China - Rubber and Forestry Development Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14657 PERFORMANCE AUDIT REPORT CHINA RUBBER DEVELOPMENT PROJECT (CREDIT 1417/SPECIAL FUND 005-CHA) AND FORESTRY DEVELOPMENT PROJECT (CREDIT 1605-CHA) JUNE 21, 1995 Operations Evaluation Department 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. Abbreviations and Acronyms CGB Central General Bureau of State Farms and Land Reclamation EDI Economic Development Institute FDP Forestry Development Project FRR Financial rate of return ICB International competitive bidding MAAF Ministry of Agriculture, Animal Husbandry and Fisheries MFO Ministry of Forestry PGB Provincial General Bureaus PMO Project Management Office PRC People's Republic of China RDP Rubber Development Project SAR Staff Appraisal Report SF Special Fund SFF State forestry farms SPC State Planning Commission FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 21, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China Rubber Development Project (Cr. 1417/Special Fund 005-CHA) Forestry Development Project (Cr. 1605-CHA) Attached is the Performance Audit Report on the China-Rubber Development (Cr. 1417/Special Fund 005-CHA) and Forestry Development (Cr. 1605-CHA) projects. The audit report was prepared by the Operations Evaluation Department. The Rubber Development project was approved in 1983, when Bank Group experience of China was limited. The project aimed ambitiously to raise China's self-sufficiency in natural rubber production by supporting new rubber planting and replanting on state farms, spreading superior technologies, and establishing rubberwood as a timber resource. The potential for high yield rubber production in China was, however, limited by the absence of clones suited to China's marginal production conditions, and the high cost of production made rubber uncompetitive with major producing countries. The economic and technical analysis of the project at appraisal was overly optimistic. Rubberwood processing was successfully put on its feet, but only after enterprises had struggled with technical difficulties posed by overly-sophisticated project designs. The high cost of credit provided under this project to rubberwood processors, which had to bear the foreign exchange risk has, however, made many of these enterprises unprofitable. The Bank Group has made no further investment in the rubber sector in China. The Forestry Development project, approved in 1985, was the first Bank-supported forestry project in China. It aimed to accelerate afforestation, improve plantation management in three provinces, and strengthen forestry extension in ten provinces. Plantation targets were exceeded by a wide margin, although afforestation methods employed were costly. Ten timber processing enterprises were established, when only three had been planned. But implementation of the timber processing component was flawed by inadequate preparation and insufficient attention to technical and market feasibilities. Research, extension, and training received inadequate consideration during implementation by the Bank and the Borrower. Important lessons have been learned, however, which appear to be paying off in exceptional performance in subsequent Bank-supported forestry projects. Notably, Bank support for forestry in China has become more focused, the "fast-growing high-yielding" program has been introduced, and technical standards for plantations have been significantly upgraded. The outcome of the Rubber Development project is rated as unsatisfactory, with modest institutional development, and uncertain sustainability. This is a downgrading in the rating assigned when the PCR was reviewed and the project was considered to be satisfactory, with substantial institutional development and likely sustainability. The outcome of the Forestry Development project is rated as satisfactory with modest institutional development. Sustainability at audit is rated as uncertain, below the PCR rating of likely. Attachment 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.  FOR OFFICIAL USE ONLY Contents Preface ............................................................ 3 Basic Data Sheets .................................................... 5 Evaluation Summary .................................................. 9 1. Background .................................................. 15 Rural Reforms ................................................... 15 State Farm s ...................................................... 16 State Forestry Farms ............................................... 16 2. The Projects .................................................. 19 Rubber Development Project (Cr. 1417/SF 005-CHA) ...................... 19 Project Objectives ............................................ 19 Relevance .................................................. 19 Preparation and Appraisal ....................................... 20 Risk Assessment ............................................. 20 Project Issues Prior to Approval ................................... 21 Forestry Development Project (Cr. 1605-CHA) ........................... 22 Project Objectives ............................................... 22 R elevance ..................................................... 22 Preparation and Appraisal ....................................... 23 Risk Assessment ............................................. 23 Project issues Prior to Approval ................................... 24 3. Implementation Experience ....................................... 25 Rubber Development Project ........................................ 25 Plantations..................................................... 25 Joint Ventures with Communes ..................................... 26 Rubber Wood Processing.......................................... 27 Procurement ................................................... 28 Project Oversight ................................................ 29 M onitoring .................................................... 29 Adequacy of Financing ........................................... 29 Supervision .................................................... 29 Training ....................................................... 30 Forestry Development Project ........................................ 31 Research, Training and Extension ................................... 32 Procurement ................................................... 33 Supervision .................................................... 34 This report was prepared by Christopher Gibbs (Task Manager), who audited the project in May/June 1994. Carla Sarmiento and Therese Mackie provided administrative support. This document has a restricted distribution and may be used by recipients only in the performance of their official dutes. Its contents may not otherwise be disclosed wiLhout World Bank authorization. 4. Project Outcomes .................................................. 37 Rubber Development Project ........................................ 37 Self-sufficiency .................................................. 37 Joint V entures .................................................. 38 Rubber W ood Processing .......................................... 38 Internal Rates of Return .......................................... 38 Social Costs of State Farms ........................................ 39 Local Responsibility for Credit Repayment ............................ 39 Adoption of the Project Cycle ...................................... 40 Technical Assistance ............................................. 40 Forestry Development Project ........................................ 40 W ood Processing ................................................ 41 Procurem ent ................................................... 42 Repaying the Credit ............................................... 42 Research and Extension ........................................... 42 Technical Assistance ............................................. 43 Internal Rates of Return .......................................... 43 5. Findings and Issues ............................................... 45 Rubber Development Project ........................................ 45 Forestry Development Project ........................................ 47 Findings and Issues Common to both Projects ............................ 48 Annex A: Supporting Tables ............................................ 51 Annex B: Borrower's Response ......................................... 55 Tables in Text Table 5.1: Comparison of World Chinese Prices for Rubber, 1981-94 ......... .46 Figures in Text Figure 3.1: Rubber Development Project - Time Spent on Preparation and Supervision, days in field ............................... 30 Figure 3.2: Forestry Development Project - Time Spent on Preparation and Supervision, days in field ............................... 35 Tables in Annex Table Al: Rubber Development Project (Cr. 1417/SF 005-CHA), Physical Targets and Achievements ................................. 51 Table A2: Rubber Development Project (Cr. 1417/SF 005-CHA), Project Costs (US$ millions) ............................... 52 Table A3: Forestry Development Project (Cr. 1605-CHA), Physical Targets and Achievements .......................... 53 Table A4: Forestry Development Project (Cr. 1605-CHA), Project Costs (US$ millions) ............................... 54 Maps IBRD 16867R - Rubber Developoment Project (Cr. 1417/SF 005-CHA) IBRD 18611 R - Forestry Development Project (Cr. 1605-CHA) 3 Preface Bank support for agricultural development in China began in 1982. Among the early projects were Rubber Development, for which Credit 1417-CHA and Special Fund 005 were approved in the amount of SDR 94.6 on November 29, 1983; and Forestry Development, for which Credit 1605-CHA in the amount of SDR 47.8 was approved on June 11, 1985. The credit and special fund for Rubber Development were fully disbursed and closed one year behind schedule on May 10, 1991; the credit for Forestry Development was 89 percent disbursed and closed two years behind schedule on December 31, 1991. This Performance Audit Report is based on the Project Completion Reports, Staff Appraisal Reports, loan documents, project files, discussions with Bank staff involved in project design and implementation, and an audit mission to China in May and June 1993. That mission held discussions with relevant officials of the Ministry of Agriculture and Ministry of Forestry in Beijing and the provinces of Heilongjiang, Sichuan, Guangdong, and Hainan, and with the staff and management from a number of state farms and state forestry farms benefitted by these credits. Their full and kind cooperation is gratefully acknowledged. The draft of this report was sent to the Borrower for comments which are incorporated as Annex B.  5 Basic Data Sheet RUBBER DEVELOPMENT PROJECT (CREDrr 1417/SPEcIA FUND 005-CHA) Key Project Data (in US$ million) Appraisal Actual Actual as % of Estimate Appraisal Estimate Project Costs 301.0 218.5 72.5% Loan Amount 100.0 108.1 108.1% Disbursed --- 108.1 Canceled --- --- Economic Rate of Return 17% 8% Institutional Development modest Cumulative Loan Disbursements (in US$ millions) FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 Appraisal 2.0 32.9 59.3 80.2 93.8 100.0 --- --- Actual 2.5 31.8 51.2 58.7 77.5 89.6 104.4 108.1 Actual as of % Estimate 125.0 96.6 86.3 73.2 82.6 89.6 104.4 108.1 Final Disbursement May 10, 1991 Project Timetable Item Date Planned Date Actual Identification 04/08/82 Preparation 10/14/82 Appraisal Mission 03/30/83 Loan/Credit Negotiations 10/11/83 Board Approval 11/29/83 Credit Signature 01/05/84 Credit Effectiveness 04/13/84 Credit Closing 12/31/89 12/31/90 Credit Completion 06/31/89 12/31/90 6 Staff Inputs (in staff weeks) M782 FY83 FY84 FY85 FY86 FY87 P188 FY89 FY90 FF91 FY92 Total Preappraisal 23-5 44.3 67.8 Appraisal 22.9 22.9 Negotiations 20.4 20.4 Supervision 5.6 32.2 15.2 11.6 10.7 7.4 11.2 15.0 4.0 112.9 Other 0.2 3.4 5.9 9.5 TOTAL 23.7 70.6 31.9 32.2 15.2 11.6 10.7 7.4 11.2 15.0 4.0 233.5 Mission Data Project Cycle Month! No. of Days Specialization Performance Types of Year Persons in Represented' Rating Problemsc Field Status. Identification 04/82 2 10 Ec, Ag Ec Preparation/ 10/82 5 20 Ec, Ag Ec(2), Pre-appraisal For, Agr Appraisal 03/83 5 16 Econ, Ag Ec, For, Agr(2) Supervision 1 02/84 2 30 For, Agr 1 Supervision 2 01/85 4 12 Agr Ec, Egr, 1 Rub spec, Pr Off Supervision 3 01/86 3 10 Agr Ec, Rub 1 spec, Pr Off Supervision 4 04/87 4 14 Agr, Egr, Ag 1 Econ Supervision 5 05/88 2 10 Rub spec, Pr Off 1 Supervision 6 10/89 3 11 Rub spec, Pr Off 1 WI spec Supervision 7 10/90 3 7 Rub spec, Pr 2 Proj. Dev. Obj. Off, WI spec Proj. Manag. Perf. Supervision 8/ 06/91 3 10 Rub spec, Pr 1 PCR mission Off, WI spec a. Specialties represented: Agricultural Economist (Ag Ec), Agriculturist (Agr), Economist (Ec), Forester (For), Engineer (Egr), Rubber specialist (Rub spec), Project Officer (Pr Off), Wood Industries specialist (WI spec). b. Performance Status: 1 = Minor or no problem, 2 = Moderate problems, 3 = Major problems. c. Performance of timber complexes was not achieving production potential. 7 FoESmTRY DEVELOPMENT PROJECT (CREDrr 1605-CHA) Key Project Data (in US$ million) Appraisal Actual Actual as % of Estimate Appraisal Estimate Project Costs 135.8 145.8 107.4% Loan Amount 47.3 55.7 117.7% Disbursed --- 55.7 Canceled --- 5.0 Economic Rate of Return 56% 38% Institutional Development modest partial Cumulative Loan Disbursements (in US$ millions) FY86 FY87 FY88 FY89 FY90 FY91 FY92 Appraisal 7.0 21.6 35.6 45.8 47.3 Actual 5.0 8.4 24.8 30.0 48.6 56.2 55.7 Actual as of % Estimate 71.4 38.9 69.7 65.5 102.7 118.8 117.7 Final Disbursement February 1, 1992 Project Timetable Item Date Planned Date Revised Date Actual Identification 3/83 3/83 Preparation 10/83 10/83 Appraisal Mission 9/84 9/84 Negotiations 2/85 4/85 Board Approval 4/85 6/85 Signing Date n/a 9/85 Effective Date n/a 11/85 Closing Date 12/89 12/90 12/91 Completion Date 6/89 6/91 6/91 8 Staff Inputs (in staff weeks) FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 F91 FY92 F93 Total Preappraisal 4.6 82.9 6.9 1.0 95.4 Appraisal 443 443 Negotiations 9.1 9.1 Supervision 5.6 17.8 17.2 8.6 22.1 10.5 13.7 22.8 2.8 121.1 Other 0.5 0.1 7.8 8.4 TOTAL 5.1 83.0 73.7 17.8 17.2 9.6 22.1 10.5 13.7 22.8 2.8 278.3 Mission Data Stage of Month! No. of Days Specialization Performance Types of Project Cycle Year Persons in Represented2 Rating b. Problems Field Identification 03/83 2 9 E, F Preparationc- 08/84 6 27 3F, E, FI, RA Preparationc- 09/84 3 16 F, FR, FE Appraisal 09/84 5 21 E, F, Hl, PO, FN Supervision 1 06/86 3 15 F, PO, FN 2 Technical Supervision 2 06/87 3 20 E, F, PO 2 Technical Supervision 3 07/88 2 5 F, FI 2 Technical Supervision 4 10/88 2 9 E, FI na Technical Supervision 5 03/89 3 17 F, E, FI 2 Technical Supervision 6 10/89 3 11 F, E, Fl 2 Technical Supervision 7 11/90 3 15 F, E, FI 2 Technical Supervision 8 04/91 1 2 E 2 Technical Supervision 9 11/91 3 2 E, F, FI 2 Technical PCR mission 03/92 3 21 E, E, FI a. Specialization: E = Economist, F = Forester, FI = Forest Industries Specialist, PO = Project Officer, FH = Financial Analyst, FR = Forestry Research Specialist, FE - Forestry Education Specialist, RA = Research Assistant b. Performance Rating: 1 - Problem free or minor problems, 2 - Moderate problems, 3 - Major problems. c. Includes FAO/CP staff 9 Evaluation Summary Introduction 1. The People's Republic of China (PRC) assumed China's seat at the World Bank in 1980 and Bank support for agricultural development began shortly thereafter in 1982. Among the early projects approved were Rubber Development (Credit 1417-CHA and Special Fund 005) in 1983 and Forestry Development (Credit 1605-CHA) in 1985. 2. PRC membership in the Bank had been carefully planned, beginning in 1974 when Bank President McNamara stated publicly that a PRC application for membership would be welcomed. Nevertheless, the level of mutual understanding between China and the Bank in the early 1980s was limited. Both parties learned about each other through the implementation of these and other early projects. 3. When Rubber Development was approved, Bank analytical work on China was limited. One unpublished economic report was completed in 1981' and a published report in 1983' included an analysis of agriculture. By then, China was reforming its economy, and the economy was in transition. Agricultural policy development led the way and involved significant liberalization of experimentation. 4. A guiding purpose of Bank support at the time was to help China overcome as quickly as possible the effects of three decades of isolation. It was against this background that the Rubber and Forestry Development Projects were designed and approved: the emergence of the world's most populous country from relative isolation, with a huge rural economy in rapid transition, and a desire by China and the Bank to work together through pragmatic cooperation. Objectives 5. China produced most of its natural rubber in Hainan and coastal Guangdong, areas less climatically favorable than those found in the leading producer countries, being cooler and prone to tropical storms. Rubber Development aimed to raise China's self-sufficiency in natural rubber production by supporting new rubber planting and replanting, spreading improved technologies, and converting rubberwood from a waste product to a timber resource. Expanded use of China's highest yielding clones would raise rubber productivity in areas on the margin of cultivation. But the cost of natural rubber production in China in 1983 was about three times the world price, and the Bank showed poor judgement when it chose to support Rubber Development. 1. Thirty Years of Socialism in China. 2. Socialist Economic Development. 10 6. China was one of the world's poorest countries in terms of forest resources per capita, and Forestry Development aimed to accelerate afforestation, improve plantation management and forestry research in three key forestry provinces-Heilongjiang, Sichuan, and Guangdong-and strengthen forestry extension in ten provinces. At preparation, forest utilization was held back inadequate forest access and equipment, poor planning and management, inadequate processing facilities, and shortages of trained personnel. Implementation Experience 7. Implementation of the plantation component of Rubber Development made good progress from the outset. Devaluation of the yuan made more local currency available than anticipated and project targets in the Staff Appraisal Report (SAR) were increased. However, progress was more quantitative than qualitative. Changes in plantation technology supported by the project were implemented slowly. The spread of higher yielding clones was satisfactory but yields could not be raised to the levels projected in the SAR. Intercropping immature rubber with cash crops proved to be poorly conceived, tree nursery practices to accelerate the onset of tree maturity were not widely adopted and a joint venture component for state farm collaboration to raise productivity on private farms adjacent to state farms was abandoned after one year. 8. Rubberwood timber production and processing was successfully established, but implementation of this component was slow. Slowness stemmed from lack of detailed processing plant designs at project approval, introduction of ambitious plans to expand the rubberwood component incrementally after approval, difficulties with elimination of "blue stain", the symptom of a fungal disease that reduces the value of rubberwood as timber, and oversophisticated equipment choices for sawmills and timber complexes. Slow implementation led to late arrival of equipment, sometimes too late to benefit from Bank supervision at commissioning. 9. Forestry Development exceeded plantation and timber processing targets in the SAR by a wide margin. The area of plantation development achieved was two and one- half times the target set, and fifty percent of the project area was established with fast growing and high yielding varieties. Nevertheless, the afforestation models employed were conservative and costly, reducing their productivity and profitability below achievable levels. 10. Implementation of timber processing under Forestry Development was especially problematical. The component was implemented with insufficient attention to technical and market feasibility studies, and expanded significantly beyond the scope of the SAR after approval. Through this project, Borrower entities gained access to an important new source of capital which they applied with enthusiasm, but with insufficient careful preparation: learning was by doing. 11. Both Rubber and Forestry Development learned Bank procurement procedures slowly and excessive Bank staff time was taken up with procurement issues. Borrower inexperience and a lax approach to implementation discipline by the Bank in the early 11 years of implementation were largely corrected later. In both projects, applied research was poorly designed and executed, and technical assistance was used sparingly. Results 12. Contrary to the findings of the PCR, prepared in 1991, Rubber Development cannot be considered satisfactory. For the plantation component, project economics were unsatisfactory from the start. The SAR appeared satisfactory because projected rubber yields were pitched unreasonably high and the shadow price of labor was set close to zero. During implementation, Bank supervision had to admit that yield projections used in the SAR were too high, and rapid increases in the real cost of labor overwhelmed the assumption about labor's low shadow price. The ERR for rubber production in China, using the best technology, is about 8 percent. For rubberwood processing, the financial rates of return calculated at appraisal and in the PCR were satisfactory, but the devaluation of the yuan has resulted in a foreign exchange burden for state farms that makes the majority of rubberwood processing plants unprofitable. 13. Rubber Development was originally justified on the grounds that rubber production technology would be improved and self-sufficiency increased, economically. Technology has been improved somewhat - new rubber plantings are superior to old - but the potential for China to produce rubber at the levels comparable to Malaysia and Thailand in the mid-1980s never existed because the climate and planting stock are inferior. Improving self-sufficiency in natural rubber production was an economically inefficient objective for China that the Bank should not have supported. 