China - Red Soils Area Development Project

Domuint of The World Bank FOR OFICaL USE ONLY MICROGRAPHICS Report No. 12033 Report No: 12033 Type: PPAR PERFORMANCE AUDIT REPORT CHINA RED SOILS AREA DEVELOPMENT PROJECT (CREDIT 1733-CBA) JUNE 23, 1993 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only I the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CHINA Fiscal Year January 1 to December 31 Currency Equivalents Name of Currency* Yuan (Y) Rate of Exchange: Appraisal year 1985 US$1 = Y3.2 1986 US$1 = Y3.5 1987 US$1 = Y3.7 1988 US$1 = Y3.7 1989 US$1 = Y4.7 1990 US$1 = Y52 1991 US$1 = Y5.3 Completion year 1992 US$1 = Y5.4 Weights and Measures Metric and Ical 15 mu = 1 ha Abbreviations ABC Agricultural Bank of China ADC Agricultural Development Corporation MAAHF Ministry of Agriculture, Animal Husbandry and Fisheries PAR Performance Audit Report PCR Project Completion Report SAR Staff Appraisal Report FOR OFFICIAL USE ONLY THE WORLD SANK Washington D.C. 20433 U.S.A. OMM* of eelr-GeerwW Opewon Evaluadon June 23, 1993 MEMIORANDUM TO THE EXECUTIVE DIRECTORS AND THE PIESIDENT Subject* Performance Audit Report on China Red Soils Area Development ProjeLt (Credit 1733-CHA Attached is the Performance Audit Report on China - Red Soils Area Development Project (Credit 1733-CHA) prepared by the Operations Evaluation Department. The audit confirms the assessment of the F:oject Completion Report, which was presented to the Board on February 25, 1993. The outcome of the project has been fully satisfactory. Annual development targets were repeatedly exceeded, and disbursement of IDA funds regularly outpaced the SAR disbursement schedule. Much of the project success is due to a favorable policy framework; strong commitment by the Borrower; and a rigorous beneficiary selection process. This produced a high level of participation by motivated, hardworking independent small farmers. Assuming continuous public investment in research and market development, sustainability is likely. Attachment Tis document has a restricted disbibution and may be used by recipients only in the performance of Sofficial duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PERPORMANCE AUDIM EPR RED SOILS AREA DEVELOPMENT PROJECT (Credit 1733-CHA) TABLE OF CONTENTS PanoNo, Preface ......... i BasicDataSheet .... ... . . . . ....... if Evaluation Summary ......... v L Background ............. 1 II. Implementation .......... .................... 4 III. Project Outcome 6............. 6 IV. Findings and Issues ......................................... 7 A. Determinants of Project Success ............................... 7 B. Problems Encountered ...................................... 8 C. Replicability and the Future Role of the Bank .................. 9 A Comments from the Borrower ........................... 11 MM: IBRD 19407R1 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its coatents may not otherwise be disclosed without World Bank authodation. PERFORMANCE AUDITRPR -HIN RED SOILS AREA DEVELOPMENT PROJECT LCWedit 1233-CMA This is a Performance Audit Report (PAR) on the Red Soils Area Development Project, involving an IDA Credit in the amount of SDR 34.0 million to the People's Republic of China, with the objective of demonstrating efficient methods of developing the productive potential of presently unutilized land in the red soil areas of south China. The credit was approved on August 18, 1986, and became effective on March 23,1987. The loan was closed on the original covenanted date of Jue 30, 1992. Final disbursement was made on October 20, 1992. A total of US$46.68 equivalent was disbursed and SDR 44,700 was cancelled. The PAR is based on a Project Completion Report (PCR) prepared by the Asia Regional Office dated January 1992,1 the Staff Appraisal and the President's Reports, the credit documents, the transcript of the Eecutive Directors' meeting at which the project was considered, on a study of project files, and on discussions with Bank staffi An OED mission visited China in October 1991, and discussed the effectiveness of the Bank's assistance with staff of the central and provincial government agencies involved. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR provides a very good account and assessment of the project experience, and discusses the performance of the Bank and the project executing agencies. Nevertheless, the project was selected by OED for audit because of its pilot nature, in the expectation that the project experience would provide useful lessons with important implications for one or more follow-on projects. The PAR therefore elaborates on particular aspects such as the determinants of project success; problems encountered; and prospects for replicability. The draft PAR was sent to the Borrower for comments. Comments received from the Ministry of Agriculture are reproduced as an attachment to the PAR. Pojec Comploe Report, Rpor Na 11, Marc 8, 19na p2 ir L zl I i om ~jjjfjjj II in Km liii 'ti I u1111 ~fl 0 fl 8 Tj i fåIII .Y- PERFORMACE AUDIT REPORT RED SOILS ARFA DEVELOPMENT PROJECT (Credit 1733-CIIA) EVALUATION SUMMARY Introduuction date. Annual development targets were re- peatedly exceeded, and disbursement of IDA 1. Introduced at a time when China was funds regularly outpaced the SAR disbusement implementing a progressive rural reform pro- schedule. gram, initiated in 1978, which was transforming the agricultural sector fron a centrally planned 5. No significant problems were encount- to a market driven system, the project focused ered by the five Bank Supervision missions. on the red soils region of southeast China where Weaknesses in financial management and sub- large areas of underutilized land of moderate loan recovery were detected early, and corrective slope thought suited to diversified crop pro- actions quickly introduced. Useful advice was duction were known to exist. provided by foreign technical assistance per- sonnel on citrus and livestock and small numbers Objectives of project staff benefitted from overseas study tours, but the full range of technical assistance 2. The project aimed to demonstrate effi- and training opportunities was interrupted by clent methods for developing the productive restrictions imposed in the wake of the unfort- potential of underutilized land through the unate events of June 1989 in Beijing, The citrus introduction of cash crop and livestock pro- component received a partial set back when a duction under single family or small household severe frost caused serious damage to many group management. citrus plantings in the winter of 1991-92. 