China - State Farms Commercialization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 29171 IMPLEMENTATION COMPLETION REPORT (SCL-43090 TF-20298 TF-28236) ON A LOAN IN THE AMOUNT OF US$59.4 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE STATE FARMS COMMERCIALIZATION PROJECT June 28, 2004 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 28, 2004) Currency Unit = Yuan Y1.00 = US$ 0.12 US$ 1.00 = Y8.28 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CPMO Central Project Management Office CRS Contract Responsibility System CTICED China Trust and Investment Corporation for Economic Development EA Environmental Assessment ENPV Economic Net Present Value EPB Environmental Protection Bureau ERR Economic Rate of Return FECC Foreign Economic Cooperation Center (of the Ministry of Agriculture) FNPV Financial Net Present Value FRR Financial Rate of Return IAEC Investment Appraisal and Evaluation Center ICR Implementation Completion Report MOA Ministry of Agriculture MOF Ministry of Finance NPV Net Present Value OED Operations Evaluation Department PFI Project Financial Intermediary QAG Quality Assurance Group SAR Staff Appraisal Report SCE Shareholding Cooperation Enterprise SFS State Farm System SOE State-Owned Enterprise SPC State Planning Commission TA Technical Assistance WTO World Trade Organization Vice President: Jemal-ud-din Kassum, EAPVP Country Director Yukon Huang, EACCF Sector Manager Mark D. Wilson, EASRD Task Team Leader/Task Manager: Weiguo Zhou, EASRD  IMPLEMENTATION COMPLETION REPORT THE PEOPLE'S REPUBLIC OF CHINA STATE FARMS COMMERCIALIZATION PROJECT (Loan No. 4309 - CHA) 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 3 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 9 7. Bank and Borrower Performance 10 8. Lessons Learned 14 9. Partner Comments 15 10. Additional Information 15 Annex 1. Key Performance Indicators/Log Frame Matrix 18 Annex 2. Project Costs and Financing 19 Annex 3. Economic Costs and Benefits 21 Annex 4. Bank Inputs 22 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 23 Annex 6. Ratings of Bank and Borrower Performance 24 Annex 7. List of Supporting Documents 25 Annex 8. The Borrower's ICR 26  Project ID: P003591 Project Name: STATE FARMS COMMERCI Team Leader: Weiguo Zhou TL Unit: EASRD ICR Type: Core ICR Report Date: June 28, 2004 1. Project Data Name: STATE FARMS COMMERCI L/C/TF Number: SCL-43090; TF-20298; TF-28236 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Other industry (45%); Agro-industry (37%); Petrochemicals and fertilizers (10%); Banking (7%); Central government administration (1%) Theme: State enterprise/bank restructuring and privatization (P); Rural markets (P); Small and medium enterprise support (S) KEY DATES Original Revised/Actual PCD: 10/28/1993 Effective: 09/09/1998 09/09/1998 Appraisal: 05/04/1996 MTR: 03/01/2001 Approval: 03/31/1998 Closing: 06/30/2004 12/31/2003 Borrower/Implementing Agency: The People's Republic of China/China Trust and Investment Corporation for Economic Development/Twelve Provinces Other Partners: None STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Jean-Michel Severino Country Director: Yukon Huang Yukon Huang Sector Director: Mark D. Wilson Geoffrey Fox Team Leader at ICR: Weiguo Zhou Kay Hill ICR Primary Author: Weiguo Zhou; Jin 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: U Sustainability: UN Institutional Development Impact: M Bank Performance: U Borrower Performance: U QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: 3.1.1 The objectives of the project were: (a) to support, accelerate and catalyze enterprise reform within the state farm system with a line of credit to be extended through an independent project financial intermediary (PFI) to state farms and enterprises for the technological modernization of existing production facilities and the establishment of new commercial ventures; and (b) to increase the capacity of the China Trust and Investment Corporation for Economic Development (CTICED), the PFI, to conduct long-term lending activities. The project's objectives were clear and in line with the government's policies to support the commercialization of state-owned companies in the agricultural sector and the reform of the state farm system. The objectives were consistent with the 1997 Country Assistance Strategy (CAS), especially the strategic objectives of assisting China to implement market-oriented reforms and the reform and restructuring of state enterprises. 3.2 Revised Objective: 3.2.1 The original objectives remained unchanged throughout the project's implementation. 