14. Forestry development is rated satisfactory. Performance in tree planting was generally more successful than in wood processing components, although transfer of tree plantation technology was less successful than projected because state forestry farm managers were unwilling at the time to abandon their traditional approaches to seedling production and plantation establishment. Ineffective applied research components failed to convince plantation managers to adopt more cost-effective methods of plantation management. However, half the plantations established employed high-yielding and fast growing species. 15. The timber processing component of Forestry Development was not in an advanced state of preparation at project approval and suffered further during implementation from growth that was disjointed, incremental, and unsupported by financial analysis. The training and research component was neither well prepared nor effectively implemented. The performance of ten Forestry Extension Centers is still unknown because reporting on their activities was negligible and none were supervised by the Bank. 16. Formal institutional development achieved under both projects was modest, but these were projects through which China and the Bank learned a great deal about each others culture, practices and procedures. The long-term pay-off, however, has been greatest in forestry, where three Bank-supported forestry projects have succeeded Forestry Development. The pay-off from Rubber Development has been limited since it is the 12 only Bank-supported project for the sub-sector to date, although the Bank supported other state farm projects. A new project to support state farm commercialization is under preparation, but it is unlikely that it benefitted from the experience of Rubber Development. 17. Sustainability of both projects is rated as uncertain. Rubber and timber plantations supported under the projects are likely to be managed in the future with fewer inputs than they received during implementation for weeding, fertilization, thinning and road maintenance. Investments made in state farm infrastructure will be affected by lack of operating and maintenance funds, squeezed as state farms carry a growing burden of overhead and social costs, and as they attempt to repay the foreign exchange cost of their debt. Investments in timber processing in both projects are also likely to suffer if the facilities supported under the project continue to remain unprofitable. The high cost to the end-users of repaying the Bank debt, denominated in SDR, has already made most timber processing plants unprofitable. Their financial sustainability will depend on the approach taken by Government to repay their debt to the Bank. This was uncertain at audit. Findings and Issues 18. China proposed a state farm rubber development project and the Bank accepted it. The original justification-increasing self-sufficiency in rubber-was weak, but rather than reject or change it, the Bank sought to make it work. But China's climate prevents it from producing rubber competitively with the world's major producers. RDP was prepared as if this comparative disadvantage did not exist, and weaknesses in preparation with respect to economic analysis and realism of objectives eliminated any real chance for project success. 19. The design of Rubber Development was technically flawed and institutionally unimaginative. Technically, the project aimed for production increases which were infeasible: institutionally it sought to reinforce a production system which should have been encouraged to change. Only the joint venture component was forward looking, but the Government was not committed to this at the time and it was abandoned after one year. Rubber Development bolstered the activities of a formerly privileged sector in China-the state farm sector. As such, the project did not contribute to poverty alleviation nor promote the adoption of market reforms. 20. Most of these flaws were pointed out during preparation or at Board discussion. Nevertheless, in its new enthusiasm to work with China, the Bank approved an uneconomic project when it should have rejected it. 21. Forestry Development was satisfactory. While project design was not innovative, it enabled China and the Bank to establish an effective working relationship that has been built upon successfully in subsequent projects. Technology transfer in plantations and wood processing was less successful than anticipated. Adherence to traditional models for afforestation lowered the potential performance of plantations, and incomplete preparation and overly rapid expansion lowered the effectiveness of timber processing. 13 Lack of attention to natural forest lowered the project's potential contribution to resource management. These weaknesses have been corrected in successor forestry projects, however. 22. Bank flexibility in implementation was employed judiciously, but the expansion of wood processing components in both projects was overly rapid and not adequately prepared. Borrower reluctance to use technical assistance contributed to slow and irregular development of wood processing components, which was also interrupted by the events of Tianamen Square in June 1989. The wide geographic dispersion of components in Forestry Development lowered the effectiveness of Bank supervision. 23. China's policies for a) onlending Bank credits and b) devolving repayment responsibilities to end users in hard currency terms, have combined to create substantial foreign exchange debts for local users of project funds who were unaware of, and unable to protect themselves from, foreign exchange risk. Without assistance from higher levels of government, many of these units will be unable to repay their share of these costs, which puts their financial sustainability at risk. Postscript 24. Since this audit was completed, world rubber prices have increased, closing the gap between world prices and China's domestic prices and raising the long-term economic price forecast by about 20 percent. Costs too have risen substantially. Thus, the ERR of the rubber plantation component if recalculated in mid-1995 might be higher than the rate calculated at audit, possibly above the Bank's usual guideline.  15 1. Background 1.1 The PRC claimed China's seat at the World Bank in 1980 and the first Bank- supported project in China was approved in 1981. Since then, Bank support for development in China has grown rapidly to exceed US$20.0 billion by the end of 1994, including more than US$5.0 billion for agriculture and rural development. In just over ten years, China became the Bank's largest single borrower. 1.2 The first Bank-supported projects in China were identified without the benefit of published economic or sector work. The Bank's first, unpublished economic report on China, "Thirty Years of Socialism in China," was shared with the Government in 1981. The Rubber Development Project (RDP), (Cr. 1417/SF 005), was identified and prepared before the Bank's first published report, "Socialist Economic Development," was issued in 1983.' 1.3 "Socialist Economic Development" included an analysis of Chinese agriculture, which concluded that there were three main areas for Bank support within China's existing five-year plan: expansion of agricultural credit; provision of large scheme expenditure (for land reclamation, water conservancy, fertilizer production, mechanization, and transportation improvements); and human resource development. The Forestry Development Project (FDP), (Cr. 1605-CHA) was appraised after "Socialist Economic Development" was completed. Rural Reforms 1.4 Chinese agriculture had been collectivized in 1955-56 by the formation of producers' cooperatives. Crop production was a collective activity where income was determined at the end of the year by dividing the cooperative's crop income by the number of work points accumulated by individuals. Despite the upheavals of the Great Leap Forward (1958-59) and the Cultural Revolution (1966-76), this system remained largely intact until after the death of Mao Zedong in 1976. 1.5 Formal five-year plans and annual plans were drawn up at the national and provincial levels to guide the economy throughout the 1960s and 1970s. Prices were set by the bureaucracy, and the level of savings and investment outside the rural sector was determined by the state budget. Agricultural planning was based on physical input and output targets. By the early 1960s, these decisions were decentralized to the provincial and county levels. Trade between provinces was analogous to international trade. 3. University Development Project, (Ln. 2021/Cr. 1167). 4. The first seven Bank-supported agriculture projects in China were North China Plain Agriculture (Cr. 1216-CHA); Heilongjiang Land Reclamation (Cr. 1347-CHA/Ln. 2261-CHA); Rural Credit (Cr. 1462-CHA); Rubber Development (Cr. 1417/SF005); Seeds (Cr. 1577-CHA); Agricultural Research II (Cr. 1516-CHA); Forestry Development (CR. 1605-CHA). 16 1.6 Chinese peasants began to experiment with rural reforms in 1978. Under the rubric of "the production responsibility system," rural reforms began to be formally adopted in 1980. Reforms were intended to relate rewards more closely to efforts; allow diversification and specialization of production to reflect resource availability and local conditions; encourage decentralization of development planning and marketing; and, expand international trade. State Farms 1.7 The Rubber Development Project (RDP) supported state farms. In 1983, state farms were administered by the Central General Bureau of State Farms and Land Reclamation (CGB) within the Ministry of Agriculture, Animal Husbandry and Fisheries (MAAF) and its Provincial General Bureaus (PGBs). State farms predated the founding of the PRC. Having been established to feed the revolutionary army, state farms became an important source of employment for former soldiers after the revolution. Often located in China's border regions, state farms performed a strategic security function as well as producing agricultural products for cities and rural food-deficit areas. State farms shipped an average 35 percent of their production to the state, in contrast with 15 percent from the collective sector. 1.8 In 1983, when RDP was approved, China had about 2,100 state farms covering 29 million ha, with 4.5 million ha under cultivation. The uncultivated area was in grassland or forest, or was land with limited potential for agriculture. Ninety-five percent of China's domestically produced natural rubber came from 170 state farms, most of which were located on Hainan Island in Guangdong Province.' 1.9 The population of state farms in 1980 was 11.4 million, including 5 million workers. Because state farms were largely self-sufficient economic units operating in poorly developed regions, they were required to finance, operate and maintain a full array of social services for their workers (education, health, and old age security) and to provide their own essential infrastructure (housing, transportation, communications, and power). State Forestry Farms 1.10 China's 3,900 state forestry farms (SFFs) belonged to the Ministry of Forestry (MFO). The MFO had been re-established in 1978 as a separate ministry in an effort to emphasize forestry development. In 1985, SFFs managed more than 46 million ha of land, of which 26 million ha was forest. Most of the nonforested land was deemed suitable for forest development. SFFs employed about 500,000 people and accounted for 10 percent of China's standing volume of timber, 21 percent of the total forested area, and 25 percent of the area under forest plantations. With the introduction of the production responsibility system, rural people were to be encouraged by SFFs to plant trees on barren or sparsely forested lands. Ownership of newly planted trees would become the property of the people who planted them, while the land would remain the property of the state. 5. In 1983, Hainan was part of Guangdong Province, but in 1988 it became a province. 17 1.11 RDP and FDP are examples of early Bank-supported development projects in China. They were prepared, appraised and negotiated when China's agriculture sector was reforming and when the Bank's relationship with China was new. After 1985, Bank lending to China accelerated, based on the experience gained through projects like these.  19 2. The Projects Rubber Development Project (Cr. 1417/SF 005-CIA) 2.1 The rubber tree (Hevea brasiliensis) was introduced into China in 1904, but production of natural expanded slowly, reaching only 200 tons annually by 1949. Extensive planting of rubber began in 1952 on Hainan Island and in Zhangjiang Prefecture of Guangdong Province. Most early rubber planting used low-grade planting materials, and improved clones were used extensively only after 1967. By 1981, China's rubber area totalled 410,000 ha, including 320,000 ha on state farms, mostly in Guangdong Province. Virtually all the rubber planted outside state farms was unimproved. 2.2 China grows rubber in a region between 18 and 24 degrees north of the equator, beyond the latitudes favored by the major producers. Many growing areas in Hainan and on the mainland coast are also subject to typhoons, and some mainland production areas are subject to low temperatures. China has attempted to combat these climatic disadvantages by the use of windbreaks, cultural practices, and breeding programs to develop cold-tolerance. But China's natural rubber industry remained isolated for three decades between the 1950s and 1980s. An inferior climate and isolation resulted in lower yields in China which averaged 670 kg per tapped ha in 1981, about half the yield of leading producers, such as Malaysia, with 1,200 kg per tapped ha. Project Objectives 2.3 By the early 1980s, China was dependent on imports for about 50 percent of its rubber consumption (natural plus synthetic), and the Government's main objective of RDP was to reduce this dependence by increasing the production of natural rubber through new planting and replanting. A related objective was to improve the efficiency of China's rubber industry, by spreading the use of high-yielding planting materials which were already widely grown in the region, and to test a smaller number of promising new materials which were already grown less extensively. A secondary objective was to establish rubber wood processing as an industry. Project components included plantations, timber factories, transport and communications, schools, clinics, housing, research facilities, and electric power. RDP was comparable to a rural development project, but located on state farms. RDP's main targets and achievements are summarized in Table Al. Proposed and actual costs are summarized in Table A2. Relevance 2.4 The Bank's stated objectives for agricultural development in China were: to remove manpower, energy, infrastructure, and transportation constraints; to improve efficiency through better project planning and analysis; and, to reduce poverty by raising incomes in the poorest regions. RDP's 1982 Project Brief recognized, however, that China had three main objectives for its agriculture sector: to increase production of food and industrial crops; to expand rural employment; and, to minimize the use of foreign 20 exchange for the purchase of food and agricultural products. RDP, therefore, responded more directly to the expressed needs of China than to the Bank's initial sector strategy. The Bank accepted the Government's proposal for a rubber development project uncritically, and put itself in the position of justifying it. Preparation and Appraisal 2.5 RDP was prepared by the Guangdong PGB based on plans already made as part of the state planning process. The PRC's Five Year Plan for 1981-86 proposed to expand state farm land development, including 60,000 ha of new tree crops. The Bank's contributions mainly took the form of technical improvements, including: adjustments in the mix of clones planted to alleviate climatic limitations; reductions in fertilizer use to reduce nutrient costs; wider spacing of windbreaks to increase timber production; expanded research and trials on rubber and windbreaks; improvements to rubber wood treatment and processing facilities; expansion of intercropping during rubber's immature stage; and strengthening of training for staff and workers. These adjustments were all well aimed, but they affected important project "details" more than "fundamentals." Throughout project preparation the Bank did not question seriously the overall soundness of the Borrower's proposal. 2.6 A Bank tree crop specialist put the issue most clearly when the Project Brief was discussed in July 1982, saying that he liked the brief but not the project.' The objections were that China's domestic rubber price was between two and three times the world market price; the wage rates of commune workers were twice the general wage rate; and, the project did not support individual entrepreneurship, which was blossoming elsewhere in China. Project viability appeared to hinge on the economic price of labor. Finally, was rubber the right crop? While it might be appropriate for the hills, it was not the best bet for flat land, and the project should be ranked low on impact, efficiency and distributional grounds. The specialist concluded "this being said, I realize that the Bank may not be influential enough in China to select projects in an optimal fashion." Risk Assessment 2.7 The SAR stated that RDP faced no major technical or organizational risks. During preparation, however, the Bank recognized the low productivity of rubber on communes adjacent to state farms.' Project design was, subsequently, modified to include a joint venture component to improve rubber production on communes. This component, promoted by the Bank, had no precedent in China, and a long-standing antipathy between state farms and communes was acknowledged. State rubber farms felt that they were opening up new lands for high priority production, while the best lands-lowlands suited to rice production-were given to the communes. Communes saw state farms as "outsiders" who encroached on village lands and rewarded their workers with above- average wages. The addition of the joint venture component made the project more 6. World Bank Office Memorandum, July 26, 1982. 7. Commune rubber yields averaged only 106 kg per planted ha. 21 innovative but also more complex, and the risk of the joint venture component failing, however, was not properly identified when the strength of this antipathy was underestimated. 2.8 At appraisal, the project focused on expanding rubber plantations through planting and replanting. Upgrading of sawmills and establishment of a timber complex to utilize old rubber trees were of secondary importance. During negotiations, however, based on an FAO investigation, the Bank agreed to include a second timber complex, and during implementation the Bank agreed further to expand the wood processing component. Rubber wood processing, however, was in its infancy and the SAR correctly identified the PGB's lack of industrial experience-described as "less than extensive"-as a risk. Project Issues Prior to Approval 2.9 Several issues were raised by Bank management during preparation and appraisal, and by the Board at approval. The President's Report of the Rubber Development Project was criticized by the Board for lack of policy content. First, the project took a one-shot approach to rubber development, since no future operations in the sub-sector were anticipated at the time. Second, the domestic price of rubber in China was almost three times higher than the world price,' and the project contained no mechanisms to lower the domestic price.' Third, the project was to be implemented in a privileged sector of the rural economy - the state farm sector, where workers' remuneration was almost twice the average - and made no contribution to poverty alleviation. Fourth, as China's rural economy was opening up to market forces, RDP tended to reinforce the planned economy and the "iron rice bowl." Fifth, the project included US$45.0 million for buildings and utilities, including US$34.1 million to house state farm employees. Finally, RDP required US$100 million of IDA resources, and the Board asked why these resources should be allocated to a project which did little to advance the development process through policy or institutional change. 2.10 Bank staff responded that domestic rubber prices were high but were justified by the need to compensate people living on China's borders and to pay for social services to workers. Furthermore, Bank staff claimed that, despite the differences between the domestic and world prices, RDP was economically viableo and offered an important entry point to China: opposing Chinese preferences at this early stage would be counterproductive for China-Bank relations. Staff expected modest future lending to the state farm sector, but opposition to RDP would undermine the ongoing broader sectoral 8. In 1983, state farms received an average price of Y6,090 per metric ton, when the cost of a ton of imported rubber delivered to Guangzhou was equivalent to only Y2,132. 9. The project did require a study be completed to identify how the price of rubber, and the cost of rubber production, might be reduced. Project files do not indicate if this study was completed. 10. The average wage rate on state farms in 1982 was Y3.0 per day. Based on experience in North China Plain and Hebei, Bank analysts argued in April 1982 that the shadow wage rate of the project should be zero, because of the existence of surplus labor. A shadow wage of YO.5 per day was agreed for the base case analysis in the SAR. Since labor accounted for more than half the total cost of rubber production, this assumption alone had a major influence on the internal economic rate of return estimated in the SAR at 17 percent. 22 dialogue.' State farms were competently managed and able to work with the Bank, and the strong rationale for RDP was technology transfer, to help China overcome its isolation from the rest of the rubber producing world. Forestry Development Project (Cr. 1605-CIIA) 2.11 When China requested Bank support for forestry development in 1982, forests in China covered about 120 million ha, placing it sixth in the world in terms of total forest reserves. Almost one-half of China's forest was concentrated in five provinces: Heilongjiang, Yunnan, Jilin, Guangdong, and Sichuan. Heilongjiang alone accounted for 24 percent of China's forests. But China had only 0.13 ha of forest per person, making it one of the poorest countries in terms of forest resources per capita. Since the 1949 revolution, more than 86 million ha of forest had been planted, but only an estimated one- third of the planting survived. A high proportion of China's forest was mature. 