CPI Consumer Price Index CPMO Central Project Management Office ERR Economic Rate of Return FAO/CP FAO and World Bank Cooperative Program FRR Financial Rate of Return ha hectare ICB International Competitive Bidding IMSERC Inner Mongolia Snowstorm Emergency Recovery Component IPM Integrated Pest Management LCB Local Competitive Bidding MOA Ministry of Agriculture MOF Ministry of Finance NCB National Competitive Bidding NPV Net Present Value PLG Project Leading Group PMO Project Management Office PRC People's Republic of China PSR Project Status Report ROE Return on Owner's Equity SAR Staff Appraisal Report SCF Standard Conversion Factor TA Technical Assistance TC Technical Comnmittee TOR Terrns of Reference WTO World Trade Organization 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: Achim Fock, EASRD  FOR OFFICIAL USE ONLY CHINA SECOND RED SOILS AREA DEVELOPMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings I 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 8 6. Sustainability 9 7. Bank and Borrower Perfornance 10 8. Lessons Learned 12 9. Partner Comments 13 10. Additional Information 13 Annex 1. Key Performance Indicators/Log Frame Matrix 21 Annex 2. Project Costs and Financing 22 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26 Annex 6. Ratings of Bank and Borrower Performance 27 Annex 7. List of Supporting Documents 28 Annex 8. Borrower's ICR Summary 29 Annex 9. Photographs 38 This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   Project ID: P003595 Project Name. SECOND RED SOILS AREA DEV. PROJECT Team Leader: Achim Fock TL Unit: EASRD ICR Type: Core ICR IReport Date: March 21, 2002 1. Project Data Name: SECOND RED SOILS AREA DEV. PROJECT L/C/TF Number: IDA-25630 Country/Department.- CHINA Region: East Asia and Pacific Region Sector/subsector: Al - Irrigation & Drainage; AL - Livestock; AM - Agro-Industry & Marketing; AP - Perennial Crops; AQ - Annual Crops KEY DATES Original Revised/Actual PCD: 01/10/1991 Effective: 06/21/1994 06/21/1994 Appraisal: 06/16/1993 MTR: 05/31/1997 05/13/1997 Approval: 02/03/1994 Closing: 06/30/2001 09/30/2001 Borrower/lmplementing Agency: PRC/MOA Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam S. Kaji Country Manager: Yukon Huang Shahid Javed Burki - Department Director Sector Manager: Mark D. Wilson Joseph R. Goldberg - Division Chief Team Leader at ICR: Achim Fock John Stemp ICR Primary Author: Achim Fock; Xueming Liu 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time:  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objective of the project was to increase production and productivity over a wide area of degraded red soils in the provinces of Jiangxi, Fujian, Hunan, Zhejiang, and the Guangxi Autonomous Region; to help alleviate poverty by increasing the income of currently underemployed farmers; and to benefit the environment by improving soil and water conservation, reducing erosion and promoting sustainable land use and agricultural practices. These objectives were in line with the Government's long-term strategies and policies for the agricultural sector as formulated in the early nineties which sought to increase production to meet the requirements created by population growth and to increase income and employment in rural areas. In addition, the objective supported the Bank Group's agricultural sector strategy, as defined in the 1993 CAS, to promote sustainable agricultural development in impoverished and environmentally vulnerable areas and increase and diversify agricultural production. The objectives of the project were clear and well-formulated. They were well designed, consistent with Borrower's and Bank Group's overall strategy at the time of preparation, and supported by the project's stakeholders. 3.2 Revised Objective: The original project objectives remained unchanged. 3.3 Original Components: The project design focused on the transformation of degraded wasteland and semi-wasteland into a productive, sustainable agricultural resource. It built largely on the experience gained under the first 'Red Soils Area Development Project' (Credit 1733-CHA) and centered around a comprehensive development of micro-watersheds with integrated land development, infrastructure, crop and livestock development, buildings, machinery, rural energy, research, training and TA. In addition to this watershed development part of the project, an agro-processing component was designed to utilize and add value to the output of farmers assisted by the project and to increase employment. Specifically, the project had the following 11 original components: (1) Land Development (costs including contingencies US$41.27 million - 13.9% of total). This component lays the foundation of the micro-watershed development by developing land both, on the slopes, mainly through terracing and soil conservation measures, and in the valleys, through the improvement of drainage of paddy fields. The component planned for 22,229 ha of new terrace development and 2,498 ha of terrace rehabilitation, including 21,647 ha of grass/soil conservation measures. In addition, 10,712 ha of paddy rehabilitation plus some bamboo and fishpond development were included. (2) Infrastructure Development (US$32.22 million - 10. 