3. Recently established Agricultural Devel- Results opment Corporations (ADCs) in the provinces of Jiangi and Fujian were responsible for pro- 5. All the farm models proved fully viable ject execution, to provide support for individual in economic and financial terms, except the farm families or small cooperative groups to ramie-based model which failed due to a pre- settle, develop or rehabilitate their allotted cipitous decline in ramie prices. The ramie was holdings with citrus, tea, ramie, dairy cattle, pigs, largely replaced by additional areas of tea. The annual crops and forest tree species. overall economic rate of return was reestimated at completion as a very satisfactory 21%. All the Implementation Experience commodity models (except ramie) benefited from product price increases which followed 4. The project started up very rapidly and market deregulation and the lifting of price a fast pace of implementation was maintained controls initiated by government in a series of right through to the covenanted completion incremental steps beginning in 1979 and still *-vi* continuing. However, large scale new planting 9 Despite the fivorable circamstances sur- to oranges in China In the past decade may lead rounding the project, it was not trouble-free to a progressive decline in the price of this fruiL aptive research and cnolg transfer through use of foreign. technical assistance and Susbhlmbilq overseas :raining of project staff was not purnued as eegtclyas anticipated at appraisal; over- 7. All the small farm and cooperative on citrus may prove to be a weak- enterprises estab'shed under the project appear ness gmm the prospect of possible ovpduc- fully sustainable provided free market prices for %o at the national level, and the known suscep- the main products do not fall drastically below tibility of the popular orange varieties to damage curret levels. The industriousness of the care- fom severe frots; and neglect of appro-priate fully selected benefciary farmers and their soil andwater conservation in the early yeas of families, and the continuation of current levels Iplmentadonwasanunfortunatesideeftacof of ADC's support services in the processing and the rapid project start-up (par 4.4) marketing areas are other important factors favoring a high degree of sustainabity.10. The succesul a of the economic and financia viability of the several Finings and Lessons farm models provides a secure base for epl- cating this project cxpeiience, with improve- 8 A strong commitment to project object- ments derived from lessons learned as docu- ives by government at all levels, and a favorable mented in the PR (pam 4-9-U. policy climate which encouraged the creation of smal farms and sef-reguating cooperative groups are seen as particularly important detea rInan of project succes w (patf 4wn PERMANCB.AD& APOR RED SOILS AREA DEVELOPMENT PROJECr (cr*dit 1733-C)IA) L BACKGROUND 1.1 The Government of China introduced major changes in agricultural policy in 1979, which resulted in a shit from collective to small-scale family farming and led to rapid growth and diversification in agricultural production. By 1985 a further phase of reform was introduced, when govertment, responding to a growing surplus in grain stocks, replaced the system of compulsory procurement quotas with voluntary contracts, and greatly enlarged the role of the market by adjusting procurement prices. These measures led to an improvement in average diet patterns, with an increased demand for fruits, vegetables, meat poultry, fish and dairy products and a corresponding decrease in direct grai consumption. 1.2 Increasing demand for a wider range of foodstuffs caused the Government to focus attention an the red soils region of southeast China, where large areas of underutilized land of moderate slope thought suited to diversified crop production were known to exist, and where the provincial governments of Jiangsi and Fujian were drawing up plans to promote small farmer settlement and agricultural intensification in the more favorable upland sites within the generally mountainous and hilly tracts of the regionY 13 The area development approach proposed by the provincial governments, which was designed to encourage small-scale individual or group farming through provision of support services, was consistent with the Bank's strategy for lending to the sector. 1.4 The objective of the project was to demonstrate efficient methods for developing the productive potential of underutilised lands on about 27,000 ha. gross (22,000 ba. net cultivable) through the introduction of cash crop and livestock production under single family or small household group management & CinWs ved sofs reSuo, so med beaue ats charamlde red or ycow sub"oB coka, es sgomo of de Yangle River and c o mellion sq.1n., or21%ofaM's surface ares, ln 11 proodes. Most otthe flat orvy gently saplong land has been developed for paddy dce, fild cops or(-a, whe ts steepest land is only suiled to forest or panstue Land of iteanediabe slope (5-2') was tageted for development under the paoject. -2- 1.5 The project was designed to be completed in four years (mid 1987 through mid 1991). Recently established Agricultural Development Corporations (ADCs) in Jiang:i and Fujian were made responsible for execution of the project, which provided support for individual farm families to settle and develop mixed agricultural holdings of around 2 ha. In size on carefully selected areas of underutilized but suitable land in Jiangi, or for small cooperative groups of collective farmers to rehabilitate or develop similarly suitable underutilizedY plots close to their existing Jointly operated collectives in Fujian. 