2.12 China's forestry strategy in 1982 emphasized increasing timber supplies from intensive plantations; exploitation of mature and over-mature forest stands; expansion of forest industries; and strengthening forest research, education, and extension. At project preparation, forest utilization was held back by lack of forest access and equipment; poor planning and forest management; inadequate wood processing facilities; outmoded equipment; and shortages of trained technical and managerial staff. Project Objectives 2.13 FDP was designed to accelerate afforestation and improve management of existing forest plantations on 92 SFFs in three key provinces: Guangdong, Heilongjiang, and Sichuan. The project aimed to establish 82,000 ha of forest plantations on land that was mainly barren, and improve 122,000 ha of established plantations. In addition, roads would be upgraded, new equipment procured, buildings and communications expanded and improved, forestry research and extension strengthened, and overseas training and technical assistance provided. FDP's main targets and achievements are summarized in Table A3. Proposed and actual costs are summarized in Table A4. Relevance 2.14 At project preparation, the PRC gave high priority to forestry. Government plans called for China's forests to be increased by 20 percent by the year 2000, an increase of 60 million ha. Real production increases were to be kept small, however, coming from modest growth in utilization of mature forest and intensive management of 200,000 ha of plantation. Expanding demand for raw material for wood processing would be met by transferring timber previously used by communes to industrial users. Despite questions raised by Bank forestry experts, this strategy was accepted and FDP was prepared consistent with China's prevailing plans for the sector. 11. World Bank Office Memorandum, June 3, 1983. 23 2.15 Despite the progress of rural reforms, the project chose not to promote forestry on emerging private farms. This opportunity was not taken because it was inconsistent with the State Farms' mandate. Instead, the Bank chose to become familiar with China's forestry and forestry institutions before attempting to influence its agenda. China, for its part, made it clear that efforts to influence its forestry policy through projects were not welcome, and that it retained full responsibility for policy development and the pace of change. During implementation, however, emphasis in China's forest sector policy began to shift from tree planting, forest exploitation and factory expansion towards improved sector planning, enhanced forest productivity, and increased efficiency in wood processing through reform of state-owned enterprises. By the time the Bank's second forestry project was approved, China's forest sector strategy had evolved considerably with Bank's support. Preparation and Appraisal 2.16 The project was identified and prepared by FAO/CP, drawing on the afforestation models traditionally used by the MFO in the provinces for species selection, planting arrangements and densities, weeding and seedling tending, fertilization, and thinning. Project design was straightforward, addressing the need to close China's wood deficit directly. The Bank recognized that China lacked regional strategies for efficient integration of forest industries, i.e., strategies which managed exploitation of plantations and natural forest jointly, and strategies to ensure that all wood fiber harvested was used efficiently and profitably. But the Bank did not insist on preparation of regional strategies as preconditions to, or a parts of, FDP.12 Such strategies would be needed, however, if China was to emulate the success of the world's more efficient forest industries. 2.17 Preparation of a sector strategy was also recommended because of pricing issues, with low prices for raw materials and high prices for forest products, which undervalued the resource and provided high profits for the state." Timber hauling costs were also far below economic levels and, most importantly, domestic timber prices were well below world prices. A sector strategy was also recommended because FDP was intended to be the first of several projects for China's forest sector. But its inclusion could not be agreed. China successfully argued that a round of timber price increases was expected in 1986 and parity with world prices was expected to be achieved by 1990. Risk Assessment 2.18 The SAR foresaw no special risks. SFFs were viewed as well managed entities, and the risks associated with new timber processing enterprises would be manageable because of prior experience of wood processing. Utilization of small-diameter timber from densely-planted, intensive plantations was not seen to be significant issue, although this problem had challenged most major timber producers before they learned how to cope profitably. This issue was especially relevant to Heilongjiang, with its harsh winter and short growing season. Bank staff claimed that equipment suppliers and technical 12. World Bank Office Memorandum, June 3, 1983. 13. World Bank Office Memorandum, September 9, 1984. 24 assistance would keep risks associated with industrial technology transfer within reasonable bounds. Project Issues Pior to Approval 2.19 Four significant issues raised by Bank management prior to approval were the lack of a forest sector strategy; the lack of regional forest management plans to relate resource availability to utilization; the absence of a component for forestry on former collectives; and the underpricing of wood. Bank staff responded that China was so large, and arrangements between the center and the provinces so complex, that a single sector strategy was unlikely to be useful: China should be treated as an exceptional case. The need for regional management plans was appreciated, but it was preferable to build a relationship with the Borrower before imposing conditions: regional plans could be formalized later." Bank staff also claimed that since FDP's main aim was to boost timber resources, working with state forestry farms was sufficient. Finally, with respect timber pricing, China was unwilling to accept attachment of policy conditionality to project loans and because Chinese timber prices were rising, the gap between domestic and world prices would be narrowed. 14. Regional forest sector studies were completed in subsequent Bank-supported forestry projects in China. 25 3. Implementation Experience Rubber Development Project 3.1 RDP was approved in November 1983, became effective in April 1984 and closed in December 1990. The credit was fully disbursed and there were no cancellations. The project was extended in 1989 for one year to permit completion of the wood processing component which had started slowly. This extension, combined with the devaluation of the yuan, also allowed areas of rubber planting and windbreaks to be expanded beyond the original targets by 31 percent and 34 percent, respectively. Plantations 3.2 Implementation of the plantation component made good progress from the outset thanks to competent state farm management, the introduction of incentive systems to encourage state farm production brigades, and expansion of the number of participating state farms from 40 to 65. But improvements to plantation technology urged by the Bank, progressed only slowly and the promotion of higher yielding clones languished. 3.3 After six years of implementation, fewer than 2 percent of the clones planted under the project in Hainan were selected, high yielding clones, in contrast to the 40 percent target proposed in the SAR. On the Guangdong mainland, higher yielding clones filled 44 percent of the area planted under the project (in contrast to 55 percent proposed in the SAR), but this was due mainly to the lower risk of typhoons in the sites chosen." State farm managers in climatically risky areas were reluctant to replace traditional clones despite their known susceptibility to wind damage and disease, or to change plantation management practices radically. Labor inputs remained high compared to other rubber producing countries, as did the thoroughness of land clearing that preceded rubber tree planting and the level of fertilizer applied. Efforts to improve plantation productivity under RDP met a limited response. 3.4 Ambitious productivity gains projected in the SAR, which had not been questioned during preparation, were criticized as unrealistic during implementation. But it was not until 1989 that the Bank stated formally that SAR yield targets were unlikely to be achieved and should be scaled back, probably by 25 percent."' The project had aimed to achieve rubber yields comparable to those achieved at the time in Thailand and Malaysia, but climatic conditions in southern China and the potential of the clones would not permit this. While the risk analysis of the SAR analyzed the effects of a 20 percent yield reduction, the base case analyzed in the SAR did not represent a feasible goal. 15. Rubber tree planting and replanting under the project occupied 43,498 ha on Hainan (83 percent by area) and 8,856 ha in Guangdong (17 percent by area). 16. World Bank Office Memorandum, January 13, 1989. 26 3.5 Nursery practices were also slow to change. Most seedlings planted were bare-root stock, taking up to two years longer to mature than the young, green-budded seedlings recommended in the SAR. Because of this, the SAR prospect of trees reaching tapping maturity in seven years could not be met. Field trials of new rubber clones and improved management practices were neither well designed nor well executed, and did not convince farm managers to modify their traditional approaches. Bank advice to plant windbreaks at lower densities and with new species to raise the economic value of the windbreak timber was not generally accepted. 3.6 Intercropping of immature rubber with economic crops-such as pineapple, sugar cane-for up three years, as proposed in the SAR, proved generally ineffective. On an exceptional basis, the Bank had approved intercropping of tea and coffee, but these also performed poorly, as should have been predicted: the rubber tree canopy closed over the coffee and tea bushes before the intercrops could become productive. Allowing tea and coffee to mature would also have created competition for the rubber. The proposed intercrops also required new investments in processing, and prices for these commodities were not attractive. 3.7 State farm managers, instead, planted rubber trees at higher densities than recommended in the SAR, and green manure crops between the immature trees. The intercropping that did take place was by state farm workers, who kept the harvest as a part of their income, rather than contributing to the income of the state farm. The net effect was to eliminate a small but significant contribution to state farm revenues in the early years of the project, and to raise further the income of state farm workers. 3.8 Labor costs, already higher on state farms than on former communes, rose sharply after start-up of implementation. Rural wages rose in response to competition from new industries which developed quickly on the Guangdong coast from the early 1980s, and in Hainan after the island achieved provincial status in 1988. Underemployed rural labor was plentiful when RDP was appraised, but the rising demand for urban labor helped to drive up rural wage rates. The new generation of family farmers also began to improve their incomes, invalidating the SAR's very low opportunity cost of labor assumption. Joint Ventures with Communes 3.9 The joint venture component between state farms and neighboring communes failed to take off and was abandoned after one year. This component had been promoted by the Bank and accepted by the Borrower, but with limited commitment. By 1985, rural reforms had spread throughout most of China; state farms-which still employed cradle-to- grave social systems-found it difficult to cooperate with villages-which had adopted the production responsibility system. Village farmers expected better returns than cooperation with state farms was likely to offer. In addition, many communes operated land which was adjacent to state farms, and frequent land disputes made cooperation uneasy. 3.10 In 1985, a new policy allowed SFs to absorb neighboring former communes when their lands were closely intermingled. As a result, state farms in Guangdong acquired responsibility for an additional 13,300 ha and 100,000 people. Instead of state farms 27 promoting improved rubber production by village farmers, the state farm sector became larger and more villagers acquired the benefits and privileges of state farm employees. Rubber Wood Processing 3.11 In contrast to tree planting, implementation of timber processing was slow. Rubber wood utilization was a new enterprise, and rubber wood processing posed technical challenges which needed disciplined management to overcome. Freshly sawn rubber wood becomes quickly marked with "blue stain," the symptom of a fungal disease, if not treated and dried within three days of sawing, reducing its value as timber. Much of the challenge presented in transforming rubber wood from a waste product to a resource, lay in eliminating blue stain. In addition, highly mechanized sawmills were new to South China, where sawing had previously been undertaken with small, hand-fed mills. 3.12 Rubber wood marketing was also new, requiring enterprising salespeople and strict attention to product quality if it was to succeed. This was especially important for furniture and components, and for export markets. Above all, rubber wood processing was an infant industry in the hands of state farm managers whose prior experience was in primary production within a planned economy. State farm managers had little experience of industrial processing, product design, and marketing. 3.13 Early delays in implementation resulted from the lack of detailed designs for sawmill upgrading and timber complex development at approval, contrary to Bank policy." Slow provision of counterpart funds added to the delays. Late completion of design work led to late approval of expenditures and even later delivery. Delays continued throughout implementation, contributing to the need for project extension. More than one third of project funds were disbursed in RDP's final two years. A considerable amount of wood processing equipment was delivered or installed after project completion, preventing the Bank from assisting with start-up activities through supervision of implementation assistance. 3.14 Despite the slow start of the timber processing component, proposals were made for an additional timber complex within a year of loan effectiveness. Devaluation of the yuan made more local currency available than anticipated and numerous additions to the project were sought and approved. In consequence, the size of the wood processing component rose from 3 percent of project costs (US$11.4 million) at appraisal to 22 percent of actual project costs (US$47.3 million). More importantly, wood processing grew incrementally and Bank staff were drawn into approving individual items of equipment, rather than assessing the worth of a plant or product line as a whole. Finally, delivery of wood processing machinery and equipment and machinery was poorly coordinated, causing delays in installation and commissioning. 17. (Operations Manual Statement) OMS 2.28 of October 1978 requires engineering and other preparation work to have progressed "sufficiently" prior to Board presentation to permit selection of the process and begin tendering for major part of the equipment for complex industrial projects. 28 Procurement 3.15 Important items of equipment purchased under the project were over-specified, and a number of costly mistakes were made. Sawmill equipment procured under international competitive bidding (ICB) was too large for the wood to be sawn and too costly for mills to maintain. Local saw doctors were unable to maintain the sharpness of hardened steel saws and replacements could not be manufactured domestically. Five saws imported by the Sanya, Hainan particle board plant at a cost of US$2.5 million proved impractical and were abandoned. Sawing at Sanya was eventually turned over to small sawmills close to the plantations where the rubber wood originated. Saws imported for Xilian State Farm at a cost of US$1.27 million were also dismantled early and offered for sale. Sawing in Xilian became the responsibility of many small, private sawyers who set up low-cost band-saw operations in the shadow of the Xilian complex and sawed rubber wood on a piece rate basis for the factory. 3.16 Xilian procured five computerized wood drying kilns under ICB at a cost of US$600,000. The Bank recommended air-drying rubber wood before drying in the kilns to lower the amount of moisture to be removed by the kilns. But the state farm was not prepared to do this, preferring to install a greater kiln drying capacity than planned: expanded drying capacity was a substitute for a well coordinated flow of wood. The original kilns were, therefore, augmented by simpler kilns purchased from Taiwan for US$80,000, in a barter trade for rubber wood. The Taiwanese kilns, in turn, were copied by the state farm itself using local materials, at a cost of US$30,000. Kiln capacity was doubled at less than one-fifth the cost of the equipment supplied under FDP, leaving Xilian's management overwhelmed at the high cost of the original equipment. 3.17 Other equipment procured under ICB is already idle because it proved to be too sophisticated, too costly to run, or required expensive replacement parts which had to purchased with scarce foreign exchange. Examples include European sanding machines in Xilian which treat 4 x 8 foot sheets of rubber wood plywood. Because the quality of unsanded boards is uneven, the machine either rejects them or the boards damage the sanding belts, which have to be replaced with new, imported belts. The factory overcomes this problem by using the sanding machine sparingly, and finishing most boards with hand- held electric belt sanders. Some equipment procured under the project has already been sold to factories in other parts of China because it was inappropriate for its original purpose. 3.18 Responsibility for inappropriate equipment choices was shared. Unfamiliarity with the raw material led the domestic designers of rubber wood processing plants to build mismatches into production lines. The Bank urged sophisticated alternatives, believing they would contribute to a technical leap forward. Chinese officials overseeing the importation of foreign-sourced equipment also restricted the choices of SF managers in order to standardize purchases and reduce foreign exchange costs. State farm managers ordered equipment they were unfamiliar with, and because they were unable to control for raw material quality, excessive stress was placed on some machinery and equipment procured. Some overseas suppliers of machinery and equipment failed to supply necessary back-up during installation and commissioning. The events of Tianamen Square, in June 29 1989, led to most foreign technicians leaving China for one year or more, interrupting equipment installation and adding to delays. Project Oversight 3.19 The project was designed to be implemented by the Guangdong PGB, with oversight by the Central General Bureau (CGB). Project management was competent, and 11 documents outlining procedures for implementation were prepared. Six hundred training sessions were provided in 70 different state farm offices in many aspects of project management, from silviculture to office management and computing. In 1988, Hainan achieved the status of a province and responsibility for most of the project was placed in the hands of the new Hainan PGB, but this change had little negative effect on the efficiency of project implementation. Monitoring 3.20 State farms in Guangdong had a well-developed monitoring system in place before the project was approved. This system provided technical and financial information at all administrative levels. In addition, a Project Management Office (PMO) was established which prepared six-monthly reports on progress to the Bank. The performance of this system was uneven: planting programs were reported on more successfully than timber processing developments. Difficulties in implementation were not highlighted early, resulting in late interventions to resolve them. 3.21 Monitoring of plantation development by PMOs was competent, but the absence of useful research findings meant that guidance to improve plantation management was not available. Under the circumstances, plantation managers responded by sticking to familiar approaches. Formal monitoring of wood processing industries took place during supervision missions when specialist Bank consultants monitored procurement, plant commissioning, and operations. The fundamental task of developing a profitable wood industry based on small-diameter timber was never explicitly addressed. Adequacy of Financing 3.22 While implementation of RDP was extended, between 7 to 9 years are required before new rubber trees can be tapped to produce an income stream. The RDP did not finance new rubber planting to maturity and, since project completion, local funds have been insufficient to maintain the standard of tending kept during implementation. Tending costs were not offset by earnings from intercropping, as proposed in the SAR. Supervision 3.23 Bank supervision was provided annually and well supported, with a total of 7 missions between 1984 and 1991, plus a PCR mission. Time spent in preparation dwarfed time spent in supervision (see Figure 3.1). Supervision missions comprised 2 to 4 people, and remained in the field for 7 to 14 days. The value of Bank supervision was acknowledged by SF managers. Only once, in 1990, was project performance rated less 30 than trouble-free when problems in timber complexes development were formally acknowledged. These problems had been observed frequently by supervision missions starting in 1984, but not until 1990 were they recorded as more than minor. A 1989 supervision report noted numerous shortcomings in timber processing, but it concluded that their significance was minor. The final supervision report noted that "miraculously, all (timber processing) was well,"" suggesting that earlier criticisms were either unwarranted or had been corrected. But the improved performance of rubberwood processing in 1990 was not well explained. Figure 3.1: Rubber Development Project - Time Spent on Preparation and Supervision, days in field 140 120- 10 100- a 60- M 40- 20 0 82 83 84 85 86 87 88 89 90 91 Fiscal Year r Preparation M Supervision S PCR Mission Training 3.24 RDP included a large training program. More than 500,000 days of training were proposed in the SAR and more than 445,000 days of training were completed. Training ranged from on-the-job training of state farm workers to management training of senior staff. EDI cooperated with the PGB to develop a course for 400 senior PGB staff at the Guangdong Agricultural Reclamation Cadre College, serving China's eight southern provinces. Nine and one-half months of management consultancy and training were also provided in the final year of the project that included travel to rubber producing areas of Malaysia. State farm managers who participated in this training acknowledge its value in exposing them to plantation practices in Malaysia, but note the financial cost was high, adding to the project's debt. 18. PCR Mission Report, June 1991. 