9%). This component was focusing on irrigation for both, upland fields and orchards and lowland paddy fields. The construction of storage facilities such as small reservoirs and ponds, as well as raising of small dams, pumping stations, distribution systems such as pipes and canals, and sprinkler are part of the construction plan. Specifically, the component included the improvement of about 10,700 ha of existing paddy land, and the provision of dry-season irrigation for about 23,700 ha of upland orchards, and fodder and other annual field crops. In addition to the irrigation infrastructure, the component aimed at meeting the additional power requirement for irrigation, agro-processing and domestic lighting by installing transmission lines, and at linking project sites to the existing network of paved country roads by constructing and upgrading about 1,036 km of all-weather gravel roads (class IV standards). In September 2001, about SDR8.052 million of the Credit were allocated to a new 'Inner Mongolia Snowstorm Emergency Recovery Component' (IMSERC) (see Chapter 10). This Component is still under implementation and not part of this ICR. - 2 -  (3) Buildings (US$24.24 million - 8.2%). About 623,600 square meters of buildings (excluding those for agro-processing) were planned under this component. This included farmsteads for new settlers (22%), offices, workshops, storage and warehouses, and service and extension centers (16%), and buildings for pigs and other livestock (64%). (4) Machinery and Vehicles (US$14.33 million - 4.8%). This component was designed to provide vehicles to supplement existing fleets to meet the expected demand for transporting project inputs and agricultural produce, including 204 trucks of 5- to 8-ton capacity, 304 trucks of 1.5- to 2-ton capacity and some insulated or refrigerated vans and milk tankers. The design also included the provision of small farm machinery such as two-wheel tractors and power pesticide foggers to specialized contractor households. (5) Crop Establishment (US$92.80 million - 31.3%). This component was designed to provide complete crop establishments in all parts of the micro-watershed under development. About 16,464 ha of fruit trees were planned, most of which peach and plum, citrus (including rehabilitation), chestnut, and longan, lychee and ginkgo. This area was also used for inter-cropping at the early stage of implementation when trees were still sufficiently small. In addition, the component design included 3,353 ha planted to tea, mulberry or grapes, 10,712 ha of improved paddy on the drained fields in the valleys, 13,755 ha of forests (mostly Chinese fir and Masson pine), and 1,143 ha of bamboo, plus some seedling nurseries and crops establishment on up-land area. (6) Livestock and Aquatic Development (US$43.74 million - 14.8%). The development of livestock and aquatic production is a crucial part of the comprehensive watershed development and was fully integrated with the other components by making the number of livestock supported by the project dependent on the requirements for animal manure in the development area and on the need to provide cash income for project farmers, in particular early in the project phase when tree crops do yet not provide yields. Specifically, the component planned the financing of 20,579 breeding pigs and about 410 thousand fattening pigs, about 210 thousand chicken and 236 thousand ducks and geese, and some 759 cows for specialized dairy households in Jiangxi and Zhejiang. In addition, 765 ha of new and 91 ha of rehabilitated fishponds were included. (7) Rural Energy (US$2.87 million - 1.0%). Under this component the financing of 9,970 biodigesters and 24,540 improved stoves was planned in order to make efficient use of the animal manure produced under the project. (8) Agro-processing (US$31.57 million - 10.7%). 18 agro-processing sub-projects were planned under this component, including seven fruit processing and one bamboo and fruit pulp plant, one tea plant, two cold stores, one cannery, one flavone plant, one silk weaving and one silk reeling plant, two feedmills, and one wholesale market. Financing plans included land, buildings, equipment, provision for waste treatment, vehicles, and about 3,781 person months of local training for workers and staff. (9) Research (US$2.45 million - 0.8%). This component was designed to support research (including some research equipment) carried out by local research institutes and coordinated by the Technical Committees. Proposed topics included soil fertility, sustainable agricultural systems, watershed management including irrigation and water management, Integrated Pest Management (IPM), agro-forestry, orchard management and post-harvest treatment, animal husbandry and aquaculture. (10) Training and TA (US$6.45 million - 2.2%). In order to build a stronger capacity for beneficiaries and project staff, this component provided support for local and overseas training, study tours, and institutional development TA comprising both foreign and local consultants. Specifically, about 40% of all participating households, and in particular women, were to be trained for a total of 20,255 person months. The component also included a total of 1,076 person months of training of agro-technical staff from townships and counties, 151 person months of higher level training, and 375 person months of long-term -3 -  domestic and 105 person months of long-term foreign training. Moreover, 211 person months of study tours and 118 months of TA were planned. (11) Project Management (US$4.37 million - 1.5%). A project management structure was