1.6 The development techniques to be adopted were all locally well researched and tested. They included cultivation along the contour or on broadbase terraces on steeper slopes, irrigation where possible, protective tree farming, and organic and chemical means of soil improvement to support a variety of field and orchard crops or livestock, including 90 percent of the orchard component to several citrus varieties, ramie (an indigenous perennial fibre crop), tea, legumes, foodgrain or fodder crops, evergreen or broadleaf tree species, pigs and dairy cattle. The several intensive farm models which provided the economic underpinning for the project were selected by technical advisory groups, and drew heavily on the experiences of local agricultural colleges and research institutions. An essential feature of all models was the emphasis given to soil enrichment through heavy applications of organic matter produced on farm by livestock, principally pigs, or externally in the form of night soil or other municipal wastes. The role of the newly created ADCs was to finance the initial investments, including housing as well as agricultural inputs, and provide advice to the selected settlers, administer the credit recovery programs, and assist with the processing or marketing of the crops as necessary. The beneficiaries (an estimated 18,800 families) were to be given usufruct rights in the form of 20 year renewable contracts for their holdings, and would have the option of disposing of their production on the local market 1.7 The main features of the project as appraised were: a) development of a gross area of about 27,000 ha of idle land with reasonable agricultural potential-characterized by moderately deep soils and intermediate slopes-through terracing, contour planting, on-farm irrigation and drainage, and construction of farm buildings and access roads; b) civil works to improve or etend existing infrastructure, including enlargement of small reservoirs, canal construction, installation of pumping stations and sprinkler irrigation systems, rural electrification, and road and bridge construction; c) construction of housing, schools and clinics, administrative buildings, warehouses, laboratories and extension stations, and livestock sheds; Athough descrbed as "Idle" land in the SA, the project ares could moe accuratly be described as "UndaflHau. Pdor to devopmet under tiw prjct most areas, widc at one e In t distant past had carried bedlesd evergreen forest, were in a degraded condition, sparsely covered by coase grass and scattered shrub or n trees, and sabject to occasional communal gradag by draft animals or collection of brush and grass for fuel or coopost. -3- d) provision of construction and farm machinery as well as trucks and other vehicles required by the ADCs for land development, support services and management; e) establishment of orchards, ramie, feed grains, fodder crops, and woodlots as well as rehabilitation of 2400 ha. of low yield tea plantation, including provision of fertilizer and seed or seedlings; f) provision of purebred stock and feed for dairy and pig breeding farms and specialized households; g) rehabilitation or new construction of processing factories for ramie, dairy products, and feed premix, and cold storage and packing facilities for fruit; h) provision of research, training and office equipment to upgrade and enlarge the existing extension sy-tem as well as training and management institutions; i) a pilot program of research and demonstration to be conducted on areas of more marginal red soils; j) domestic and overseas training, study tours, and technical assistance to project management organizations and the staff of agro-technical service agencies. Finance Plan 1.8 Project cost at appraisal was estimated at US$122.2 million, including the IDA credit of SDR 34.0 million (US$40.0 million equivalent at time of negotiation), corresponding to 33 percent of total cost. The balance of US$82.2 million equivalent was to come from the Agricultural Bank of China (ABC) (US$27.8 million), provincial and local governments (US$11.1 million), the central government (US$3.8 million), and farmer or state farms investments (US$39.5 million). The IDA funds were to be disbursed against foreign or local purchases of materials, breeding animal- equipment and vehicles, and technical assistance or overseas training, together with 30 percent of land development, canal construction and crop establishment costs. Due to a decline in the value of the US dollar against the SDR, and several devaluations of the Yuan during implementation, the actual disbursement rose to US$46.7 million equivalent, corresponding to 41 percent of the actual project cost. Pre-Implementation Processing 1.9 The project was first proposed in early 1984 by the Jiangd Provincial Government and the proposal was forwarded to the Bank by the Ministry of Agriculture, Animal Husbandry and Fisheries (MAAHF), as a development project confined to Jiangi Province. It was enlarged to include a contiguous area in Fujian Province by a Bank identification mission in July 1984. The design was developed further by a Bank preparation mission in June 1985 which addressed the issues of the ADCs roles and organizations down to the prefectural and county levels and reviewed and -4. offered suggestions for Improving the several investment models proposed. Special attention was given by this mission to the matter of site selection as defined by soil suitability, slope and accessibility. After further preparation by the Jiangxl and Fujian ADC staffs to define technical standards and criteria for individual investment loans, the project was appraised In September 1985. 