31 Forestry Development Project 3.25 FDP was approved in June 1985 in the amount of SDR 47.8 million (US$47.3 million) and the credit was closed in December 1991, two years behind schedule. The credit was 89 percent disbursed and SDR 5.1 million (US$7.0 million) was canceled. However, to have implemented the appraised project within the original time frame should have been recognized at the outset as unrealistic, given the newness of China's membership in the Bank and the number of components that were not designed in detail at approval. The addition of new wood industry components during implementation delayed implementation further. 3.26 The MFO implemented FDP through its provincial bureaus in Guangdong, Heilongjiang, and Sichuan. But the project was administered through two separate PMOs: one for the plantations and wood processing and another for forest research, training and extension. The MFO referred to these as Parts A and B, respectively. This arrangement, however, was not useful. The two parts were not mutually supportive by design and the administrative arrangements ensured that effective integration was never achieved. Recognizing that research results and training should affect future more than current operations, they had a negligible impact on the performance of afforestation and wood processing during implementation. 3.27 FDP exceeded its planned physical targets by a wide margin. The establishment of new plantations exceeded the target set in the SAR by two and one-half times, although the afforestation models (species selection, planting density, weeding frequency, fertilization rate, and thinning) used were largely traditional and conservative. The number of wood processing factories established was more than three times the target, and the volume of vehicle and equipment procurement was twice the target. These increases were made possible by the devaluation of the yuan, which created the equivalent of an additional US$17.0 million in available financing, and the corresponding provision of more counterpart funding than projected. 3.28 Roads constructed under the project opened up important new areas for management that were previously accessible only by foot. But the Bank and the Borrower could not agree on how forest road maintenance should be carried out. Forest roads were capable of being quickly damaged by rain, requiring rapid attention before being subjected to heavy use. The approved project made provision for purchase of heavy machinery to construct and maintain forest roads, but the Borrower preferred hand labor. The Bank maintained that machinery was superior on technical and economic grounds, especially when speed was important. Bank supervision missions regularly reported that the frequency of road maintenance was inadequate, being performed only once annually rather than twice. But despite increasing real labor costs, SFFs continued to prefer manual labor, and the level of road maintenance was generally satisfactory. 3.29 Implementation of the wood processing component proved the most problematical. The wood processing component grew rapidly beyond its planned scope, but without the benefit of sound feasibility studies. The unexpected availability of additional yuan prompted SFFs to develop plans for seven additional wood processing factories within 21 32 months of project approval. The intent of this expansion was appropriate, but the means of its accomplishment were less than adequate. The preparation of individual proposals was less rigorous than it should have been and market analysis was minimal. 3.30 FDP provided a large injection of new capital into forestry in the project areas. Hongya, an important timber base in Sichuan Province, is typical. Project investment was three times the total investment of the previous 28 years. Those receiving the credits had previously been starved of capital and were willing to mobilize local counterpart funds, including borrowed funds to maximize their access to FDP credits, confident that they would be able to repay the credits out of income when repayment was due. But the quality of economic and financial analysis of additions to the project was low. Acquisition of capital equipment was mainly justified on technical grounds alone. 3.31 Project implementation also coincided with sharp increases in the general level of prices in China. Inflation, which had risen by about 3 percent annually between 1982 and 1987, took off at rates between 10 and 28 percent between 1987 and 1991, and many of the cost estimates used in the SAR proved to be low. Rural labor costs, in particular, rose quickly from Y2.5/day at appraisal to about Y8.0/day, and as much as Y15.0/day in parts of Guangdong at the PCR stage. The assumption that large pools of unemployed and underemployed rural labor would hold down wage rates proved invalid. Increases in labor and other costs raised the costs of plantation establishment and road construction throughout the implementation. Supervision reports show that average plantation costs almost doubled from Y475.0/ha in 1985 to Y908.0/ha in 1989, a real increase of 30 percent, with comparable increases for forest road construction costs. 3.32 Inflation partly offset the benefit of a devaluing yuan. But as it became clear that more yuan would be available than planned, the MFO requested that the projects be expanded. Every effort was made at the local level to use as much of the available Bank credit as possible. The Bank agreed twice to revise the project and twice to extend it. But scarcity of counterpart funds became a problem for the Borrower. To obviate this, the Bank agreed retroactively to raise disbursement percentages for plantations (from 49 percent to 65 percent), and forest roads (from 25 percent to 65 percent). At completion, the MFO had used 67 percent more counterpart funds than were expected at approval. Research, Training and Extension 3.33 Research, training, and extension were implemented slowly. This was appropriate because the component was prepared only in outline at approval. However, this component-Part B-never fully recovered from incomplete preparation and a slow start nor from its administrative separation from afforestation and wood processing. Bank supervision allocated few staff resources to Part B, and was unable to compensate for the weaknesses in preparation. Although Part B accounted for 20 percent of Bank support for FDP at appraisal, it did not receive a corresponding level of Bank supervision. 3.34 Training was mainly intended to prepare staff for forestry research and extension, but slow progress in training held back progress in other areas, especially in the four research centers. Slow progress resulted from incomplete preparation, but the events in 33 Tianamen Square in June 1989 provided a further impediment, when some students overseas chose not to return home. After Tianamen Square, Government willingness to support overseas training fell. Bank approval of both project extensions was aimed in part to provide time to complete FDP training, but the Government was cautious. For example, in October 1990 the Bank was informed that 150 overseas training places had been approved, but the MFO submitted only 54 proposals to the Ministry of Finance, which approved 32. Of these, none had left for training by May 1991 when the PCR mission took place, one month before project completion. 3.35 The research component was intended to generate findings of value to forest managers. However, by 1989, when the new National Afforestation Project (Cr. 2145- CHA) was under preparation, Bank staff were unable to identify lessons and findings from FDP's research component of value to its successor. "The credit is financing afforestation, thinning of existing forests and road construction on State Farms by the same methods that were is use before the project. There is limited provision for introducing new technology, techniques or species or for increasing productivity or improving efficiency. Economic and financial criteria for selecting forestry investments were not introduced... But now we are preparing the Forestry Sector Loan, we look for lessons learned from the project concerning research results, cost-effectiveness of various plantation types, financing mechanisms, or introduction and evaluation of new technology. We find that there are very few. It is in this sense that the development impact is weak." Research that did take place was not grounded in adequate experimental designs, and research results to guide future choices about forest technology or financing were either unavailable or considered unreliable. 3.36 FDP made no provision for assessment of natural forest resources or preparation of forest management plans. The project did, however, propose selective cutting in 10,000 ha of mature woodland in the Hongya Forest Farm in Sichuan Province. But this area provided habitat for the Giant Panda, an endangered species of international significance. The Bank learned of this problem from the World Wildlife Fund in 1990, and the MFO agreed in January 1991 to suspend all project activity in the area and reclassify it as a nature reserve. This satisfactory outcome was achieved relatively quickly, but the fact that it occurred at all indicates that the lack of projects plans for forest management was a weakness. Procurement 3.37 The MFO learned Bank procurement procedures only slowly. The Bank was approached frequently to approve purchases already made or to allow local shopping in place of ICB. In the early years, breaches of procurement procedure were common, but 19. World Bank Office Memorandum, May 9, 1989. 34 they were typically accepted by the Bank in the interest of disbursing funds. The Borrower managed the procurement process to its advantage. For example, a contract was canceled rather than allowed to be awarded to the low bidder, because the bidder was foreign,' another was awarded with a major bid item missing rather than award it to a foreign low-bidder. Local suppliers were preferred over foreign, even when the local supplier did not meet bid specifications.21 Approval to award contracts was sought for procurement of materials not authorized under the credit agreement.' The Bank reprimanded the MFO for shortlisting bidders for one ICB contract all from the same country.' This incident was followed by Bank insistence on more ICB and a less piecemeal approach to non-ICB procurement. 3.38 Even after several years of collaboration and provision of special training, the MFO failed often to follow procurement guidelines. The ceiling on non-ICB purchases was exceeded without approval; too little time was allowed for bidders to respond to requests; bid documents had widely varying content; contract awards were assessed with too few bids; small items for ICB were not grouped into bids of sufficient size to attract bidders; too much detail was included in bid specifications; and, retroactive approval was sought for signed contracts. As a result, Bank staff time was spent on procurement that should have been spent on more substantive issues. In 1985, the MFO was unfamiliar with Bank procedures and with many of the items being procured, but the Bank's early (1985-87) readiness to make procurement exceptions or retroactive approvals made procurement discipline hard to learn. Supervision 3.39 The Bank sent nine supervision missions to FDP, plus a PCR mission. Two missions in 1991, however, totalled only 8 staff days and dealt with administrative details.' Time spent in field supervision was dwarfed by field time spent in project preparation (see Figure 3.3). Because FDP covered parts of three provinces in separate corners of China,' early supervision missions were stretched, despite management's best effort to provide adequate supervision: the distances to be covered, and the time required, were just too great. This was acknowledged after three years,2 and the approach taken was to split missions or to focus on issues needing special attention. After 1989, supervision time fell as efforts were made to prepare FDP's successor. In total, 20. Bank Supervision Report, January 16, 1991. 21. World Bank Office Memorandum, August 4, 1989. 22. World Bank telex, April 18, 1989. 23. World Bank letter, April 22,1989. 24. The first mission of April 26-27, 1991 was a two-day project review meeting with MFO staff in Beijing. For the second mission of November 1991, recorded in the PCR table on use of Bank resources, three members spent a total of six person days on supervision, but no report is contained in the file. 25. County-level forest extension centers were included in an additional nine provinces. 26. Bank Supervision Report, July 19, 1988. 35 Sichuan and Heilongjiang were supervised four times in six years, and Guangdong five times. Given the newness of the Bank's relationship with the MFO, FDP's complexity, and the volume of late disbursements, this was not sufficient. In particular, the very limited supervision in 1991 when several new wood processing industries were being commissioned was a deficiency. Figure 3.2: Forestry Development Project - Time spent on Preparation and Supervision, days in field 350 300- 'd 250- 200- S160- 9 100- 50- 83 84 85 86 87 88 89 90 91 92 Fiscal Year m Preparation M Supervision PCR Mission 3.40 Supervision of Part B was not adequate. The weak performance of this component is attributable largely to lack of preparation before project approval, and late preparation by consultants after implementation was underway. Bank supervision should have strengthened this weak component, but Part A attracted almost all of the supervision resources. Only two of the four research centers were supervised, and these missions were brief. None of the 10 forest extension centers, equipped at a cost of US$2.0m, was supervised.  37 4. Project Outcomes Rubber Development Project 4.1 RDP successfully achieved or exceeded its physical plantation development targets: the 40,000 ha target for rubber, and the 12,000 ha target for windbreaks, were both exceeded by more than 30 percent (see Table Al). But plantation models (clones, spacing, weeding, and fertilization) remained largely traditional. The quality of planting was satisfactory, but the project made little impact on plantation technology. 4.2 Social and economic infrastructure was improved under RDP. School classrooms added under the project exceeded the target by 150 percent, hydropower installed exceeded the target by 40 percent, and bridges and culverts built were 100 percent of target. Maintenance of these facilities has been generally satisfactory. Other infrastructure was less successful. Rural roads, telephone lines, dwellings, stores, thermal power generation capacity, and high voltage lines were below target levels by 21 percent to 55 percent. 4.3 Rubber yields have not reached the levels set at appraisal, which were unrealistically high. RDP called for yields in a range from 1,120 to 1,460 kg per tapped ha., with peak yields between 1,530 kg per ha. and 2,050 kg per ha., and an average of 1,350 kg per ha. The PCR reported, and the audit confirms, the yield of new plantings which had begun bearing after seven years are likely to average between 1,159 and 1,174 kg per ha. These yields are below levels achieved in Malaysia in 1981, of 1,200 kg per tapped ha. But current yields in Malaysia are now 25 percent higher, averaging 1,500 kg per tapped ha, with an expectation that yields will to rise to 2 tons per tapped ha by the end of the decade.27 Self-sufficiency 4.4 RDP aimed to raise China's self-sufficiency in natural rubber, but this has not yet been achieved. While China's natural rubber production expanded from 153,000 tons in 1981 to 264,000 tons in 1990, its contribution to overall self-sufficiency fell from 32 percent to 29 percent.' Guangdong and Hainan's contribution to overall self-sufficiency fell slightly more than this, from 26 percent of total rubber consumption to 21 percent. In the short-run, this result may have been expected because of the accelerated culling of old 27. Malaysia's advantage in rubber production is based on a more favorable climate and the diffusion of new technologies that have raised the efficiency of both land and labor resources. New technology has resulted in widespread use of high-yielding clones, a 12-month tapping year (compared to eight or nine months in China), and higher productivity per tapper (from 300 to 500 trees tapped per worker per day in Malaysia, compared to 125 to 300 trees tapped per worker per day in China). 28. Bureau of State farms data reported in Project Completion Mission Report of June 5-13, 1991, Table 2. 38 trees and the delay before new plantings begin to yield,2 but growth in rubber demand is outstripping domestic supply. Joint Ventures 4.5 The joint venture component was not successful. This component had not been well prepared, and for the reasons given in paragraph 3.10, failed to take off. This represented a lost opportunity to promote private production and for state farms to spread their overheads. Because they absorbed adjacent villages and their lands, state farms acquired land for crop development other than rubber, but also gained responsibility for 100,000 more people, raising their overheads further. Rubber Wood Processing 4.6 Rubber wood processing was established after a slow start, the result of inexperience and weak preparation. But rubber wood is now converted to timber and manufactured products which are sold domestically and internationally. Incidence of bluestain has been reduced to low levels but not completely eliminated. The salvage value of rubber trees boosts plantation income, but the boost to technology provided by the procurement of sophisticated wood processing equipment has not been as great as intended. Too much machinery and equipment supplied under RDP was over-specified, too sophisticated, or too costly for state farms to operate and maintain. Much imported machinery has been replaced with domestic machinery of lower cost and simpler design. Product quality has fallen below the standards sought at appraisal. However, many of the adaptations made are appropriate to the market and resource constraints producers now face. Internal Rates of Return 4.7 The economic rate of return (ERR) was estimated by the PCR at 16 percent, compared to 17 percent at appraisal. The ERR for new rubber planting was estimated by the PCR at 15 percent, and for replanting 20 percent. The audit believes that these estimates are overstated, and real figure for rubber planting is closer to 8 percent. This was first pointed out in the Bank's fourth supervision report of May 1988. First, the benefits of intercropping have not materialized and the value of intercrops actually produced are lower than those used in SAR and PCR models to compute internal rates of return. Second, tapping new rubber plantings rarely took place in the seventh year as proposed because the nursery practices recommended to accelerate the onset of tapping were not normally followed: tapping began in the traditional eight to nine years. Third, yield estimates used in the SAR and the PCR were too high. The Bank's tree crops 29. Since the 1984, virtually all of China's investment in new rubber plantations in Guangdong, Hainan, and Yunnan,ha been supported by the Bank through RDP and Rural Credit III. More recently, the Asian Development Bank has supported SF development in Guangdong, including support for rubber. 39 advisor recommended a 25 percent reduction in yield estimates to make them realistic.' Fourth, the economic cost of labor of Y 0.5/day used to compute the ERR, while it may have been justified at the time, proved low. Rural labor markets in Guangdong and Hainan lost workers because of the rapid pace of the urban economy in coastal regions of south China, and the pool of unemployed and underemployed labor used to justify an economic cost of labor close to zero disappeared.' In addition, most wood processing plants have been slower to reach capacity than planned, especially for sawn wood and furniture production. Social Costs of State Farms 4.8 State farms are responsible for substantial social costs, including workers' housing, children's education, health care for workers, their family members and retirees, and pension payments. RDP's contribution to housing and other social infrastructure, and the failure of the joint venture component, has increased this burden. For example, Xilian State Farm, Hainan supports 15,386 people.' Xilian estimates that its social costs in 1993 were Y7.3m, equivalent to Y2,100/ton of dry rubber produced. These costs are significant when put in perspective of Xilian's overall costs and revenues. In 1993, Xilian had gross revenues of Y70.0m, including Y48.5m from rubber and rubber wood processing. Profit, however, amounted to only Y1.04m after taxes of Y1.54m, before repayment of the Bank credit, equivalent to Y6.4m per year, starting in 1994. Local Responsibility for Credit Repayment 4.9 Devaluation of the yuan against the SDR has sharply raised the cost of credit repayment. As is customary in China, the full costs of the credit plus on-lending charges are borne by the entities which used the credit. At approval in 1983, the exchange rate was Y2.0739 per SDR, but by May 1994 when repayment began, the rate was Y12.4406 per SDR: the yuan had devalued by a factor of six. If the effects of domestic inflation are netted out, local users of RDP credit will have to repay in real terms three times more yuan than they borrowed because of devaluation of the yuan. 4.10 The RDP credit of SDR94.6 million (credit and special fund) made available to the Government was on-lent to PGBs (and thence to state farms) for 25 years, with a 10- year grace period and an interest rate of 6 percent. As a result, SDR169.8 million were 30. Supervision Mission No. 4, May 5-15, 1988, Annex 3, p 11, and World Bank Office Memorandum, January 13, 1989. With 1987 prices, average peak yields of 1,350 kg/ha produce ERRs of 7.6 percent and 7.9 percent, and FRRs of 7.0 percent, and 7.8 percent, for new planting and replanting respectively. With 1987 prices and yields of 1,800 kg/ha, ERRs rise to 11.5 percent and 12.0 percent, and FRRs to 11.4 percent and 12.2 percent, for new planting and replanting respectively. But average yields of 1,350 kg/ha, as proposed in the SAR, will not be realized under Guangdong and Hainan growing conditions and with domestic clones. Re-estimating the ERRs of the PCR just for rubber production, after taking account of 25% reduction in yield, results in ERRs between 8.1% and 8.4%. 