designed with implementation responsibility for the Governments of the participating provinces, guiding and supervising responsibility by Ministiy of Agriculture, and financial responsibility by Ministry of Finance. Project management included Project Leading Groups (PLGs) and Project Management Offices (PMOs) at central, provincial, city, county, and township level, and Technical Committees (TCs) at central, provincial, city, and county level. The components of the project were clearly linked to the objectives described above, and adequate for their achievements. They were well designed, building upon each other, and with detailed and practical technical standards. The relatively high degree of complexity of the project, which was necessary for a successful watershed development, took into account the capacity of project management. For this reason the implementing agency was a different institutional set-up than that in the precursor (first) Red Soils Area Development Project. 3.4 Revised Components: The design of the red soils area development was well prepared and remained largely unchanged throughout the implementation period (except for IMSERC, see Chapter 10). However, mainly due to favorable exchange rate developments, availability of project funds for implementation, in real terms, exceeded appraisal estimates substantially and the scope of the project was extended by increasing the number of project watersheds by 49 and expanding 16 out of the original 217 watersheds. Consequently, output indicators of all micro-watershed development components substantially exceed appraisal estimates. At the same time some smaller adjustments in the relative importance of components and activities took place, e.g. the increase in the share of citrus and the number of livestock and the reduction in mulberry trees, chestnuts, and some other sub-activities. While a number of agro-processing plants were cancelled during implementation, mainly due to changes in market conditions, the total costs of this component actually increased because of higher prices of construction works and equipment purchased and because of the expansion of those sub-projects that were implemented. 3.5 Quality at Entry: Quality at Entry is rated satisfactory, based on the strength of (i) consistency of project objective with the Bank's long-term strategies and the Government's policies for agricultural and rural development and poverty reduction; (ii) a project design which incorporated valuable lessons learned and experiences from other Bank-financed watershed development projects and, in particular, the first Red Soils Area Development Project, including a greater emphasize on risks management and project sustainability; (iii) innovative and sound project design including excellent technical specifications and a thorough economic analysis; (iv) strong Borrower ownership; and (v) the Bank's safeguard policies being adequately addressed in project design. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project's objectives and outputs were substantially achieved. Agricultural production and productivity over a wide area of degraded red soils increased considerably. Household survey data indicates that the output value in real terms of participating farm households almost doubled from 1994 to 2000 and exceeded that of nonparticipating households by about 30% at the end of the implementation period. Before the project, paddy yields in the valleys of the small watersheds were very low and no production took place on the sloped areas; in 2000, crop yields in the project area exceeded - 4 -  those outside by more than 25% for most crops. The project further increased farmers' income and employment and alleviated poverty by directly improving the living standards of 68,373 beneficiary households or approximately 400,000 people. Given the expansion of the project area, the project could have benefited even more households. However, the figure exceeds the appraisal estimate (67,000 households). The average annual per-capita net income of these beneficiaries, measured in 2000 prices, increased substantially from about 1,200 Yuan in 1994 to about 2,450 Yuan at the end of the project; and this income also exceeded that of non-beneficiaries by about 20% (see Annex 1). Other measures of living standards were also improved, including access to training, information, transport, and other resources. Employment increased in virtually all beneficiary households and also beyond this group since the increased economic activity created employment outside the project area, in particular in the down-stream sectors. Women benefited substantially from the project. Their involvement in project activities was very high as the demand for their skills and labor in project implementation was great. In addition, some farmers in those villages from which beneficiaries moved into newly developed watersheds benefited indirectly by the freeing-up of resources. The overall financial and economic Net Present Value (NPV) of the project is positive (see Chapter 4.3), though less than the appraisal estimate, which is partly due to some output prices being lower than assumed at appraisal and the a severe frost in 1999/2000. The environmental impact of the project has also been very positive, primarily as a result of increased forest coverage and the successful introduction of soil and water conservation measures on slope land. Reduction in soil loss has been confirmed in the findings of Agro-Environmental Monitoring Stations in the project provinces, ranging from 24% in a sample watershed in Jiangxi to 78% in one in Guangxi (see Annex 1). 