1.10 The appraisal mission gave particular attention to ensuring that the ADC charters would be effective instruments permitting the ADCs to perform their role as efficient public sector development agencies, separate from the administrative functions of in-line government departments, and that their financial viability would be maintained through the introduction of an effective cost recovery system with acceptable interest rates, comparable to those imposed by the ABC. 1.11 No serious problems arose during the appraisal report processing phase, and the project as finally appraised and negotiated drew all-round support within the BanL 1.12 The Board approved the project on September 9, 1986. One Executive Director expressed particular satisfaction with the emphasis given in the project design to economic development of marginal land, with the emphasis on terracing, tree and perennial crop cultivation. 1.13 The Credit Agreement was signed on December 18,1986 and the project was declared effective on March 23, 1987, five days later than specified in the original credit agreement II IMPLEMENTATION Start-up 2.1 At the time of the first supervision, in February, 1987, and one month before effectiveness, the first round of tenders had been completed and procurement of fertilizers, steel and electric cable had been effected at substantial savings. Project management offices at provincial, prefectural and county levels were found to be well staffed with competent personnel, and extensive training programs had been carried out, including an overseas study tour to Australia on citrus growing and processing, and dairying. The project experienced a rapid start-up in both provinces, with 1,700 ha. of citrus, ramie, windbreaks and fodder crops developed in Jiangl and 2,000 ha. of citrus and tea in Fujian in the first year. 2.2 A revised budget was prepared in the course of the first supervision, to take account of an escalation in costs, particularly for labor, and devaluation in the value of the yuan which had occurred since appraisal 16 months earlier, and to ensure adequate budgets for the faster pace of project execution reflected in both the rapid start-up, and in the accelerated development proposals put forward by the two provincial ADCs at that time. 2.3 By the time of the second supervision, in December 1987 and only nine months after effectiveness, physical progress of the project was recorded as excellent, and well ahead of schedule in both Jiangi and Fujian, with 30 percent of the land development and 25 percent of the infrastructure improvements completed. Settlers were reported to be of high caliber. Taining of -5- staff was progressing well, but further training was recommended in financial management. Notwithstanding the fact that the staff appraisal report stipulated that no more than 10 percent of the orchard component would be planted with fruits other than orange, the mission expressed concern with the fact that 90 percent of the orchard component developed up to that time was citrus, mainly mandarin orange, and the ADC were recommended to consider increasing the proportion of other fruits or alternate economic tree crops for subsequent plantings. Some concern was also expressed regarding the financial accountability of the ADCs, as reflected in their lack of provision for bad debt and a poor sub-loan recovery record from settlers prevailing at that time. - 2.4 The third supervision, undertaken in September, 1988 and 18 months after effectiveness, reported that physical progress continued to be very good. The ADCs were again criticized for their over-emphasis on orange in the case of the orchard component, and reforestation and erosion-protection activities were noted as needing attention. The mission included a foreign citrus consultant who made valuable recommendations for a research and development program covering virus indexing of the local citrus clones, clone comparison experiments and budwood foundation block planting at the Fujian Citrus Research Institute. He also recommended topics for extension including improvements in budding techniques, tree training and micro-irrigation. Terms of reference for several short-term consultants in livestock, citrus agronomy, virology and post- harvest handling were drawn up. 2.5 By the time of the fourth supervision, in September 1989 and only two and a half years after the project had been declared effective, physical investments were for all practical purposes completed, and the mission described the project as highly successful, notwithstanding a continuing concern at the possibility of a glut in orange production when the orchards reached maturity in a few years. Arrears in credit recovery (39 percent and 15 percent in Jiangsi and Fujian respectively) were noted as an area of special concern, and ADCs were urged to improve their collection frequency and to adjust their interest rates upwards to match that of the ABC and to better ensure the ADC's own financial viability. Improvements were quickly made in both these areas by the project authorities. This mission benefitted from the presence of a livestock consultant. He commented adversely on the isolation of the ADCs from the in-line technical agencies at provincial level, which mitigated against the provision of correct technical guidance or the conduct of applied research. Arrangements were made for a consultant to assist with the preparation of a PCR in mid 1990, in anticipation of the project b*ing completed a full year ahead of the date estimated at appraisal. 