31. The project's ERR was slightly sensitive to the first three factors identified above, and highly sensitive to the fourth factor. The opportunity cost of labor used by the Bank in later projects was adjusted upward to reflect this reality. 32. Plantation and farm workers and managers, 4,575; timber processing, transportation, and construction, 1,406; social sector workers, 1,342; retired workers on pensions, 3,017; and dependents, 5,046. 40 due to be repaid in 1994. At the same time, the value of the SDR increased from Y2.74 to Y12.44, raising the outstanding domestic currency cost of the credit to Y2,112.3 million, between 1984 and 1994. On-lending and devaluation have combined to raise the implicit cost of funds to local users from 6.0 percent to 23.0 percent. PGBs and SFs failed to appreciate the effects of possible currency devaluation and many have neither foreign exchange earnings nor ways to protect themselves from foreign exchange risk. As a result, many beneficiaries under the credit will be unable to repay their shares without financial assistance from higher levels of government. Adoption of the Project Cycle 4.11 A significant benefit of RDP, acknowledged by the Borrower, was the exposure of PGB staff and SF managers to the Bank's project cycle and discounted cash flow analysis. Both techniques were learned by a large number staff of the CGB and the PGBs, and have been applied to other projects not funded by the Bank. The recent agreement of the Asian Development Bank to fund a tree crops project on state farms in Guangdong has been attributed in part to the Guangdong PGB's ability to analyze and manage new investments learned under RDP. Technical Assistance 4.12 The SAR allocated US$1.1 million for technical assistance, but actual expenditure totalled only US$400,000. The shortfall was caused by reluctance to use long-term borrowing for foreign technical assistance. There is a common belief on state farms that technical assistance does not contribute to income or provide value for money: foreign technical assistance is seen to be costly and risky. Costliness is measured against China's low domestic fees and salaries, and riskiness is related to consultants' lack relevant experience of China. While the impact of the low use of technical assistance is hard to assess, competent technical assistance might have improved the level of new technology used in plantation establishment and reduced the number of problems associated with implementation of the timber processing component.3 Forestry Development Project 4.13 Afforestation under FDP satisfactorily exceeded both the physical targets set at appraisal and the expanded targets set when the project was revised (see Table A3). This achievement was made possible by competent management and devaluation of the yuan, which permitted a 44 percent increase in the SAR target for plantations and the expansion of the number of wood processing factories from three to ten. 33. A notable exception to this was the contribution of an experienced consultant on rubber plantations of Chinese descent from Malaysia who demonstrated his value to the project as a member of the Bank's appraisal team. This consultant returned to the project several times at no fee, and made a significant to the plantation component. In the course of this activity, the consultant earned wide respect from the Borrower. 41 4.14 The plantation work was satisfactory and the genetic quality of much of the planting stock used was superior to that previously used on state farms. Almost one-half of the 118,000 ha of plantations established under the project were of fast growing and high yielding clones. State farms demonstrated their capacity to establish and maintain large-scale plantations, but they were reluctant to change their plantation establishment and management practices significantly. Labor and fertilizer use was excessive, and species choices and afforestation models were traditional. In consequence, the physical and economic performance of plantations was adequate but sub-optimal. Contrary to the findings of the PCR, FDP plantations produced modest environmental benefits through small reductions in soil erosion. But as monocultures of softwood trees, which replaced mixed forest in some areas, plantations made little contribution to maintenance of biodiversity. Wood Processing 4.15 The overall performance of the wood processing component was less satisfactory. Most of the ten factories supported by the project were unprofitable at audit, when depreciation and credit charges are accounted for. The main reasons for poor performance were inadequate design prior to approval; disjointed and slow implementation, which resulted in plants being commissioned in isolation or late, limiting the Bank's ability to supervise and assist with start-up problems; too-rapid expansion after project approval, which led to inadequate preparation of new investments; and, the high cost of foreign exchange, resulting from the devaluation of the yuan which substantially raised processing plants' debt costs. 4.16 The SAR proposed three wood processing factories but ten were built. Two of the three original factories (Leizhou Tannin and Binxian Shuttle Factories) failed almost immediately, and have struggled since, because of limited demand for their products. These problems could have been avoided if market studies had been prepared in advance. The third original factory (Shaoguan Plywood) was operating at audit at a loss because of design, financing, and market factors. Shaoguan's management has been unable to complete the factory according to specifications with the funds available, and the capacities of several pieces of plant equipment are mismatched. The mill lacks operating capital and faces stiff competition from new, larger joint-venture plywood mills in Guangdong. Finally, the market for plywood turned slack in 1993 when the pace of building construction was slowed by Government. The net result is losses Y100 for every cubic meter of wood processed, for a total loss of Y660,000 in 1993. Other mills have faced similar difficulties. The seven other factories were considered likely to break even by the PCR, but this outlook has changed for most of them now that the high cost of the credit to the end users is apparent. Only Yilan Veneer Factory in Heilongjiang claimed to be profitable after repaying the Bank credit.' 34. Yilan's success is mainly attributable to its use of oak and ash from mature and overmature natural forest (not plantation wood financed by the project), the Bank-supported wood processing being an addition to an existing plant, and recent substantial increases in the prices of its products. 42 Procurement 4.17 Procurement experience was comparable to RDP. The MFO was not experienced in Bank ICB procedures and excessive task manager time was spent on procurement issues. Bank correspondence files are distinguished by the high incidence of exchanges related to procurement. Between 1985 and 1987, most Borrower requests to the Bank for special consideration on procurement issues were agreed to quickly: after 1987, the Bank attempted to gain greater compliance with standard procedures, and the Borrower found it difficult to make this adjustment. 4.18 Project files indicate that the Bank used its authority flexibly, relaxing the minimum size contract for ICB from US$50,000 to US$200,000, and raising the ceiling for non-ICB purchases from US$5.0 million to US$9.5 million. But in June 1989, six months before the project's original closing date, the Bank was still providing training in ICB and a procurement specialist was sent to work with the MFO as late as August 1989, four years after project approval. Some delays in ICB were attributable to China's own approval procedures and to the Import and Export Supervision Office which influenced ICB purchases to eliminate unnecessary purchases, standardize purchases, and obtain value for money. Repaying the Credit 4.19 As with RDP (paragraph 4.10 and 4.11), responsibility for repayment of the FDP credit was devolved to country forestry bureaus and, in turn, to the enterprises which used the funds. Local units were required to repay their share of the credit in SDR terms at the prevailing exchange rate. Most SFFs failed to appreciate the foreign exchange risk they were accepting when the project was approved. They were unfamiliar with foreign exchange risk, and unable to protect themselves against it. But between project approval in 1985 and the date of the first credit repayment in 1992, the SDR had risen in value against the SDR from Y2.07 to Y7.96. By January 1994, when China eliminated its two- tiered exchange rate system, the SDR had risen to Y12.44. By audit, devaluation of the yuan and China's internal on-lending arrangements, had raised the implicit cost of FDP funds to users to 20.1 percent. Many SFFs are unable to repay these costs and require financial assistance from higher levels of government. Research and Extension 4.20 Support for four research and ten extension centers accounted for 15 percent of total project costs and almost 30 percent of the project's foreign exchange cost, but performance was disappointing. The project supported research, training, overseas studies and study tours, and purchase of laboratory and computing equipment Twelve staff were sent overseas for long-term, post-graduate degree training, but at the time of audit the number of returnees was unavailable. Sophisticated laboratory equipment was acquired for four centers to enable them to conduct research and analyze forest and timber products. The audit mission visited one center and found that much of the equipment procured was underutilized or unserviceable. Utilization was low because training had been lacking, operating funds were not available for maintenance and repair, electric 43 power was not dependable, and some equipment was either too specialized or not relevant to the center's mission. Technical Assistance 4.21 Technical assistance and training were approved worth US$2.8 million, but only US$0.9 million was spent. Low utilization of funds was caused by lack of preparation and weak commitment, but Borrower caution was justified. There was no detailed plan at appraisal for implementation of the so-called Part B, and a plan was finalized by consultants several years after project approval. Participation in study tours was low because the number of English-speaking research staff available was lower than estimated by the SAR, and this slowed development of the research program. Government also delayed approvals for overseas training following the events of June 1989. Internal Rates of Return 4.22 PCR estimates of ERR and FRR are 38 percent and 20 percent, respectively, compared to 56 percent and 27 percent at appraisal. While the PCR does not provide details of the calculation of ERR and FRR, the estimates are well above the Bank's guideline, but below the rates estimated at appraisal because of slower tree growth and higher production costs. 4.23 Financial rates of return to the wood processing components are below economic rates because wood is still underpriced in China. However, the two original wood processing plants which were making losses in 1992, at the time of the PCR, had not recovered by audit. The third original plant was profitable at the time of the PCR, but became unprofitable in 1994 when repayment of the Bank credit began. Six plants which were breaking even at the time of the PCR would be loss making at audit if they repaid their Bank credits at 1994 exchange rates. In addition, in all cases, substantial domestic counterpart funding obligations remained outstanding. Only one factory (Yilan Veneer) has remained consistently profitable. 4.24 Indicators of cost-effectiveness are not available for Part B, but the productivity of the US$22.4 million investment sunk in research equipment and overseas training is considered to be low. The one research center (out of three) visited by the audit mission had impressive facilities which were poorly maintained, sophisticated equipment which was underutilized, and research programs of limited relevance to the needs of the forest industry. The center lacked funds to operate and maintain its facilities adequately. The ten extension centers are credited by the Borrower with disseminating useful information on traditional afforestation methods to individuals and collectives, but supervision missions visited none of these centers during implementation and project files are silent on implementation issues or outcomes. Given the size of the investment in made Part B, the outcome is disappointing.  45 5. Findings and Issues Rubber Development Project 5.1 Rubber Development was one of the first Bank-supported projects in China and implementation contributed something to the effective working relationship that exists between China and the Bank. Through RDP, the PGBs learnt Bank approaches to project analysis, the project cycle, and ICB: the Bank learnt about China's administration, the decentralization of responsibility, and the problems of transition in an economy which had been isolated for more than 30 years. 5.2 The Bank was enthusiastic about its new relationship with China, appreciating the long-term nature of the relationship it was building, but its approach to RDP was less critical than it should have been. The Chinese were confident and capable, and resisted Bank attempts to reshape its proposals radically even when reshaping would have been beneficial. The Bank acted as if it was better to implement an imperfect project than to reject it or delay implementation until it was perfect: understanding gained through implementation would provide the foundation to correct weaknesses in the future. 5.3 But the Borrower has paid a high price for RDP. First, the project was not imaginative in design and contributed little to the reforms which were taking place in China. Instead, by working through state farms which were controlled from the center and largely insulated from market forces, RDP expanded a part of China's pre-reform economy. Second, by the Bank agreeing readily to Chinese proposals, China learned Bank methods and procedures only slowly, and the project grew with insufficient analysis of strategy or components. 5.4 The project aimed to raise China's self-sufficiency in rubber. This was never a sound objective, nor has it been achieved. China's production of natural rubber has grown, but consumption has grown faster and the contribution of domestic natural rubber production to overall self-sufficiency has fallen. RDP's contribution to self-sufficiency came at a high price-about US$700 for every ton of rubber produced on state farms-when compared to 1981-94 world market prices (see Table 5.1). The Bank helped China to produce a commodity it should have bought on the world market. 5.5 RDP was intended to provide the Bank's only support for the rubber sector, although Rural Credit III (Cr. 1871-CHA) supported private production of rubber in Yunnan Province. Other state farm projects were supported" by the Bank, but the experience of RDP has had a limited long-term pay-off. A new state farms commercialization project is under preparation,' and RDP's experience (and FDP's) suggests that it is needed, but it appears not to have grown from the experience of RDP. 35. Heilongjiang Land Reclamation; Seeds; and Xinjiang Agricultural Development. 36. The State Farms Commercialization Project due to go to the Board in FY 1996 will promote privatization, business planning and management in the state farm sector. 46 Table 5.1: Comparison of World Chinese Prices for Rubber, 1981-94 Worldprice Exchange rate Worldprice Chinese Domestic USS/ton YuanIUS$ Yuan/ton Price Yuan/ton 1981 125 1.7 2,125 6,800 1982 100 1.9 1,900 - 1983 124 2.0 2,480 1984 110 23 2,530 1985 92 2.9 2,668 -- 1986 95 3.5 3,325 1987 112 3.7 4,144 --- 1988 129 3.7 4,773 7,050 1989 112 3.8 4,256 - 1990 102 4.8 4,896 - 1991 101 5.3 5,353 --- 1992 102 5.5 5,610 1993 99 5.8 5,742 - 1994 109 8.7 9,483 7,300 5.6 RDP had little policy content. Rubber pricing in China was recognized as inefficient during preparation and project approval, but the project did little to change that At Board presentation, Bank staff promised a study on lowering costs of production and the domestic price of rubber, but the files show no record of the study being completed. However, by allowing rubber prices to rise only slightly over 10 years, and by the fal of the yuan, China's domestic price for rubber and the world price have tended to converge, but RDP did not encourage this. 5.7 RDP used SDR 94.6 million to bolster the activities of a privileged sector in the Chinese economy. The project was not designed to contribute to poverty alleviation and implementation resulted in little transfer of new technology. For these reasons, the justification for the use of scarce IDA credits was weak. RDP was an entry point to China, but not an optimal vehicle for advancing the Bank's development agenda. 5.8 Bank support for RDP was hinged on technology transfer and helping China overcome years of isolation, but this was less successful than anticipated. Plantation managers were conservative, planting fewer new clones than proposed, and weak applied research failed to show how plantations could be managed more profitably. Rubber wood processing was established, however, but much of the technology supplied under RDP was inappropriate. The main reasons for this were unfamiliarity with rubber wood as a raw material, with industrial processing, and with business management. But unfamiliarity should have tempered the project's enthusiasm for sophisticated equipment and the readiness to expand this component during implementation. 47 5.9 Counterpart funding became a problem for two reasons. First, expansion of the project beyond its original scope increased the demand for local funds. Local funds were mobilized from cash reserves and as loans from banks and the central government, which many project entities are currently unable to repay. Priority in repayment is given to the Bank credit, and repayment of counterpart funds borrowed from the SPC and provincial sources will wait until the Bank credit is repaid. Second, the project as designed provided five years of funding for a crop that takes eight or nine years before tapping can start. The Bank was assured that sufficient funds would be available to tend trees to maturity, but state farms have been unable to provide the optimal degree of support for tending after the credit was closed. 5.10 The most pressing issue facing state farm managers at audit is financial sustainability. The cost of credit repayment, denominated in SDR terms, is too high for most users to repay from project-related income. State farms will undoubtedly strive to repay the credit, but many individual plantations and wood processing plants will be unable to make their payments without help from the PGBs. If PGBs intervene to accept or share RDP's foreign exchange risk, they will do so with earnings from sources other than rubber. 5.11 At the PCR review, OED concluded that RDP was an outstanding project because it had exceeded its original physical targets by a wide margin, with ERR and FRR well above the Bank's guideline. With the passage of time and the opportunity to evaluate the project on the ground, this conclusion should be revised. RDP is not only not outstanding, it is unsatisfactory. Institutional development is rated as modest and sustainability as uncertain. Forestry Development 5.12 FDP was the first Bank-supported forestry project in China. In addition to its formal objectives, FDP was the vehicle to provide a working relationship between the Bank and the MFO. For this reason, the Bank accepted many MFO proposals for change beyond the SAR with limited comment or requests for full justification. But, despite many problems with procurement, FDP achieved most of its main objectives and enabled the MFO and the Bank to develop a highly effective working relationship on which three successor projects have capitalized. 5.13 FDP was not an innovative project and lacked sectoral and strategic plans. These had been called for by Bank technical advisors during preparation, but the MFO was not prepared to undertake sector planning at the time, believing it had a sound proposal. Lack of sector planning meant that efficient utilization of small-diameter timber was never fully addressed and mills adapted incrementally to the resource they were receiving and their limited perceptions of market opportunity. For China to emulate successful forest industries elsewhere, it would need to grow trees cost-effectively under difficult conditions, utilize all the fiber produced efficiently, and minimize production costs. Furthermore, FDP's focus on plantations ignored natural forests, reducing the overall efficiency of timber management. Poor resource planning opened the possibility of damage to wildlife habitat. While this latter issue was resolved quickly, it could have been avoided. 