3.3 Original Components: 3.3.1 The project was prepared between 1993 and 1995, and appraised in 1996. The Loan to support the project was approved in March 1998 and became effective in September 1998. The design built on the economic reform measures already initiated within the system, which focused on: (a) resolving the critical issues within the state farm system; and (b) expanding the productive capacity and catalyzing the commercialization of the state farm enterprises. The design was also based on the overall performance of the CTICED. The project's state farms reform design provided a sound basis for achieving the overall project objectives. The project design incorporated lessons learned from an OED report (Industrial Restructuring Study, Report No. 14670, June 30, 1995) summarizing the experiences with industrial restructuring, previous Bank-supported projects in China with enterprise reform features, and other projects implemented in China's state farm system. The project design as a whole was appropriate; it was realistic, consistent with the Bank's strategy and government reform policies for the state farm system, and promoted close cooperation between the CTICED and the Ministry of Agriculture (MOA). 3.3.2 The project had two components: Component 1: Line of Credit (US$299.5 million, 99.8 percent of the total). This component was designed: (a) to support policy and institutional reform, already in place and evolving, and technological modernization; and (b) through the provision of sub-loans by the CTICED, to finance investment sub-projects to expand the productive capacity of state farm enterprises. Component 2: Technical Assistance for the CTICED (US$0.5 million, 0.2 percent of the total). This component was designed to strengthen the institutional capabilities of the CTICED by: (a) the provision of training programs for staff in project analysis, supervision and portfolio management; (b) the development and adoption of: (i) a strategic plan for the CTICED; (ii) a credit manual; (iii) standardized loan documentation and policies; and (iv) procedures for disbursements and eternal audits, and further development of a management information system; (c) improving the organization in the areas of credit and internal audit operations; and (d) the provision of equipment required for these programs. - 2 -  3.4 Revised Components: 3.4.1 The original project components remained unchanged throughout the period of implementation. 3.5 Quality at Entry: 3.5.1 The project was not reviewed by the Quality Assurance Group (QAG). The project's Quality at Entry is considered to have been unsatisfactory. It took too long to complete the lending process and the project had too high an expectation concerning the reform of participating state farms and enterprises. Project preparation could have been improved if: (a) the lessons of engaging financial intermediaries in Bank-financed projects in China had been adequately incorporated in project design; (b) in-depth risk analysis had been carried out and mitigation action plans prepared; (c) more specific key performance indicators, targets and project contributions to the performance of the reform programs had been defined and documented; and (d) stronger and more specific commitments from various participants involved in project preparation had been ensured. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: 4.1.1 The project's objectives were relevant and consistent with the Bank's CAS and the government's reform programs for the state farm system. The objectives were clear and understood by the participating agencies and enterprises. However, the original project objectives were not achieved. The outcome of the project as a whole, in terms of its Development Objectives, was unsatisfactory. This rating is based on the following: (a) The objective of accelerating state farm enterprise reform and promoting technological modernization for state farms and enterprises was not satisfactorily achieved; it was jeopardized by the cancellation of US$90.6 million of the Loan (60.4 percent of the original Loan amount) and the much-reduced number of participating sub-projects (only 22 percent of the targeted number of sub-projects). The first cancellation (of US$80.75 million) was made on June 8, 2000 at the request of the Ministry of Finance (MOF) for two reasons: (i) the rapid development of China's economy made domestic capital more accessible and with more favorable terms; and (ii) the market changes caused by the Asian financial crisis made some end-users change their investment strategy. The second cancellation (of US$8,445,626 representing the whole of the then-undisbursed balance of the Loan) was made on March 17, 2003, also at the request of the MOF. The last cancellation (of US$1.4 million) was made on April 29, 2004 as a result of a refund received by the Bank. (b) Only a limited achievement was made of the objective of increasing the capacity of the CTICED to conduct long-term lending activities for economic development because the CTICED was involved in project implementation for less than two years (in the initial project implementation period). 