2.6 In December, 1990 a draft PCR had been prepared with the assistance of the above consultant. This did not conform to the Bank's preferred PCR format and was never processed beyond the draft stage. It presented a generally favorable view of the project experience, with most physical targets attained or exceeded. It claimed that the soil improvement and water conservation technology applied through the project had been highly successful, as demonstrated by the satisfactory incomes generated under the project. The report also commented favorably on the high percentage repayment rates on beneficiary loans, reflecting a satisfactory improvement in the management of the credit program. 2.7 The fifth supervision, in April 1991, recommended that a follow-on project should be prepared to replicate the successful experience of the project, but designed to concentrate on specific catchments rather than distributed over a wide area. By this stage the only credit category with a -6- substantial undisbursed balance was that for technical assistance and overseas training, and it was recommended that the residual funds be spent on an agro-industry feasibility study and on overseas training. In the event few of the remaining funds were used for these purposes due to the imposition of restrictions on overseas travel in the wake of the unfortunate events of June 1989 in Beijing. 2.8 In December 1991 the project received a partial setback when a severe frost caused serious damage to many citrus plantings, particularly in Jiang where the 1991/92 winter was the most severe for the last 40-50 years.J 2.9 The credit closed on schedule on October 20, 1992. IlL PROJECT OUTCOME 3.1 The outcome of the project has been particularly satisfactory. The objective of demonstrating efficient cash crop and livestock based farm models on previously underutilized lands in the Jiangi and Fujian red soils region has been fully realized. The tea and dairy based models, with ERRs between 30 and 40 percent and FRRs between 20 and 30 percent (PCR, page 6, Table 6.1), have been particularly successful and exceeded appraisal expectations, while the citrus models, while still satisfactory with ERRs of 12 and 24 percent for Jiang:i and Fujian respectively, were below appraisal expectations in economic terms because of the high tree mortality caused by the record 1991 frost. The ramie based model failed due to a precipitous decline in ramie prices and I4 percent of the original 4,575 ha target was replaced with tea. The overall ERR reestimated at completion was a satisfactory 21 percent, eight points lower than the 29 percent rate estimated at appraisal. All the commodity models, except for ramie, benefitted from product price increases which followed market deregulation and the lifting of price controls initiated by the government in a series of incremental steps beginning in 1979 and still continuing.e The very high ERR of 37 percent for the dairy component reflects the favorable milk to feed concentrate price prevailing, while the higher ERRs for tea reflect the dramatic increase in yield which can result from only moderate investments in rehabilitation. 3.2 The actual area of land developed slightly exceeded the original 27,000 ha target, but the number of beneficiary households declined by 27 percent (from 18783 to 13,619) due primarily to an increase of the average Fujian tea holding, made unilaterally by the Fujian ADC without the Bankls agreement, from an SAR expected 0.4 ha to 2 ha. 3.3 Among the most striking aspects of the project were the quick start-up and rapid pace of implementation, which led to the completion of physical investment activities nine months ahead of appraisal epectations. Disbursement of IDA-provided funds also exceeded the SAR disbursement Seve winter fros arn not uncommon in te project ares, where written records liocate that cim has been culthated for me than 100 ya & As of dw end of 1991, only seventeen agricultual products were subject to state price control, as aSialst 110 at the beginning of 1980. -7- schedule for each fscal year (Basic Data Sheet, pagei). The record of credit repayment by beneficiary farmers improved rapidly from a poor start, and was outstandingly good by the end of 1991 at which time 111 percent of scheduled repayments had been made in Fujian and 98.6 percent in Jiangsi (para. 6.3), but will be adversely affected by the frost damage sustained in Jiangul (para. 3.1), where a three-year moretorium on sub-loan repayment for affected farmers has been introduced. 3.4 The two provincial ADCs have undergone substantial institutional strengthening as a direct result of their participation in the project Senior management was pragmatic and forceful from the start, and was instrumental in building up a strong cadre of professional managerial st4 and directing their efforts towards the development of sound commercial enterprises. Their loan recovery record is good, in spite of the 1991/92 freeze damage to citrus, and the ADCs are providing high quality support services in the areas of inputs supply, product processing and marketing to its client farm communities. As a result, the outlook for project sustainabity is highly likely. IV. FINDINGS AND ISSUES overview 4.1 This is the seventh agricultural project in China supported by the Bank to be completed, and the fifth to be audited. All seven projects# had satisfactory outcomes. 