48 5.14 Technology transfer was the main rationale for Bank support. While the quality of plantation stock was raised on half the plantations established, traditional management practices prevailed elsewhere. Research and extension were neither well prepared nor well integrated into the project's afforestation and wood processing components. The separation of the project into Parts A and B, with two PMOs, contributed to the ineffectiveness of the applied research component. A study of timber pricing policy was completed under FDP in 1986, but it did not lead to dialogue on policy reform. 5.15 The quality of investment in wood processing was mixed at best. Despite very heavy use of staff time in project design (see Figure 3.3), preparation was incomplete. This was exacerbated by substantial, incremental growth in the size and scope of this component during implementation, and Bank supervision was not sufficient to trouble shoot the problems that resulted. 5.16 The MFO was slow to learn Bank procurement procedures. This was due the Borrower's inexperience, the complexity of the procedures themselves, and a belief that following procedures would slow procurement unnecessarily. Furthermore, the Bank did not inculcate good procurement habits during the early years of implementation, and it was difficult to break bad habits once they were formed. In addition, a tendency existed in China to minimize foreign purchase of materials, equipment, and expertise, notwithstanding agreements made. 5.17 The devaluation of the yuan against the SDR and the devolution of responsibility for credit repayment, have combined to create repayment problems for credit users. Most borrower enterprises were unable to earn foreign exchange or to hedge against exchange risk. Some will repay their share of the credit, but this will be done using revenues from other enterprises. Others will be unable to repay and will depend on higher authorities to share the burden. Findings and Issues Common to both Projects 5.18 FDP and RDP were early projects for the Bank in China. At the time of preparation, China was changing rapidly, family farms were being formed and the command economy was giving way to the market. But neither project encouraged change outside the state sector, and to that extent an opportunity was lost: both projects favored tradition over innovation. In forestry, the relationship has paid off in successor projects where the participation of the private sector grew from zero in FDP, to 75 percent in the National Afforestation Project (1990), and 90 percent in the Forest Resource Development Project (1994). For rubber, a comparable pay-off has not been achieved. 5.19 Among state farms, enterprise reform is badly needed to help them adapt to the market, plan and control their growth, improve technology, raise revenues, lower production costs, and reduce the burden of social costs. State farm managers came originally from the ranks of the army and the Communist Party and learned to run estates on socialist principles. RDP and FDP expected managers to embrace the market, but the difficulty of turning cadres into entrepreneurs was underestimated. RDP and FDP had the opportunity to begin this admittedly difficult process, but neither chose to tackle it. 49 5.20 The successful components of these projects were those where prior experience could be applied most directly (tree and rubber plantations): the least successful were those which were the least well prepared (wood processing) and for which the Borrower was most reluctant to use credits for "soft" activities (research, training and extension). Weaknesses in plantation development came to be understood by the Bank and the experience was successfully internalized in the forestry projects that succeeded FDP. 5.21 Wood processing investments, however, were made with insufficient technical, financial, or market analysis. Through FDP, many of the weaknesses of wood processing industries came to be understood, but follow-on projects have focused on forest management not wood processing industries. Research lacked focus and application, training effectiveness was not evaluated, and extension was neither monitored nor evaluated. 5.22 Efforts to promote new technology met with limited success. This was disappointing. China had been isolated from many sources of new technology for thirty years and these projects were intended to help overcome this. But conservative state farm managers usually won out. Their resistance to change in plantations management contrasts markedly with a risk-taking approach to new commercial enterprises, where inexperience did not prevent them from plunging in. 5.23 Reluctance to employ technical assistance was marked and sometimes soundly based. The Chinese recognized that too few foreign consultants had sufficient experience of China to make them cost-effective to clients quickly, and fees were so high compared to domestic fees that it was hard for Chinese managers to comprehend how foreign consultants could ever be cost-effective. But most importantly, many Chinese managers mistakenly believed that because technical assistance did not generate revenue directly, its use should be minimized or eliminated. As a result, technical assistance was used sparingly and tasks which were dependent on foreign consultants became risky. 5.24 Devaluation of the yuan stimulated an increase in project scope. But the Bank approved expansions in project scope which were not well prepared. In projects spread over a wide area, such as FDP was spread in three provinces, Bank supervision and technical assistance were not sufficient to compensate for weak preparation. 5.25 The foreign exchange risk associated with these credits was devolved to local users who were unaware of the risk posed and unable to protect themselves from it. Given the size of the devaluation of the yuan against the SDR that has taken place, making local users pay the full foreign exchange cost of the credit will make many of them unprofitable. Unless the foreign exchange costs of the credit to local users are re-evaluated, many of them will have to be restructured or closed.  51 Annex A Table Al: Rubber Development Project (Cr. 1417/SF 005-CHA) Physical Targets and Achievements Indicators Unit SAR Actual Actual/ SAR % A. Participating State Farms no. 40 65 163 B. Planted Area (i) Rubber ha 40,000 53,254 131 (ii) Windbreak ha 12,000 16,061 134 C. Timber Factories (i) Farm Sawmill m2 --- 24,757 (ii) Timber Complex m2 55,036 D. Transport & Communication (i) Rural Roads km 780 583 75 (ii) Bridges & Culverts km 3864 3864 100 (iii) Telephone Lines km 780 378 49 E. School, Clinic and Research Buildings (i) School and Clinic m2 39,000 101,000 261 (ii) Research m2 6,000 2,724 45 F. Houses (i) Dwellings m2 648,000 466,801 72 (ii) Offices, Stores m2 72,000 56,646 79 (iii) Others m2 --- 135,825 G. Electric Power (i) Hydropower kw 5,000 7,020 140.4 (ii) Thermal Power kw 3,000 1,379 46.0 (iii) Voltage Line kw 400 269 67.3 Annex A 52 Table A2: Rubber Development Project (Cr. 1417/SF 005-CHA) Project Costs (US$ millions) Appraisal Estimate Actual Item Local Foreign Local Foreign Costs Ex.Costs Total Costs ExCosts Total Rubber Establishment 103.6 19.7 123.3 83.9 16.0 99.8 Commune Development 11.2 2.1 13.3 0.7 0.1 0.8 Windbreak Establishment 12.1 1.3 13.4 10.4 1.1 11.5 Buildings and Utilities 33.7 11.3 45.0 29.4 9.9 39.3 Rural Roads 7.7 1.8 9.5 3.5 0.8 4.3 Equipment and Vehicles 0.0 16.7 16.7 0.0 11.3 11.3 Sawmills and Woodprocessing 2.4 9.0 11.4 10.0 37.4 47.3 Training and Research 2.1 1.1 3.2 2.4 1.3 3.7 Technical Assistance 0.0 1.1 1.1 0.0 0.4 0.4 Base cost 172.8 64.1 236.9 140.3 78.2 218.5 Physical Contingencies 10.7 3.4 14.1 Price Contingencies 38.0 12.0 50.0 Total project cost 221.3 79.5 301.0 140.3 78.2 21&5 53 Annex A Table A3: Forestry Development Project (Cr. 1605-CHA) Physical Targets and Achievements Appraisal Revised Actual! Actual! Indicators Unit Estimate Target Actual SAR Revised New Plantations ha. 82,300 117,900 118,376 144% 100% a) Fast Growing ha. 23,900 59,500 57,375 240% 96% b) Traditional ha. 58,400 58,400 61,001 104% 104% Existing Plantations a) Tending tt'. 437,000 435,711 100% b) Thinning ha. 49,000 61,537 126% Chemical Fertilizer tons 10,800 7,500 7,989 74% 107% Road Construction a) New Class III km 930 1,126 1,136 122% 101% b) Upgrade to Class III km 500 410 415 83% 101% c) Forest Tracks km 500 500 100% Equipment and Vehicles no. 536 885 988 184% 112% Buildings m2 157,000 158,285 101% Utility Lines km 1,084 808 949 88% 117% Other Construction no. 21 29 31 148% 107% Wood Processing Facilities a) Factories no. 3 10 10 333% 100% b) Workshops no. 12 7 7 58% 100% Training & Technical Asst. a) Overseas mm 533 761 747 140% 98% b) Domestic mm 1,460 1,605 2,459 168% 153% c) Consulting Services mm 34 34 100% Extension Centers no. 10 10 100% a. Activity measured in -tending times", i.e. number of hectares tended multiplied by the number of times each hectare was tended. Annex A 54 Table A4: Forestry Development Project (Cr. 1605-CHA) Project Costs (US$ millions) Appraisal Estimate Actual Item Local Foreign Total Local Foreign Total Cost Cost Cost Cost Costa Cost Plantation Establishment 14.5 0.8 15.3 21.6 0.0 21.6 Forest Improvement 13.9 0.7 14.7 19.8 0.0 19.8 Chemical Fertilizer 0.5 3.1 3.7 0.7 0.0 0.7 Road Construction 28.7 1.5 30.2 22.9 0.0 22.9 Equipment & Vehicles 3.0 12.8 15.8 2.3 22.7 25.0 Buildings & Utilities 12.8 1.5 14.3 14.8 0.0 14.8 Wood Processing Facilities 7.7 5.5 13.1 9.9 0.0 9.9 Training & TA 0.3 2.5 2.8 0.3 0.6 0.9 Management & Overheads 3.0 0.0 3.0 7.7 0.0 7.7 Research & Extension Centers 13.3 9.7 23.0 12.9 9.5 22.4 Total Project Cost 97.6 38.2 135.8 113.0 32.8 145.8 a. Some foreign expenditures related to wood processing factories and buildings are listed under the "Equipment and Vehicles" category, as a result of project accounting practices. This is slightly different treatment from the SAR. 55 Annex B March 28, 1995 Re: Praft Performance Audit Report for Forestry Development Project ( Cr1605-CMA) Mr. fGaham Donaldson Chief, Agri. -and Human Development Division Opeibaiin -Evaluation Department The World Bank Vashington, D.C. 20433-SA Dear Mr. Donaldson, Your letter dated Feb. 9, 1995 and the enclosed" Draft Performance Audit aeport* rarf * China- Rubber Devalopment, Projoct ( Cri417-CMA)u and I Foretry Development Pro5eet (Cr.1605 - CRA) received. Tbroiib careful studying, we would like. to provide the follouing &;moents for your Waformation. 1. Ve think that all the analysis regarding the exppriences and issues e- isted- to the proj eat of FDP is of a comprehensive docetation. Dp, the first farestry project financed by :be Benk was surel rsatied to both parties In tArs of the project quality such as plantation establishment, young growth tending, roead and houses bilding etc. In a4t6i, all the equipment and vehicles procured vere adequateLy servicing for the project , especially througk pmejeat implementatian, the forces of faresry research and technical extenion.- were also strengthned and thereby laid a sound foum- dation and provided useful exper.encess far the coming projects further financed by the Bauk, so we would my that DP bad achieved the targeted gual and obj ec. tives, henoe it .was a successful example in forestry projects finarned by the Bank loan. Actually, the project bad also inL 'e course of preparation and iplementatIan exd.ted acme problems, such as the introdnction of new affores. tation approaches, integration of research with production etc. However, we are not only aware of those problems but also In the follow-up projects of RAP and. PRDP. took a serious manner to have them to be tankldd gradually. 2, Par recent yas, the exchage rate of yman (RMB) against the USD had expe-ienced a geat change, just as the report mentioned that ach a:change would sharply raised the cost of %credit repayment for the users, yet, we may Annex B 56 still Say that prowsided tb4t the Sazgement is iproved and the products are of markatabls for the wood processing sectors, the economic results for them would catch up and therefore the repayment of loan would no longer a problem. Furthermore, since the sale piice of timber in the domestic market had in recent years soared In a big margin, so the repayment for the state- onmed forest farms would also not become a problem being 'hard to be tackled, even if some difficulty may still be. exnted, however, ay of them vould not forced to be closed. 3. Regarding .the overseas trainees mentioned in Para.. 420, " Twelve staxf uere sent overseas for training name had returned u, here we would provide an informationi about this iroblem. that same of them have so far already re- turned to their units. and made a grat contribution in their positions. best regards-. Tiang lingrong Depty Director The World Bank Loan Project Management Centre Ministry of Iorestry 'The PRO BaijI,g, China P.S. Since Mr. QQ is now In gsington D.C. fo= official duty, he was :skEd me send you our comments for your cnaideration. 57 Annex B The World Bank 1818 H Street N.W. (202) 477-1234 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D.C. 20433 Cable Address: INTBAFRAD INTERNATIONAL DEVELOPMENT ASSOCIATION U.S.A. Cable Address: INDEVAS September 21, 1995 Mr. Lai Shiren, Deputy Director General General Bureau of Guangdong State Farms Dongguangzhuang Road, Shahe Guangdong, China Dear Mr. Lai, CHINA - Rubber Development Project (Cr. 1417/SF 005) Thank you for your letter of September 21, 1995. 1 am pleased that you found the revisions to your comments suggested by OED to be acceptable. Please note, however, that OED's suggested revisions are not requirements. OED would be pleased to receive the final version of your comments no later than October 6, 1995. I suggest that you send them by courier. On receipt of your comments, OED will proceed to publish the audit, including the comments of the Guangdong General Bureau of State Farms, as revised, your letter of September 21, 1995, and this letter. Lastly, let me repeat that the audit is an OED product, based on a full examination of the record of project preparation and implementation, including all official project documents, the complete World Bank project file, interviews with all the responsible World Bank task and Divisional managers, and the World Bank Resident Mission in Beijing. The schedule and itinerary followed by OED's field mission was agreed in advance by the General Bureau of State Farms, the Guangdong and Hainan General Bureaus of State Farms, OED, and the Bank's Resident Mission, as is customary. The only significant changes that occurred to the agreed itinerary were proposed by the mission's hosts after the mission's arrival in Hainan. These changes were protested by the mission at the time because they reduced the amount of time available for on-site project evaluation. Under these circumstances, the mission's time was as well spent as it could be. Sinc-erely, Roger S1I he Agriculture and Human Development Division Operations Evaluation Department RCA 248423. 9 WUI 64145 W FAX (202) 477-6391 Annex B 58 GENERAL BUREAU OF GUANGDONG STATE FARMS Dongguanzhuang Road, Shahe, Guangzhou, China W_j Tel: (020) 7705740 fVA Fax: (020) 7724705 IIM Post Code: 510612 September 21, 1995 Mr. Roger Slade, Chief Agriculture and Human Resources Division Operations Evaluation Department The World Bank 1818 H Street, N. W. Washington, D. C. 20433 Dear Mr. Slade, Thank you for your letter of September 8, 1995 and your suggested revisions to our comments on OED's Performance Audit Report of the China Rubber Deve- lopment Project(Cr. 1417/SFOOS-CHA). We have spent a long time for reinvesti- gation and held discussions with a nunber of management on state farms and industrial enterprises after we received the OED's Performance Audit Report (draft) end of February, 1995 and come out with the comments. As required by OED, we have removed the two paragraphs stated in CONCLUSIONS which OED considers as unacceptable personal references and we have revised once again the comments completely based on its suggestion althouth we do not appreciate the author's working style and attitudes. What the author's mission travel activities stated in our earlier comments are all factual matters, of .which there is no one can deny. We would kindly advise you that this will be the final revision and you are kindly requested to incorporate the revised version of our comments together with the audit report itself and circulate to the Bank's Board of Executive Directors. Sincerely, Lai Shiren Deputy Director General cc: Mr. Joseph Goldberg Mr. Shengman Zhang 59 Annex B COMMENTS TO THE DRAFT PERFORMANCE AUDIT REPORT OF CHINA - RUBBER DEVELOPMENT PROJECT(CR.1417-CHA) JUNE, 1995 I. BRIEF INTRODUCTION China Rubber Development Project(RDP) financed by the World Bank began in 1982. The Bank sent missions to Guangdong for project identification, examination .and selection. RDP(Credit 1417/Special Fund 005) was approved by the Bank's Executive Board of Directors on November 29, 1983, signed on January 5, 1984 and became effective on April 13, 1984. The credit and special fund totalled 94.6 million SDR, equivalent to USD 100 million. The Project was expected to be implemented over a five-year with completion by June 30, 1989. With prior approval by the Bank, the Project completion was appropriately postponed until December 31, 1990. The Bank sent its final project supervision mission to Guangdong and Hainan in June 1991 and the Project Completion Report(PCR) finished in March 1992. Sponsored and organized by Ministry of Agriculture of China, a joint project examination and acceptance group with participants from State Planning Commission, National Agricultural Investment Corporation, National Machinery and Electrical Equipment Inspecting Office, Xinhua News Agency, Guangdong Provincial Audit Bureau, Guangdong State Farms Bureau and Hainan State Farms Bureau carried on a final supervision to the RDP in March 1994 and completed with "Opinions to the Final Acceptance of the Project". The Bank's PCR and the "Opinions to the Final Acceptance of the Project" prepared by relevant departments all gave positive attitude to the Project appraisal, decision of the Project as well as the Project implementation. They all concluded that the Project had been successfully implemented and great results achieved. Meanwhile, they also pointed out some problems occurred during the implementation. The PCR and the "Opinions" are fair, correct and imbued with authoritativeness and conclusiveness. II. PRINCIPLE DISPUTES RAISED BY THE AUDIT REPORT We received Draft Performance Audit Report of RDP from the Bank's Operations Evaluation Department for comments February 27, 1995. After reading the report and checking with facts, we found out that major principle issues in the Audit Report do not tally with the facts. The Audit Report had not only adopted an attitude of negating the project's great achievements for 10 years, but also rejected the correctness the Bank decided to start the RDP and denied the final assessments by the Bank's PCR and the "Opinions" by Chinese relevant departments. The Audit Report also distorted the objective of the Bank's lending policy by saying that "A guiding purpose of Bank support was to help China overcome as quickly as possible the effects of three decades of isolation" to make "emergence of the world's Annex B 60 most populous country from relative isolation". The purpose and objective of the World Bank's lending are to help its member countries mainly the developing countries with their per GNP under USD 371 to rehabilitate, develop their national economy, create more job opportunities and to improve their living standards. The People's Republic of China is one of the Bank's members and belongs to the developing country. The per GNP in 1982 was under USD 371. Therefore, China borrowed loans from the Bank conforms to the Bank's objectives. China is one of the permanent member state of a council in United Nations. She had established diplomatic relations with 125 countries over the world by 1982. China was not isolated from the world. The friendship and credits China established with relevant countries in the world was based on the right and sound foreign policy guided by the Chinese Government. It does not mean only through the Bank's lending--Rubber Development Project. After receiving the Audit Report, we had an overall review of the project, made specific investigation, listened to the opinions from some project units and earnestly state our comments as follows: III. PROJECT APPRAISAL HAD BEEN GOING THROUGH MORE FURTHER DETAILED STUDIES AND REPEATEDLY VERIFICATION. THE DECISION IS THEREFORE POSITIVE CORRECT The Audit Report was trying utmost to deny the correctness of the Project Appraisal and its decision. The Audit Report stated that during negotiations, upgrading of sawmills and establishment of timber complexes were based on an FAO investigation. "The Bank showed poor judgement when it chose to support Rubber Development". "Nevertheless, in its new enthusiasm to work with China, the Bank approved an uneconomic project when it should have rejected". "The Bank accepted the Government's proposal for a rubber development project uncritically, and put itself in the position of justifying it". After China resumed her legal seat at the World Bank in 1980, Rubber Development Project was approved by the State Council in 1982 and listed as the second group project prepared for the Bank lending. In April 1982, an expert group consisted of three members, Messrs. James Georing, Khoo and Tan Peng Hua, in the company of officials and experts from General Bureau of Guangdong State Farms started an on-the-spot investigation in six(6) rubber farms in Hainan and Zhanjiang Prefectural Bureaux. In July 1982, Mr. Edward. V. K. Jaycox, Director of East Asia & Pacific Region Program Department and Mr. Oaio Koch Weser, Chief of China Operations Division, East Asia & Pacific Region Program Department paid a supervision visit to project areas. Based on the visits and supervision of the Bank's groups and the instructions from Ministry of Agriculture, the General Bureau of Guangdong State Farms organized a group of experts and economists from different project units of Hainan, Tongza and Zhanjiang Prefectural Bureaux to make detailed study and investigation to 61 Annex B the project areas, including the land resources, natural environment, rubber growing conditions, the old plantations proposed to be newplanted and the