4.1.2 However, the project did improve the productivity and commercialization of enterprises and accelerated the transition from the planned economy to the market economy of the participating state farms and enterprises; it also facilitated the reform process in other aspects. Good achievements and outcomes were accomplished for some sub-projects, notably Jiangsu Kesheng Group Company (pesticide production) and Guangxi Sisal Co. Ltd. (sisal processing). Detailed outcomes and achievements are shown in Annex 1. - 3 -  4.2 Outputs by components: 4.2.1 The outputs of the project as a whole are considered to have been unsatisfactory. This rating is based on the following considerations: (a) a total of 26 sub-projects were supported by the project, which was only about 22 percent of the SAR target; (b) the final amount of the Bank Loan actually disbursed was US$59.4 million, which is about 39.6 percent of the SAR target; (c) the project yielded only a poor weighted-average financial rate of return (FRR) of 8.6 percent and an economic rate of return (ERR) of 10.4 percent; and (d) the project output indicators established in the SAR were not satisfactorily achieved. Details are shown in Annex 1. 4.2.2 Component 1: Line of Credit (US$203.9 million, 99.8 percent of the total). The output of this component was mixed. (a) Physical implementation. 26 sub-projects were distributed in twelve participating provinces/autonomous regions (including Fujian, Guangdong, Guangxi, Hainan, Hunan, Inner Mongolia, Jiangsu, Liaoning, Ningxia, Shandong, Xinjiang and Zhejiang). Less than the full amount of their sub-loan allocation was withdrawn by eight sub-projects, of which four sub-projects decided to stop further participation in project implementation after the first or second sub-loan withdrawals during 1998 and 1999 and made advance repayment to the CTICED. According to the CTICED, the reasons for their withdrawal included: (i) more preferential loan terms were available from local banks (Fujian Zhongrun Tangerine Shaddock sub-project); (ii) the revocation of the guarantee by the original loan guarantor (Shandong Guangbei Dairy sub-project); (iii) the provision of sufficient funds by local government (Zhejiang Ningbo Squid Fishing sub-project); and (iv) one sub-project's requirement for funds was satisfied by domestic sources (Zhejiang Xiaoshan Fast-frozen Vegetable sub-project). The other four sub-projects (Hainan Luoniushan Market, Dalian Dairy, Jiangsu Weisang Chestnut Flour and Xinjiang Land Reclamation) continued their participation in the project and completed their respective project implementation. Two sub-projects (Guangdong Baole Infant Diaper and Guangdong Huadu Litchi) were physically bankrupted soon after their investments were made. The Dalian Sanhuan Medicine sub-project shifted its investment to a wholesale market for cooked meat. The Inner Mongolia Grain sub-project shifted its investment from the original proposal for land reclamation for grain production to the replacement of farm machinery as a result of the government's new policy banning land reclamation. In December 2001, the government proposed a new sub-project, the Yushu Greenhouse Vegetable Production sub-project, for the Bank's consideration. This initiative was supported by the Bank, and a Bank mission visited the proposed sub-project site in May 2002 to assist the Central Project Management Office (CPMO) in its appraisal. However, the government decided to drop this sub-project as a result of its careful study of the review and approval procedures of both the Bank and the government. The Bank consented to the decision. Physical implementation of all 22 sub-projects was completed by the time of the ICR mission. (b) Reform programs. In general, the reform programs have been progressing well, though not uniformly, across the spectrum of the participants. In line with the government's