42 The following, mostly positive findings, deserve emphasis: (a) the unusually rapid start- up to the project, with many activities already well under way even before formal declaration of effectiveness (para. 2.1); (b) the very rapid rate of implementation, with annual development targets consistently exceeded, and with physical completion attained well in advance of appraisal expectations (para. 2.5); (c) the consistent rating of the project as having 'no significant problems at each supervision (Basic Data Sheet, page iv); (d) the extremely fast disbursement rate of IDA funds; (e) the very low, but adequate, supervision input provided by the Bank (only 5 supervisions, averaging less than one a year for the 63 months between effectiveness and credit closing (Basic Data Sheet, page vi); (f) good continuity in supervision, with the same task manager responsible for all supervisions except the first, which was led by the appraisal mission leader. A. Determinants of Praiect Success 43 It is instructive to list the favorable features which contributed to the success of this project. These include: lbW car siz projects wer North China Plain Adcultur, QDet 1261 (PAR No 736 dated Aprt 1989); Seeds, a 157 (PCR No.993 dated October 1991); Heougiang Land Redata, edt 1347 and Lan 2261 (PAR No.1067 dated May 1992); Rural Setor Adjuatment, Creft 1932 and Loan 2967 (PAR No. 10767 dated June 1992); Rubber Deelopwent, ade 1417 (PCR No. 10984 dated August 1992); and Rural Credit, edt 1462 (PAR No. 11125 dated September 1992). -8- a) So comtme to the project and support for its objectives at all levels of the borrower's organizations-Including the Ministry of Agriculture in Beijing; the two pro4ncial governments and the ADCs at provincial, county and township levels; b) Favorable poliey climate which encouraged the creation of single family, independent farms in Jiangsi, and small self-regulating cooperative groups in Fujian, capable of producing a diversifed range of agricultural commodities for free market sale; c) Boergetic Ladership at the senior management levels of the ADCs; d) Adequate number of dedicated. well disciplined staf at all levels of the ADCs structure; e) A which produced a highly motivated, hard working force of small farmers with above-average educational levels; f) Promotion of economically and financially robust intensive farm models (based on citrus, dairy cattle, tea, pig farming and associated woodlots); g) A high level of constructive interaction between Bank and borrower staffs from the preparation through the supervision phases; h) Intensive local training of implementing agency staff and beneficiary farmers during the start-up phase; i) Aequate local budets. sufficient to meet an accelerated implementation schedule; j) A Commendable degree of adaptability and fleibility during implementation on the part of both Borrower and the Bank, leading to appropriate changes in project scope, including most notably the abandonment of the ramie-based farm model and substitution with additional tea plantations, and a change from individual family farm models to small cooperatives in Fujian, where the opportunities In terms of land availability for creating new farm units was lower than in Jiangxi. B. 4.4 Despite its success, the project had some shortcomings These included: a) The extreme emphasis given by the borrower during implementation to the rapid generation of returns from the income generating investments, as emplified by the farm models, led to neglect of longer term investment in research and technology transfer. This neglect is reflected in the much -9- reduced actual expenditures on research equipment, and training and technical assistance, as compared with the SAR estimates (only 25 percent and 43 percent respectively-PCR Part III, Table 5). Foreign technical assistance was used only sparingly by the Borrower, apparently reflecting doubts about the value of some forms of external expertise. However, short- term specialists in citrus and livestock technology were acknowledged to have provided excellent advice and were highly regarded by their counterparts The 100 ha pilot research program for investigating techniques for developing more marginal lands than those improved under the project [para 1.7 (i)] received low priority. More active applied or adaptive research into such matters as vegetative conservation techniques, crop varietal improvements or balanced fertilizer requirements could be expected to extend the range of site conditions suitable for red soils development in the future. b) A heavy concentration on citrus, and in particular, mandarin orange, was recognized by the Bank as a possible weakness from the marketing view point during the first year of implementation (para 2.3). Later, the heavy mortality of citrus due to frost damage in the last year (para 2.8) further called into question the wisdom of relying so heavily on this fruit. A more careful marketing outlook and price projection study, and frost risk analysis for citrus, than were carried out during project preparation for the first project are essential before additional planting of citrus can be considered in any follow- on project; c) The rapid pace of physical development during the start-up phase led to some neglect of soil and water conservation measures. Quality of establishment and maintenance of terraces, vegetative covers, windbreaks and forest plots were found wanting by the Bank during the early supervisions. The project authorities were quick to take corrective action by encouraging farmers to improve their standards. This approach was only partially successful, and there remains room for further improvements. C. Replicability and the Future Role of the Bank 4.5 The project had an undoubted pilot character. By Chinese standards it was not large, and, at US$40.0 million credit, it shared with an earlier seeds project the distinction of being one of the two smallest agricultural sector operations supported by the Bank in China; its objectives were primarily demonstrational (para. 1.4); the ADCs were new and untested parastatal bodies charged with a responsibility to promote independent small farm enterprises while operating as profitable entities in their own right (para. 1.10); and the farm models adopted were innovative in the sense that I See AnMdet pars 7(b), for as elabomto by the BonMr on the S of foeign techalca agbace. I The sequieke sudwis are belwg andertaken in preparadon for a second Red SoA Prjc4t, aceduled for BoWd pmesaton iD Eank FM~ -10- they reflected a consensus of opinion by local agricultural, including research, specialists as to the profitability of individual family farms or small cooperative units practicing intensive cultivation on underatilized red soils. 