social and economic circumstances of Guangdong State Farms Area. The Group had especially summarized the overall situation for 32 years of society, economy, technology and management in Guangdong State Farms since large-scale rubber development started in 1951. "The Project Report for Newplanting and Replanting of Rubber on Guangdong State Farms" with 10 appendices and 27 tables of cost accounting was accordingly prepared. In October 1982, a pre- appraisal mission consisted of five experts, Mr. James Goering, Senior Agronomist, Mr. T. B. Wiens, Senior Agronomist, Mr. G. Devitt, Forestry Expert, Mr. Poh Loh Lim, Senior Rubber Expert, and Mr. Byrd, Financial Expert, was sent to Guangdong State Farms for further study of the project conditions. The mission combined with the information and materials provided by local counterparts, made seriously analysis of the economy and technology performance and compared with several scenarios. At the latter period of the pre-appraisal, Mr. Youdman(transliteration), Director of Rural Development Department and Mr. Turnham, Deputy Director of Agricultural Projects Department joined in with the mission for pre-appraisal. In April 1983, Mr. A. Green, Senior Tropical Crops Expert, joined together with the five-member Pre-appraisal Mission. The official appraisal started. The Appraisal Mission shared positive attitude to the project feasibility study and completed the Staff Appraisal Report(SAR). It took about 2 years for the project starting from identification through appraisal until signature and its effectiveness of the Loan Agreement. Within the 2 years, all the Bank officials and experts with their local counterparts involved in the project identification and appraisal had spent a lot of time, made a great of efforts, studied a large amount of information and first-hand materials and come out with scientific conclusions. The 10-year practice of the project has proved that basic arguments set forth in the SAR are practical and realistic, tally with objective reality and therefore the decision is positive correct. The Audit mission had neither been to Guangdong and Hainan State Farms nor involved in the project practice before. The first visit to the Project only happened in June 1994 for gaining only a superficial understanding of the Project through cursory observation or "looking at flowers while riding on horseback". But the Audit Report states that during negotiations, upgrading of sawmills and establishment of timber complexes were based on an FAO investigation. "The Bank showed poor judgement when it chose to support Rubber Development". The Audit has also quoted one sentence from a Bank tree crop specialist to criticize the Project by saying "this being said, I realize that the Bank may not be influential enough in China to select projects in an optional fashion". The Audit Report has denied all the amount of work completed by the predecessors and all the major achievements gained. This is what neither we nor the Bank officials and experts with their Annex B 62 local counterparts involved in the Project will accept. As for whether the approval of the RDP by the Bank had been based on the correctness of the SAR or only based on what the Audit states as "in its new enthusiasm to work with China", and whether the Bank, prior to the approval of RDP, had carefully considered or whether the Bank had put itself in right position, these should leave for the Bank Executive Directors to answer and give comments. IV. MAJOR ACHIEVEMENTS GAINED THROUGH THE PROJECT'S 10-YEAR PRACTICES(1984-1994) The Audit Report is using every ounce of its energy to deny the major achievements for the Project's 10-year practices. It declared "Rubber Development can not be considered satisfactory. For the plantation component, project economics were unsatisfactory from the start". It said the SAR projected rubber yields unreasonably high. "Intercropping immature rubber with cash crops proved to be poorly conceived". It also affirmed that most timber processing plants would be unprofitable. In Project Design and Management, The Audit Report was describing it as "institutionally unimaginative". "A new project to support state farm commercialization is unlikely that it benefitted from the experience of Rubber Development". It distorted the relations between state farms and communes by saying "a long-standing antipathy between state farms and communes was acknowledged". The Project "made no contribution to poverty alleviation". Nobody can change or distort the facts. There is no denying of the facts. Let us recall the Project achievements gained through the 10-year practices. 1. Agriculture Sector Planting of rubber, windbreaks and intercrops all overfulfilled the targets. Rubber Establishment concluded with good quality. Rubber trees are growing well and are basically reaching tappable size as expected. Rubber yields reach or even surpass the targets stated in SAR. Completion of rubber planting amounted to 52,354 ha, which is 30.8% more over the SAR target of 40,000 ha. Planting of windbreaks reached 16,061 ha, 33.8% more over the target of 12,000 ha. Intercrops planted in young rubber plantations totalled 22,143 ha, which is 121.4% more over the SAR target of 10,000 ha. The completion of rubber, windbreaks and intercrops has not only surpassed the targets, but also achieved a historical breakthrough in quality. Rubber Establishment and planting were strict with high standards and completed with strict supervision and acceptance system. High-yield clones were planted in line with local conditions. Planting and upkeep of rubber were doing well with even stand and high survival rate. The average girth rate increased 5.5-6 cm annually. Some even reached 7 cm on some other farms. Rubber planted in Hainan was 63 Annex B ready for tapping by 1991 while those in Zhanjiang area by 1992. This condition had met the requirement of reaching tappable size in the eighth year from planting in Hainan and in the ninth year in Zhanjiang stated in the 8AR. Some farms even started tapping in the sixth or seventh year from planting. Although adverse impacts met by natural disasters during the 10 years, the reservation rate reached 85% by 1994. Rubber planted under RDP is considered the best plantation in quality in the history of Gaungdong and Hainan State Farms. Since the commence of tapping in 1991, rubber yields are considered satisfactory. Rubber under RDP on some project farms has gradually become the main force in rubber production. COMPARISON OF REAL PRODUCTION WITH SAR TARGETS Unit: T/ha/year Hainan: Tapping Year 1991 1992 1993 1994 Serial Tapping Year 1st year 2nd year 3rd year 4th year Yields in SAR Target 0.35 0.44 0.74 1.00 Yield actual in Hainan 0.67 0.83 1.05 1.25 Increase over SAR Target(%) +91 +88 +42 +25 Among Which: Nanmao Farm 0.92 0.56 0.83 1.10 Bayi Farm 1.34 1.53 1.59 1.67 Xilian Farm 0.70 0.84 1.30 1.27 Zhanjiang: Tapping Year 1992 1993 1994 Serial Tapping Year 1st year 2nd year 3rd year Yields in SAR Target 0.33 0.55 0.75 Yields Actual in Zhanjiang 0.62 0.58 0.69 Increase over SAR Target(%) +87 +5.5 -8 Among Which: Nanhua Farm 0.66 0.57 0.63 Jianshe Farm 0.81 0.88 0.69 In June 1994, rubber in Zhanjiang area had suffered a great loss from a rare and strong Typhoon. Rubber production was 8% lower than SAR expectation in the year. Production in other years no matter in Hainan or Zhanjiang are much higher than the SAR Target. Production in some year even increased over 90%. Rubber production at present is in its infancy. Yields in years between 1999 to 2009 will be peak period and annual average yields for Hainan are expected to be 1.8T/ha and Zhanjiang 1.5T/ha. Total production for the Project cycle is expected to be 1.589 million tons of dry rubber with annual average of about 58,850 tons predicted in the PCR, which will be definitely realized and surpassed. The Audit Report accused the SAR "projected rubber yields were pitched unreasonably high". "The potential for China to produce rubber at the levels comparable to Malaysia and Thailand in the Annex B 64 mid 1980s never existed because the climate and planting stock are inferior". Are these facts? The Audit ignored the facts. Its accusation is very lamentable. And its arguments cannot stand the test of practices. Rubber price in the world market increased greatly in 1994 and since China merged the foreign currency exchange rate into one, customers rushed for procuring domestic rubber. The average selling price per ton of Class 1 standard block cost Y 12,500 in 1994 which is twice as much of the price Y 6,090 during appraisal period, 1.6 times as the price Y 7,850 when the project implementation ended. The Project benefits increased greatly. From the present point of view, there is a tendency that the rubber price domestic and world market would go up. Therefore, the Financial and Economic Rate of Return predicted during appraisal can be realized or surpassed. But the Audit Report stated "the ERR for rubber production in China is only about 8%". We really do not understand how and based on what the Audit Report came out with this conclusion. The Audit Report also accused "Rubber Development cannot be considered satisfactory. For the plantation component, project economics were unsatisfactory from the start". As is known to all that rubber trees are expected to reach tappable size in the 7th or 8th year from planting. During the rubber immaturity the major benefit targets shall include quality of rubber plantation establishment, reservation rate, the increment of young trees' girth rate and the rubber plantation stands. For those targets, the rubber establishment and the growing of young trees have all been in good quality. RDP's economics had been satisfactory since its commencement. We really do not realize what the Audit's immature rubber economics standards are and what kind of benefits it really want while rubber trees are in their infancy? The Audit Report states that "intercropping immature rubber with cash crops proved to be poorly conceived". In the rubber's immature phase, planting with annual cash crops as cover crops not only provides with covering of the surface, water and soil conservation, application of light and heat resources and upkeep of utilization of land resources but also increases directly the income at the project's early stage and raises the Project's rate of return. This practice has proved to be correct in China for forty years' practices and also confirmed by Chinese and foreign experts. It has been experiencing like that in China and so have the other major natural rubber producing countries in Southeast Asia. But the Audit described it as "poorly conceived". This would indicate that the Audit is thorough ignorant in this field. 2. Industry Sector The establishment of wood processing has opened a channel for Guangdong and Hainan State Farms to comprehensively utilize rubberwood and windbreak forest for improving exploitation of timber resources and promoting the industrial development. It was expected to expand and construct 19 sawmills and 65 Annex B woodworking factories during appraisal. 21 were completed by Project completion. The SAR projected 3 timber processing complexes with 4 actually completed. The establishment of wood and timber processing not only makes it possible that about 200,000 cbm of felled rubberwood and windbreaks can be comprehensively utilized every year, but also increases the villagers' income by purchasing wood materials from them for processing. It has effectively exploited and utilized the timber resources. Rubberwood and branches, which had been poorly utilized in the past, only for fuelwood, have been changed into valuables, creating much new treasures to the Guangdong and Hainan State Farms. Major products of the 4 timber complexes turned out in 1994 included 15,300 cbm of sawn wood, 28,000 cbm of particle board, 2,600 cbm of finger-joined board, 200,000 pieces of varied furniture components, 250,000 sqm of building components and 450,000 pieces of other wood products with total product value of Y 148.432 million. Profits and tax amounted to Y 21.445 million. Taking Xilian Timber Complex for example, original investment for the Complex was Y 22.706 million with Y 14.46 million financed by the Bank. By 1994, fixed assets of the Complex had amounted to Y 38.6 million. Designed annual capacity of Xilian Complex was 12,000 cbm of sawn wood, 1,500 cbm of blockboard, 1,500 cbm of finger-joined board and Y 13.95 million of production value. It has now developed into annual production of 20,000 cbm of sawn wood, 3,000 cbm of blockboard and 3,000 cbm of finger-joined board. The Complex has also got additional production of 3,000 cbm of particle board, 5,000 cbm of plywood and 3,000 cbm of raw furniture components annually. Products are well sold in markets. Production value in 1994 reached Y 35.2 million with Y 3.41 million of profit and tax and Y 7.15 million of depreciation. Gross output value of industry and agriculture for Xilian State Farm in 1994 was Y 100.37 million with Y 50.1 million of industrial output value. Xilian Complex only shared about 35% of the total output value of the whole farm, 69% of the Farm's industrial output value. Xilian Timber Complex has now become the leading enterprise with best economic benefits on Xilian State Farm and given an impetus to its industrial developments. The Audit Report stated that "investments in timber processing are also likely to suffer if the facilities supported under the project continue to remain unprofitable". This is not in accordance with the facts. 3. Institutional Establishment Project Management Office(PMO) at varied levels and project management systems have been established. A large group of foreign-oriented economic personnel received training. Early in January 1984, PMO was set up at the levels of General Bureau, Prefectural Bureaux and project farms, equipped with 504 staffs in fields of finance, economic management, agricultural and Annex B 66 forestry engineering, responsible for project implementation, examination, supervision and handling with routine affairs. During project implementation, PMO staffs at each level were not only working hard, but also organizing and coordinating well the business with some other relevant departments in order to make smooth progress of the Project. We have learned from the Bank financed project a series of advanced scientific management process starting from project selection, identification, investigation, appraisal, implementation to procurement of equipment. All these have been put into practices in Guangdong and Hainan State Farms and good results have been achieved. Through the study of the Bank's management process, the decision making and the supervision management for the enterprises' management in Guangdong and Hainan State Farms have been enhanced. A large group of personnel received training and have become experts in Bank's project management. They were sent to project units in Guangdong Province, Gansu and other provinces by giving lectures on Bank Financed Project Management. PMO of General Bureau of Guangdong State Farms has taken on the responsibilities in the whole process of ADB financed Tropical Crops Development Project which is under implementation and other foreign economic cooperation. During the Project implementation, we had seriously summarized the 30 years' experience in economic management and agricultural technology within Guangdong and Hainan State Farms. Based on varied management systems then practised and combined with characteristics of the Bank financed project, we have worked out some management regulations: "Some Regulations on Rubber Cultivation", "Regulations on Land Use for Rubber Plantations", "Methods on Planning Management", "Methods on Financial Management", "Methods on Accounting", "Statistic Reporting System", "Methods on Project Construction, Supervision and Acceptance", "Regulations on Collecting Goods Procured under RDP", "Regulations on Enhancing the Management of Goods Procured under RDP". We also worked jointly with People's Construction Bank of China Guangdong Branch and Guangdong Provincial Audit Bureau by drawing up "Methods on Project Infrastructure Funds Management" and "Auditing Regulations". Practice of these regulations proved that they have effectively organized the project's operation and implementation. So that there are regulations to follow for the project management. The regulations have played a good role in the project's internal control. The regulations have been introduced to participants in several national-wide World Bank Financed Projects Conferences. Some of the regulations were borrowed by relative provincial Bureaux for reference. In the Project Completion Report, the Bank mission stated that "the successful completion of the project demonstrates positively that GBGSF(General Bureau of Guangdong State Farms) has the managerial capacity to undertake complex projects and the aptitude to work as a team with international aid organizations". In 1991, nine(9) foreign consultants employed by Asian 67 Annex B Development Bank to undertake the feasibility study for the proposed Tropical Crops Development Project. After working with their local counterparts in Guangdong State Farms and completing the on-the-spot investigation, they concluded in their feasibility study report that "the GBGSF has recently successfully completed a World Bank Funded Rubber Development Project. The experience gained from managing and executing this earlier project will be invaluable to the GBGSF in its implementation of the new venture." But the Audit Report states that RDP was "institutionally unimaginative". " A new project to support state farm commercialization is under preparation, but it is unlikely that it benefitted from the experience of Rubber Development". This is thoroughly a despite and undisguisedly denial to the efforts and achievements done and gained by the staffs in PMOs of Guangdong and Hainan Bureaux. For procurement procedures, it concluded that Borrower (adopted) a lax approach to implementation discipline by the Bank in the early years of implementation for procurement procedures. GBGSF followed the Bank's guideline for procurement actions from the beginning to the end. Offers were all requested from at least three quotations no matter it was through ICB or direct purchase. Calling tenders or contracts signed were all done prior to the Bank's approval and the Bank keeps all the records. We do not quite understand where the Audit's conclusion had come from. 4. RDP has achieved great social and other benefits in poverty alleviation and increment of workers and farmers' income RDP has provided 62,800 job opportunities to high school graduates on farms and adjacent villagers. 40% of whom are women. Average annual income for each worker on project farms was only Y 879 in 1983. Annual income per worker reached Y 3,562 in Hainan State Farms, and Y 4,650 in Zhanjiang area which is respectively 4 times and 5.3 times of the previous records. RDP has completed 104,000 sqm of schools, clinics and scientific research floorings and procured 740 sets/pieces of teaching, scientific research and medical apparatus. These have not only improved the conditions of scientific research, education and medical treatments, but also made great contributions to guarantee the health care of more than one(l) million adjacent villagers and entering school of their children. RDP has completed 466,000 sqm of housing area. About 13,000 families with about 60,000 people moved into and lived in new houses. RDP has also completed some facilities of power and hydropower stations, power transmission lines, rural roads, bridges/culverts and telecommunication systems which have improved the production and living standard for state farm workers. Adjacent villagers in rural towns within state farms boundary are all benefitted from the facilities. This has greatly facilitated the development Annex B 68 of rural economy. About 100,000 of adjacent villagers with their land were merged into state farms in 1985. Adult villagers share the same treatments with state farms workers. The land which had been proposed for planting rubber in state farm-commune joint ventures much earlier were all planted with standard rubber plantation specified for state farms. These villagers have received much benefits than those in joint ventures. By doing this, the disputes in utilization of land had been well settled and the mutual relations between state farms and communes also improved. In order to negate the RDP, the Audit Report states that the RDP "made no contribution to poverty alleviation", which does not conform to the facts. The Audit has also described exaggeratedly the disputes occurred in utilization of land between state farms and communes as "a long-standing antipathy between state farms and communes was acknowledged". This is an openly distortion of the facts and the relations between the two groups. V. ASSESSMENTS GIVEN BY PREVIOUS BANK MISSIONS DURING PROJECT IMPLEMENTATION During Project implementation, Bank missions were sent every year to Project area for seriously supervision and positive attitudes were given by the Bank officials and experts to many project units for their successful implementation. During the implementation from 1984 to 1991, nine(9) missions had been sent for project supervisions. The missions have inspected 33 state farms(62 farms if repeatedly calculated ), more than 50% of the total, 16 times of the 4 timber complexes, 8 sawmills, 2 tropical-crop research stations, 3 hospitals and the Management College in Guangzhou. Every time when they arrived, besides listened to the briefings by officials and experts from General Bureau, prefectural bureaux and project units and consulted written materials, they would always go down to the production teams/brigades, set foot in rubber plantations and visited factory workshops to directly talk with farmers, tappers and workers/technicians about the production, to collect and master the first-hand information of the project implementation. This kind of working methods and style of going down to the grass- roots units and the steadfast working attitudes were very well received every where by the Chinese officials, experts and the people working down in the grass-roots units. Suggestions and opinions in all aspects put forward by the missions are always considered seriously by all relevant circles. A Bank mission paid a visit to the terrace construction on Nanmao State Farm in