policies, all participating state farms and enterprises have taken steps in their respective reform programs. Overall, the project had positive impacts to move each participating farm and enterprise to the next major level of reform. As a result, the project improved the production efficiency and the management systems and increased the capacity of marketing competition of the project farms and enterprises under the state farms system, facilitating the commercialization of project farms and enterprises. Of the total of 22 sub-projects, excluding the four sub-projects that were withdrawn early, eighteen have been transformed, or are in the process of transformation, into either limited liability companies or limited liability share-holding companies. All of the sub-projects have completed their major reforms, to different degrees, in the areas of: separation of social functions (77 percent), housing (95 percent), pensions (95 percent), and medical - 4 -  insurance (73 percent). Many have become truly autonomous commercial companies and some are still in the process of reform. General Reform Progress in Key Areas No Sub-project Type Enterprise Reform Separation of Housing Pension Medical Social Function Reform Insurance Insurance 1 Guangdong Baole Infant Diaper SOE LLC Yes Yes Yes Yes 2 Guangdong Xinyi Malt Sugar SOE Shift to LLSHC in progress Partial Yes Yes No 3 Fujian Zhangpu Citrus SF CRS No Yes Yes No 4 Fujian Fu'an Tea Product SF LLC No Yes Yes Yes 5 Fujian Zhao'an Litchi Orchard SF CRS Yes Yes Partial No 6 Inner Mongolia Grain SF LLC No Yes No No 7 Hunan Dongtin Lake Irrigation SF LLSHC and CRS Yes Yes Yes Yes 8 Guangdong Huadu Litchi SOE LLC Yes Yes Yes Yes 9 Dalian Sanhuan Medicine SOE LLC Yes Yes Yes Yes 10 Guangdong Maoming SF LLSHC Yes Yes Yes Yes Micro-Crystal Glass 11 Guangdong Yantang Dairy SOE Shift to LLC in progress Yes Yes Yes In progress 12 Guangdong Zhanjiang Sisal SF CRS and LLC in progress No Yes Partial Partial 13 Jiangsu Shengyang Timber SOE LLC Yes N/A Partial No Processing 14 Yinchuan Yinguangsha Grape SOE LLSHC Yes Yes Yes Yes 15 Guangxi Sisal SF LLC No Yes Yes Partial 16 Hainan Luoniushan Market SOE LLSHC Yes Yes Yes Yes 17 Guangxi Zhongxin Guo'an SOE CRS Yes Yes Yes In progress Shrimp 18 Jiangsu Kesheng Pharmaceutical SOE LLSHC Yes Yes Partial Yes 19 Hainan Sanya Timber SOE LLC Yes Yes Yes No Processing 20 Dalian Dairy SOE LLC Yes Yes Yes Yes 21 Jiangsu Weisang Chestnut Flour SOE CRS Yes Yes Yes Yes 22 Xinjiang Land Reclaim SF LLC Yes Yes Yes Yes LLC: including Group Corporation (c) Technical quality. The technical quality of sub-projects was generally good; notably, the quality of buildings and equipment of some sub-projects is considered to be at international standards. The project modernized the technical production facilities or established new activities for some sub-projects and partially achieved the SAR target to focus financial support to secondary industry out of primary production of agricultural products, and several sectors benefited from this Loan. Competition in prices and quality is underestimated by many sub-project managers. Only a few companies are planning their future activities in a framework of market-oriented production and diversifying their outputs. Other companies seem less dynamic or too inexperienced to evaluate the risk of "incoming" competition, and are reluctant to consider new scenarios of partnership or development patterns. Product quality is not yet considered by all sub-projects as a key component of the production and marketing process that could lead to the economic sustainability of investment. (d) Environmental assessment. According to the project implementation agencies, Environmental Assessments (EAs) were prepared for all sub-projects and submitted to both the local Environmental Protection Bureau (EPB) and the CTICED. The reviewed EAs were of sufficient quality and the required mitigation measures were generally sufficient to enable compliance with existing pollution standards. The implementation of environmental mitigation measures at the sub-project level has generally been satisfactory though with scope for improvements. In the Dalian Sanhuan dairy sub-project, an up-to-standard environmental monitoring program was established with support from the Dalian EPB. In most cases, the monitored parameters were limited to Chemical Oxygen Demand and total effluent - 5 -  discharge. Other issues that were observed included unhealthy working conditions, erosion in litchi orchards established on slopes of more than 25