4.2 Outputs by components: (1) Land Development (US$44.8 million actual). The component is rated satisfactory. Achievement of physical targets is high; and the significance of sound land preparation practices for agricultural development has been widely recognized and adopted, even beyond the project area. About 25,750 ha of sloped land have been newly terraced and about 3,370 ha of terraces have been rehabilitated. These figures exceed the original plan by 15% and 23%, respectively. Additional soil conservation measures taken include the planting of vetiver grass, day lily or other deep-rooted plants to protect terrace lips from erosion. Generally, terracing and trenching have been executed satisfactorily. Other land development works include paddy rehabilitation, mainly drainage improvement (11,667 ha, 109% of SAR), construction of fishponds (202 ha, 231 % of SAR), and land development for bamboo (2,515 ha, 202% of SAR). (2) Infrastructure Development (US$36.9 million). The component is rated satisfactory. At project completion supplemental irrigation facilities have been provided for 37,457 ha, predominantly under orchards, exceeding appraisal target (34,417 ha) by 9%. The need to irrigate up-land orchards has been successfully introduced under the project and is now accepted as standard watershed development practice. This is a substantial achievement despite the fact that the performance of the irrigation systems, measured in terms of adequacy of water delivery and on-farm water distribution, varies among watersheds within and across provinces. Moreover, operation and maintenance including irrigation cost recovery was addressed during project implementation, and water charges appear sufficient to cover the cost of operation and maintenance. Roads constructed under the project total 1,465 kni, exceeding the appraisal target by 49%. (3) Buildings (US$31.7 million). The component is rated highly satisfactory. Some 860,000 square meters of building construction, comprising mainly farm housing and pig sheds, were completed under the project, 40% more than planned. Farm housing accounts for 23% and pig sheds for 63%. About 3,280 farm families, 50% more than estimated at appraisal, were settled in the watersheds, mostly in Jiangxi. Pig - 5-  sheds can accommodate over half-a-million pigs. Construction quality is generally good, with technical standards often exceeded. In some watersheds, larger structures such as warehouses and workshops were over-designed, and, consequently, are under-utilized. (4) Machinery and Vehicles (US$11.1 million). The component is rated satisfactory. 269 pick-up trucks and 185 trucks up to 8 tons of capacity (29 and 40 more than planned, respectively) as well as 116 motorcycles were financed by the project. While the pick-up trucks and the motorcycles were used mainly by the project management offices, most of the trucks, as well as about 1,130 hand-held tractors were purchased and operated by specialist contract households. Some of the smaller farm machinery planned under the project was not purchased. In summary, physical targets were largely met and the trucks and tractors provided valuable means for transportation and production, not only for the household(s) owning the vehicle, but also for neighboring farmers who contracted the services of these farmers. (5) Crop Establishment (US$92.7 million). The component is rated satisfactory. Almost all physical targets have been exceeded. About 20,768 ha of fruit trees have been established under the project, 26% more than planned at appraisal. Growth and vitality of most plantations are highly satisfactory. In fact, most fruit trees have generated yields earlier than expected at appraisal. In some orchards the tree populations are excessive and this is likely to shorten the productive life of the fruit trees. Another problem is that some areas planted with citrus or other sub-tropical fruits suffered severe frost damage in the winter of 1999/2000. However, considerable efforts have been undertaken to rehabilitate these plantations, including replanting worth US$4.2 million. Paddy yields on the improved lowland fields increased substantially. In many cases, the production cycle increased from one to two harvests. Other crop establishment activities include tea (1,504 ha new tea, 95% of SAR; and 579 ha tea rehabilitation, 127%), forests (15,280 ha, 111%) and bamboo (3,024 ha, 265%), orchard inter-cropping (17,124 ha, 122%), various annual crops on irrigated or non-irrigated upland (6,233 ha, 109%), and seedling nurseries (96 ha, 117%). (6) Livestock and Aquatic Development (US$49.6 million). The component is rated highly satisfactory. Physical targets have been exceeded substantially. Some initial reluctance regarding the stocking rate set under the project was quickly overcome. The economic benefits, especially important at the early implementation stage, as well as the very positive effect of manure to increase the organic content of degraded soils, has been widely recognized and integrated livestock and crop production is applied beyond the project areas. By the end of the project 578 thousand fattening pigs, 27 thousand breeding pigs, 748 thousand chicken, and 361 thousand