4.6 The existence of extensive areas of underatilized land with similar potentials throughout the huge expanse of red soils affords an excellent opportunity for project replication. As already noted [para 4.4(b) footnote 6J, a follow-on project Intended for Bank support is currently being prepared. The interval of more than one year between the completion of this audited project (June 30, 1992) and the presentation to the Board of the follow-on project (Bank FY94), as well as the timely production of the PCR within six months of credit closing, should ensure that all possible lessons of experience learned from the execution of the first project are taken into account during the preparation and appraisal of the second. 4.7 As identified in an Executive Project Summary in October, 1992 the next project is likely to promote an environmentally more appropriate, small watershed approach rather than follow the fragmented distributional pattern of small farms assisted through the audited project. This approach implies greater attention to the steeper sloping, shallower soil areas of the upper catchments, where the role of forestry will be more important. A renewed effort to extend the technology for red soils development through adaptive or applied research under a greater range of soil and topographic conditions, in the interests of wider replicability, and to build up the extension services, is also intended. More thorough market analyses for citrus and other fruit crops, and a frost risk analysis for citrus are also being addressed during preparation, as also are refinements in the agro-processing and marketing roles of the ADCs. 4.8 Given the high reestimated financial rates of return reported in the PCR for most farm models (para 3.1), the very much larger actual size of the tea holdings compared to SAR proposals (para 3.2), and the very apparent above average prosperity of most beneficiary farm families observed by the audit during visits to the project area, more attention should also be given to establishing optimal farm sizes for the several farm models in any future project, with a view to better accommodating principles of equity and poverty alleviation in the upcoming project. As much as 10 milMon ha of undetiland with potential for development a archard or other =te croMps, food or almal feed cMp althadon, patue or comnercal fomet"y are estimated. - 11 - Page 1 of 4 COMMENTS FROM THE BORROWER Mr. Graham Donaldson Chief Agriculture and Human Development Division Operations Evaluation Department The World Bank May 20, 1993 Dear Mr. Donaldson: I received your letter dated on March 30, 1993 and attached Draft Performance Audit Report for Red Soils Area Development Project (Cr. 1733- CHA). I and my colleagues, together with people from Jiangxi and Fujian ADCs read the report and held discussion on it carefully. The following is our comments: 1. The Red Soils Area Development Project (Cr.1733-CHA) is a successful project. Over more than five years integrated activities of agriculture, livestock and forestry have been carrying out on about 27,000 ha of under-utilized red soil area. Through joined efforts, including the hard work of project farmers, vigorous management of ADCs' staff and the guidance provided by the World Bank and Chinese government, the project has gained not only great economical benefit, but also good social and ecological result. The achievements of the Red Soils Area Development Project shall provide good demonstration for the future development activities on a even larger scale. 2. We think that the Report gives generally complete and right evaluation on the project, and reflects the achievements obtained by the project. The basic data in the Report is also correct despite there are minor matters which needs to be cleared (see the later part of this letter). The Report summarizes * the experiences and lessons obtained from the project, and raises some issues which need to be further studied. It has been agreed by the World Bank and the Chinese government that a larger red soil development project shall be carried on in five southern provinces following the first one. The ongoing preparation of the following project is taking full advantages to draw lessons and experiences of the first one, indicating that comments and suggestions in the Report is playing an active role. - 12- AT&ACHMENT Page 2 of 4 3. Over 40 years Chinese government has set many research institutes and soil stations in the southern area to conduct reserach programme for developing red soil, and various land reclamation activities on many spots have also been carried out by state farms and collective corparations. Those efforts, to certain extent, are successful in terms of accumulating rich data and experiences, and testing various techniques. That the great success of Red Soils Area Development Project financed by the World Bank is on the base of applying and developing those integrated techniques into practice on a large scale. The introduction of valuable knowledge in management and investment from the Bank projects also contributed to the success. Those joint efforts ensured the good result of the project and radiates great enthusiam. 