March 1984. Mr. Poh Loh Lim commented that "this kind of terraces is considered the best in the world". Mr. A. Green praised that "this is the best quality terrace I have ever seen". When the mission was told that planting targets for the same year had been overfulfilled at the next leg visit on Nanlin State Farm, Mr. Green was very happy by saying that "I have been engaged in many projects, the implementation in the first year 69 Annex B was always difficult. It is expected to complete 51% of the targets. But you have surpassed the original tasks. You have done a large amount of work. You should report to the Bank as soon as possible for reimbursement. There is no doubt that this will be a successful project". "I am glad to see that the project implementation provides with more job opportunities so everybody has things to do", said Mr. Poh Loh Lim after the mission's supervision. In February 1985, a four-member mission led by Mr. W. T. Smith, Chief of Agricultural Operation, Asian Department, visited the rubber planted in 1984 on Nantian State Farm. The mission found that the average girth rate increased 7.47 cm in one year after planting. An official from Tongza Prefectural Bureau told the mission that the Bureau planted 4,300 ha of rubber in 1984. About 95% of the planting materials were high stumped buildings with polybags. "The project is progressing well with good quality. This visit leaves me a deep impression", said Mr. Smith at the end of the mission supervision. Mr. James Goering, Senior Representative of Bank Resident Mission in Beijing then, was also with the supervision mission, he appraised that "the implementation of the project goes very well, especially those rubber planted in fields with high quality standard and they grow well". Mr. Jack Blencowe, member of the mission gave the following comments: "From your planting, I can see that it has surpassed Malaysia and Thailand in many circumstances. I have been involved in rubber projects in 7 countries, I find this project is the best considering about the implementation". The 1986 mission visited project farms in Zhanjiang Prefecture in February 1986. When supervising the rubber planted on Hongwuyue State Farm, located at 22 degrees North Latitude, Mr. A. Green commended that "considering about the rubber planted successfully in such a high latitude at north, the project implements well, progresses well and the quality is of high standard". As head of the four-member supervision mission in 1987, Mr. Wenpo Ting led the mission to concentrate on family farms, project management and statistic reporting system. The mission paid a visit to Mr. Xu Busong's family farm at Changqing Brigade, Nanlin State Farm. The mission members consulted Mr. Xu of his rubber maintenance and management, looked around the fruits crops and horticulture planted nearby his house. The estimated labour force income for Mr. Xu's family in 1987 was Y 2,200 in average. The mission commended that the planting of the rubber in the family farm was growing well and the family had made a very good arrangement in their daily life. Later, all the mission members joined with Mr. Xu's family for a group picture. The mission checked the statistic report accounts, account books and final accounts and the utilization and management of goods on State Farms Nantian, Dongxing and Nanlin. Afterwards Dr. Ronald C. Ng was pleased to conclude to the Chinese counterparts that "your project management is good and sound, completed with full. contents and data. We are happy for your management and we don't have to worry about it". Annex B 70 Ms. N. K. Hill led 2 missions for the project supervision in 1988 and 1989. In May 1988, while inspecting Nanmao State Farm some of the rubber which would be tappable ahead of schedule, the Rubber Expert Mr. Poh Loh Lim congratulated the farm by saying that "the SAR stated rubber in Hainan would be tappable in the eighth year from planting. But some will meet the standard in 6 years. I am quite happy with this successful project". The Forestry Expert Mr. J. Keith Templeton gave the following comments that "I learned very few about Chinese rubber industry in the past. I am amazed at the high quality of planting, the good ways of utilizing of rubberwood. Personally, I think some countries can learn many experience from China in rubber planting and rubberwood utilization". All the officials and experts of previous Bank missions were almost holding identical views to the RDP. It is obvious to all that the rubber establishment is of high standard and rubber grows well under the RDP. But the Audit Report stated that "(the Project) progress was more quantitative than qualitative", accusing us of consideration too much in quantity, less in quality. Saying that the project was unsatisfactory. We appreciate many valuable opinions and suggestions put forward by the Bank officials and experts during previous missions supervision. The suggestions include: wholly extension of stumped buddings with polybags, adoption of green buds for bud grafting, not too regularly pruning for young trees; planted more high- yield clones with cold-resistant, application more fertilizer less organic matter, to reduce planting cost; not intercropping with long-term annuals like coffee and tea but with short-term annuals; to enhance the prevention of pests and diseases in rubber nurseries and in fields; to speed up timber processing and to employ foreign consultants to conduct timber processing technology, management and training. We have respected the recommendations by the Bank's experts and adopted those favoured by the local conditions. Those we felt inappropriate to local conditions had been gone through small trial before their large- area extension. China began her large scale of rubber planting in 1951. Some experts had affirmed that it was a forbidden area for rubber growing above 17 degrees North Latitude. Through constant research and experimental work, China has successfully grown rubber in large scale above 18 degrees North Latitude and accumulated a great number of experience. We have respect for foreign experience while we would consider the Chinese realities. We borrow foreign experience but will not copy everything. By doing so, we have created and accumulated the experience in rubber establishment with Chinese characteristics during a long- term practice. We have established a large scale rubber base. Rubber growing area has come in the 4th in the world. VI. MAJOR PROBLEMS DURING PROJECT IMPLEMENTATION 1. Reasons the construction and production of the timber complexes lagged behind schedule 71 Annex B a. Less experience in timber processing industry in that time, large investment, complicated technical process, poor information in marketing and what kind of products should be produced and what the production scale it should be, were the reasons of the delay. For construction schedule, we wanted to start Sanya Complex as a trial to collect and gain experience then go on the other complexes. That is also one of the.reasons. b. The Design Institute could not produce in time the design drawings for Sanya Complex. This had made the construction lag behind schedule. Test-run of the Complex was expected to commence in September 1989. But the experts from Bison Company of Germany left for home presumptuously in June 1989 for more than one month. Some other experts at the factory site were not competent for assembling. In the meantime, experts for glue-making could not produce qualified glue even after a long-time testing, causing the produced particle board products to fail in meeting the required specifications. As a result the commission had not been completed until September 1990, delayed for one year. c. Construction of Zhanjiang Presswood Factory with production lines of Building Components and Transport Pallets started in November 1987. It was put into trial production by April 1989. This was considered a smooth progress. But a flaw was discovered in the high pressure, equalizing vessel, which had been supplied by the Seller, Werzalit Company of Germany. Products in quantity and quality of Mould Flo( also by Werzalit) could not meet the standard. After many negotiations with the Seller, Mould Flo was renewed September 1990 and the high pressure, equalizing vessel was replaced with a new one July 1991. Normal production started from July 1992. 2. Inappropriately choosing of some equipment The head bandsaw carriages were with large and complete functions, but consumed large amount of electricity, not suitable for processing small-sized timber, which have not been used and the equipment and funds are kept idle. The Plant Growth Chambers were procured for research stations in breeding of plants. Since there is lack of power in rural area, and the chambers consume too much electricity, full roles of the chambers can not be achieved. 3. Marketing remains a problem Designed capacity of transport pallets in Zhanjiang Presswood Factory was 400,000 pieces annually. Since the products were not suitable for the market requirements, marketing out the products remains a big problem. Anyway, new products of market-oriented are under study and development. 4. Worrying about risks for clones planting Annex B 72 It was expected to have a trial planting of 7,300 ha of new clones during appraisal. Since there was no successful experience in planting new clones, we dared not take the risks. During the implementation, only 3,042 ha of land planted with new clones, which had made up 41.6% of SAR targets. VII. CONCLUSIONS The arguments were raised by the Author of the Audit Report. The Audit's working methods, style and attitudes were not deep into reality. Its arguments are not tally with the facts. Therefore, they can not stand the truth. If the Audit mission had spent more time in the field, we believe the Audit's conclusions would have been more favorable. We have received some dozens of Bank officials and experts from project identification to project completion. All of them worked so hard and set foot down to the grass-roots units. We do appreciate their working style and attitudes. The fundamentals stated in the Audit Report do not conform with the facts. The Preface states that the preparation of the Performance Audit Report was "based on Project Completion Reports, Staff Appraisal Reports... and held discussions with the staff and management from a number of state farms". We have checked with PCR, SAR and some materials and found out there are not any identical opinions shared with the Audit in major principle issues. There are 65 state farms involved in RDP. The Author visited only one state farm(Xilian State Farm). How could he say that he had held discussions with the staff and management from a number of state farms? The purpose of this written material we are preparing is not only to denounce the Audit's mistaken opinions and views, but also overall and objectively reflect the RDP's realities and to maintain the truth and the solemnness the Bank towards auditing. We would like to take this opportunity to express our sincere thanks to all the officials and experts from the World Bank who have offered their helps to the project, also thanks to the World Bank for its financing to the Project, through which large number of people in Guangdong and Hainan State Farms Bureaux benefitted from. PREPARED BY Project Management Office General Bureau of Guangdong State Farms Project Management Office General Bureau of Hainan State Farms 73 Annex B APPENDIX 1 Project Achievements and Assessments Stated in the Bank's Project Completion Report The project generated considerable benefits as a result of productive tree plantings, institution building, technology transfer and social-economic inputs. The planting of 52,354 ha of rubber and 16,061 ha of windbreaks increased rubber, timber and cash crop production; created 62,800 new jobs, 40% of which are held by women; and at project completion in 1990, farm income had increased from Y 900 to about Y 2000 (in nominal terms) per worker. The quality of the planting achieved was excellent due largely to (a) planting of quality materials derived from sound nursery management; (b) good field preparation and establishment, including adequate maintenance in weed control, nutrition, application of organic manure and green mulching; (c) appropriate practices in water and soil conservation including establishment of legume covers to improve soil fertility and mitigate soil erosion; and (d) effective pest and disease management and prevention of damage by domestic animals. The ERRs for the project were estimated to be 15% for new planting, 21% for replanting, and 16% overall. The shortcomings of the project were that the diversity of planted clones was less than expected; the use of advanced planting materials was not readily adopted; windbreaks were occupying land which could be used more suitably for rubber planting; operational inputs were not as cost effective as could have been achieved; and research programs were constrained by requirements for research institutes to generate income and by lack of coordination. The timber complexes, though initially lagging in establishment and later in operational efficiency, gave indications of being financially and economically viable at the time of the PCR. Annex B 74 APPENDIX 2 "Opinions to the Final Acceptance of the Project" by Chinese Examination and Acceptance Mission 1. Targets for rubber and windbreaks planting have been overfulfilled, waste and uncultivated land reclaimed and forest mulching area increased. This had been playing a good role in the transformation of ecologic environment. Since the rubber establishment and upkeep of rubber continue to be of a very high standard, rubber is growing luxuriantly with very high reservation rate. Rubber planted at early project stage would come into tapping one to two years ahead of schedule. The yield will reach or surpass the expectation during appraisal. It is estimated with 52,354 ha of planted rubber that the project cycle will accumulate to turn out 1,588 thousand tons of dry rubber(58,800 tons per year in average), which will accordingly reduce the state's import of rubber. This could annually save USD 50 million of foreign currency for the State. The whole project cycle will save for the State USD 1.3 billion of foreign currency expenditure. 2. All the 21 sawmills, especially the 4 timber complexes have been put into production. Except certain products failed to open the market and not able to reach designed capacity, the major products have met with, some even surpassed the designed capacities. Product quality conforms to the designed requirement. These will make it possible and better comprehensive utilization of about 200,000 cbm of felled rubber trees and windbreaks due to replanting in Guangdong and Hainan State Farms every year. Felled rubberwood was used as firewood in the past or became rotten due to no transport access to plantation. Since the upgrading of sawmills and establishment of timber processing, waste rubberwood can now be produced to valuable particle board, treated sawnwood, presswood, pressed-furniture and transport pallets. This has opened a new era in utilizing rubberwood resources. The State can save foreign currency by reducing the import of wood materials. Export of partial rubberwood products can both receive foreign currency and accelerate the industry development in state farms area. 3. Introduction of complete set of advanced management methods and scientific management programs from the Bank and the training of a large group of management staffs for business-orientation will make the state farms in Guangdong and Hainan Provinces benefitted in their modernization process. 4. Completion of some infrastructure like rural roads, power stations, telecommunications and resident houses has improved the communication, power supply and housing of the project farms. Procurement of engineering machineries and transport vehicles has strengthened the transportation fleet and enhanced mechanization 75 Annex B level on project farms. Procurement of advanced equipments for scientific research, training, office facilities and medical apparatus has considerably changed the old faces of the lagging- behind equipments, improved the efficiency in scientific research, school teaching and handling office business and strengthened the diagnosing and curing capabilities to difficult and complicated cases of illness. 5. Due to the inappropriate selection of some equipments(head bandsaw carriages in Sanya and *Xilian Complexes and agri- machinery on some other farms) in the project implementation, there are some equipment leaving idle. Marketing of some products(transport pallets in Zhanjiang Presswood Factory) remains unsolved and internal management of some project units has not been well established. More attentions should be given to the problems mentioned above, upkeep of the equipment which are unable to use shall be enhanced. The equipment shall be transferred to some other units if possible in order to avoid overtaking of funds. There should be much concerns for domestic and international markets for some wood products. Maintenance of immature rubber at latter stage shall be enhanced. Every latent possibility and potentiality for improving production should be tried hard so that all the final targets expected during appraisal can be thoroughly realized. Annex B 76 APPENDIX 3 The Replanting and Newplanting of Rubber with World Bank Loan on Dongtai State Farm Dongtai State Farm, located in Qionghai city, was established in 1951. It is one of the early rubber growing bases on Hainan island. There are presently 12,850 people including 7,181 workers and staffs. Total land area is 10,170 ha with 4,354 ha planted with rubber. The Farm started using the loan from the Bank in 1984 and completed 1,082 ha of replanting and newplanting(with 633,100 plants of rubber planted), which is 115.8% against the expected 934 ha. Completion of windbreaks is 274 ha, 124.5% of the expected 220 ha. The Farm also finished planting 646 ha of leguminous mulching plants. The Farm had made plantation for replanting and land for newplanting prepared before replanting and newplanting. Terrace was built around the slopes for those newplanting in hills. Windbreaks and mulching crops were planted at the same time when replanting in fields in order to strictly control the soil erosion. After planting, the plant roots were buried with topsoils and base manures. Responsibility contracts were signed with individuals for rubber maintenance and management. Young trees were growing sturdily with very high survival rate. By 1994, 584,400 plants of rubber planted under RDP on Dongtai Farm kept alive. The reservation rate is 92.3%. Some rubber under RDP was reaching the tappable size in the 6th year after planting. According to SAR, 1994 was the fourth tapping year. Average yield in that year was 3.225 kg per tree. Yields totalled 1,442.9 kg per ha, which is 44.29% increment over the SAR targets. 77 Annex B APPENDIX 4 The Planting and Newplanting of Rubber with World Bank Loan at Hongqi Brigade, Nanmao State Farm Hongqi Brigade of Nanmao State Farm in Hainan Province is one of the pioneers in using Bank loan for rubber replanting. Thoroughly replanting of the old plantation of 83.2 ha commenced in 1983, planting with 45,260 plants of rubber. The Brigade had drawn up blueprints for the 2nd generation of rubber establishment before felling and replanting of old plantation. High standard terraces were built. Windbreaks and mulching plants were planted while replanting of rubber. Strict technical advices were conducted and maintenance were enhanced after replanting. Rubber girth increased 8-10 cm each year between 1984 and 1988. In August 1987(4.5 years after planting), there were 357 plants in a best individual position put into trial tapping. In 1988, there were 9,306 trees reaching tappable size in the brigade. Yields amounted to 7.17 tons of dry rubber, averaging 0.77 kg per tree. In 1989, 14,910 trees reached tappable size, producing 20.03 tons of dry rubber with 1.34 kg per tree in average. In 1990, 19,500 trees were tapped. 45.9 tons of dry rubber were produced, averaging 2.35 kg per tree and 552 kg/ha/year calculated by planted area. In 1991, tappable size of trees totalled 29,632 plants, yielding 82.3 tons of dry rubber, averaging 2.78 kg per tree and 989 kg/ha/year. In 1992, 33,449 trees came to tapping. Due to the influence by typhoons, tapping in the year lasted only 7 months, with the production of 68.2 tons of dry rubber. It was 2 kg per tree in average and 819 kg/ha/year. In 1993, tappable trees amounted to 38,193 plants, yielding 106 tons of dry rubber. Average yield for each plant was 2.78 kg and 1,274 kg/ha/year. In 1994, 38,854 trees were tapped, 138.74 tons of dry rubber were turned out with average 3.57 kg per tree and 1,668 kg/ha/year. By May 5, 1995, tapping in the year covered only one month. According to the sampling, yields of each tapping increased 67% against the same period in the previous year. It is expected the yields in 1995 would top 150 tons of dry rubber with average 1,800 kg/ha/year. Dry rubber production in 1981 before replanting was 50.19 tons Annex B 78 for the Brigade. It was about 571.5 kg/ha. After replanting, the total production in 1994 was 2.76 times as much as in 1981. Production in per hectare was 2.92 times as much as in 1981. There are 53 workers and staffs in the Brigade. Average income was Y 6,348 in 1994. Some people received even more than Y 8,000. During Project implementation, 8 buildings were completed. About 90% workers and staffs moved into new houses. IBRD 16867R GUANGXI GUANGDONG He u --- ,- Ma mo Shankou - Lanrang D a a -- - ¯ . Beh Romauchuant z CHINA RUBBER DEVELOPMENT PROJECT , PROJECT AREAS H.,ka -PROJECT FARMS ENGAGED IN: REPLANTING NEW PLANTING ® STATE FARM HEADQUARTERS ROADS RAILWAYS RIVERS PORTS -.- PROVINCE BOUNDARIES - - INTERNATIONAL BOUNDARIES 51-Hal an 2C, 2D' .......... flonfg HA INA"N KILOMETERS_ - MILES " o 20 0-~ ~ 4,'IREP,<OF Gan,m0.,m 112 Thi, map ho, b.e p red by Th. WoHd B.nk'. staff -x,lusivel for Ya X an Anyou rh. co .onienc ro d,rl and i for th. internal use of Th. World Bank Group. .. nom.inations usd and th. boundari.. shown 0n thi. 4. ,co~mp do noI imcpl, on Ih. part o The World Bonk Group, any judgmnt Are ~ a t a ,o xon n This mop i3 based on IBRD 16867, January 1983 tn 1h9a statu, F ny 1erilory er any endoryement or cpt.nc . 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