geese and ducks have been financed, exceeding the original plan by 33% to 256% respectively. (7) Rural Energy (US$3.1 million). The component is rated highly satisfactory. More than 12,000 biogas digesters and more than 27,700 improved stoves were financed under the project, exceeding SAR figures by 21% and 11%, respectively. The use of biogas digesters is a cheap and simple method of producing energy from renewable resources, leading to a cleaner environment and reduction of other energy sources. The component has successfully introduced the use of this technology on a large scale. (8) Agro-processing (US$45.0 million). The component is rated unsatisfactory. Of the 18 sub-projects planned at appraisal 4 were never realized, 5 were dropped after some initial investments, and 2 have suspended production, mainly because of strong market competition, a relatively small scale of operation and weak management. Of the remaining 7 sub-projects, only the Jinhua Frozen Fruits and Vegetables Plant in Zhejiang can be regarded as being entirely successful in terms of its economic profitability and its impact on local farmers. The Hangzhou wholesale market, though loss-making in previous years, is likely to become profitable, and has provided some additional market channel and information to beneficiary farmers. However, agricultural products from the project areas constitute only a very small part of the products traded in the market. The two feedmill sub-projects are only partially successful, running on only - 6 -  about half of their capacity. They are profitable but in a vulnerable financial position, and have limited impact on farmers. Yushan Silk Weaving Factory in Jiangxi faces serious problems in marketing their products and, despite having made some profits, is also in a vulnerable financial position. Finally, 2 plants are still not operational at implementation completion. (9) Research (US$1.8 million). The component is rated satisfactory. Research results were widely disseminated and the project has benefited from the introduction of improved varieties of citrus and other fruit resulting from the work carried out at provincial research institutes and plant breeding stations. The research results have become an important basis for the further sustainable development of red soils watersheds. (10) Training and TA (US$7.7 million). The component is rated satisfactory. Training represents a crucial element of the project, and considerable more domestic training and study tours have been financed under the project than originally planned. About 815 thousand person time of training at the farm, township, county, and provincial level were given in during the implementation period, about 47% higher than the SAR figure. Training has been highly valued by project farmers and staff. (11) Project Management (US$4.4 million SAR - US$7.3 million actual). The component is rated satisfactory. Please refer to the discussion of the borrower's performaance in Section 7. 4.3 Net Present Value/Economic rate of return: The economic rate of return for the watershed development part of the project (Components I to 7, 9 and 10) is estimated at 19%. This is lower than the 24% estimated at appraisal, the main reasons for which are (i) substantial decline in some agricultural output prices, e.g. prices of lychee and longan plummeted by more than 40 percent in real terms, (ii) losses due to the frost damage of the 1999/2000 winter, and (iii) a substantial increase in labor costs, from 8 Yuan/day at SAR to 15 Yuan at ICR (2001 prices). Nevertheless, an economic return on the investments of 19% is still substantial. A comparison of ERRs by project province is shown below. Fujian Guangxi Hunan Jiangxi Zhejiang Total Project ERR at ICR 20% 18% 17% 19% 17% 19% ERR at SAR 25% 31% 19% 17% 24% 24% Following the approach used at appraisal, the economnic analysis did not include the agro-processing component, which accounted for 13% percent of total project costs. However, separate economic analysis have been carried out for four out of five agro-enterprises which were operational at the end of project implementation. ERR vary between 10% for the Hangzhou Wholesale Market and 17% for the Jinhua Frozen Fruits and Vegetables Plant. These four enterprises account for 62% of all investments made under the component. The returns on those enterprises which have either suspended their production or have not yet entered into operation as well as that for Hengyang Feedmill where no reliable data could be obtained, is difficult to quantify (30.6% of total), but the aggregate NPV is highly likely to be negative. Investments that were made into plants that were abandoned before completion did not generate any return (3.5% of total investments). ERR at ICR ERR at SAR Gannan Feedmill, Jiangxi 14% N.A Yushan Silk Weaving Plant, Jiangxi 14% N.A Jinhua Frozen Fruits and Vegetables Plant, Zhejiang 17% N.A Hangzhou Wholesale Market, Zhejiang 10% N.A -7 -  4.4 Financial rate of return: The financial profitability of watershed development program is generally satisfactory at the household level, as shown by various crop budgets and activity models (see project files), and at aggregated provincial level as outlined in the table below. FRR values are lower than their SAR estimnates due to the reasons provided in Chapter 4.3, but still quite high. Fujian Guangxi Hunan Jiangxi Zhejiang FRR at ICR 16% 17% 16% 17% 16%