4. We quite agree that there is -plenty of work needed to be done and there is room for further improvements in soil conservation, water mangement, testing of new varieties, afforestation and the mixture of trees and grasses, etc. We understand that the development of red soil is a comprehensive and complicated engineering system, which has short term objectives and long-term objectives. We are aiming to establish an efficient, sustainable agriculture-system with sound economical, social and ecological benefits. 5. During the project implementation, the Bank side and the Chinese project management side made several readjustments according to changing reality. We gave high marks on this flexibility which ensured the project proceeded on the right track. In Jiangxi province, the 1.4 ha-rami-per-household-plan at the appraisal changed to a 1.4-ha- tea-rehabilitation-per household, and the total beneficiary households numbered 9,878 actually at completion instead of 9,843 at appraisal, a slight increase than the plan. While in Fujian, the tea gardens were run by small collective corporations, in which a couple of households might take responsibility of actual work but all the households in that collective groups would be benefitted from tea gardens at various degree. So there might be different statistic figues in calculating beneficiaries. At appraisal, Fujian allocated a small quantity of fund on pig raising and after supervision adjustment was made to increase the amount of disbursement against pig shed. As a result most of orchards had pig farms attached and could obtain organic matter self- sufficiently, with only a few exception. Intercrop ratio accounted for 85% in orchards in Fujing province in the actual implementation, but this cost did not appear on the investment schedule since there was no funding during appraisal against intercropping expenditure in Fujian. ADCs raised funds to cover this expenditure from other resources. If this part of operating funds. were reflected -13-. Page 3 of 4 on the table, the total expenditure would be added a little. 6. It is unexpected to have such serious frost as it happened in 91/92 and it has been the lowest record of temperature in that areas in histore. Citrus orchards in Jiangxi and Fujian suffered hard damage. Both the Chinese government and the World Bank made studies and analysis on this issue after the disaster. In reviewing we should remark highly that the Bank supervision team in 1987 gave strong suggestion in diversifying fruit patten, though at that time the main concern was the risk of citrus market and the farmers should not heavily relying on one fruit. Now this advice has proven correct in reducing natural risk as well. In 1988 and 1989 both provinces increased the non-citrus planting area that generated income in 1992 and partially migrated the loss. Jiangxi province decided that farmers who suffered citrus damage could postpone the repayment of interest and capital for three years, and the loss shall be born by farmers and accumulated interest shall be paid back after the recovery. Fujian also adopt measure to help farmers to overcome the difficulty. 7. We realized that there are two main problems which caused disbursement aginst expenditures in Catergory III much reduced: (a) The current policy of loan utilization is who borrows who pays back. While in China the production units are separated from research units. So it is difficult to verify the debt bearer for the expenditure on research component, as a result the slow and less disbursment happened in this aspect. We think this situation will be graduately improved as the deepening of institutional reform in China. (b) We welcome foreign experts to come to China for a short period of work. Experience from past years has showed that some foreign specialists, who know China well, can find the gap between China and other countries, and can also bring into China with advanced technology and valuable information from abroad. They really do the project a great favour. But generally speaking that are not the most cases. Some experts, who may be very good in their specialities, but know little about China and about the project. They offen spend plenty of time to get themselves acquinted with the local situation first before they could get seriously to the point. In addition there are obstacles in language and in way of thinking, which lead an uneffecient job and less satisfied result. Therefore project people are reluctened to employ very expensive foreign specialist. However this is an old problem and we wish this could be improved in the future. One important lessons we draw is to set a condition when bid for consutants. Chinese professiency and experience in China should be one - 14- AT'AHEN Page 4 of 4 condition as a qualified international consultant. Besides the scope of work must be clearly defind as to the project demand. If project people find that the foreign consultant are really good and bring benefit for the project, they will be enthusiatic in employing them even at very high cost. 8. In the part of Key Data in PAR, it mentions that the last major procurement was two refrigerated milk tankers delivered in mid 1992. Please check it since this procurement did not occure. 9. We fully agree the point of view expressed in the PCR and PAR that a comprehensive evaluation on the red soil I project shall play significant role in preparing the second red soil project by replicating useful practice, improving unsatisfied aspects and exploring new issues. We sincerely wish a cordial corperation with the World Bank may make the second red soil development project a greater success. Yours sincerely, Zhang Kaiping director Office of External Economic Relations Ministry of Agriculture 審