Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: ICR0000133

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-45010, IDA-32550, JPN-50625)

ON A

LOAN

IN THE AMOUNT OF US$46.7 MILLION

Public Disclosure Authorized AND A

CREDIT

IN THE AMOUNT OF SDR 73.8 MILLION (US$99.5 MILLION EQUIVALENT)

TO

THE PEOPLE’S REPUBLIC OF CHINA

FOR THE

Public Disclosure Authorized GANSU AND INNER MONGOLIA POVERTY REDUCTION PROJECT

June 26, 2007

Rural Development, Natural Resources and Environment Sector Unit Sustainable Development Department

Public Disclosure Authorized East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS (Exchange Rate Effective June 5, 2007) Currency Unit = Renminbi Yuan (RMB) RMB1.00 = US$0.1306 US$1.00 = RMB7.659

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS ABC Agricultural Bank of China CAS Country Assistance Strategy DCA Development Credit Agreement DID Difference in difference (analysis) ERR Economic Rate of Return GS Gansu ha hectare IBRD International Bank for Reconstruction and Development ICR Implementation Completion and Results Report IDA International Development Agency IM Inner Mongolia IP Inspection Panel M&E Monitoring and Evaluation MIS Management Information System NPV Non-Project Village mu Chinese area measurement (1 mu = 0.07 ha, 1 ha = 15 mu) PAD Project Appraisal Document PDO Project Development Objective PHRD Japan Policy and Human Resources Development Fund PMO Project Management Office PV Project Village QAG Quality Assurance Group SARS Severe Acute Respiratory Syndrome SDR Special Drawing Right SSB State Statistical Bureau WB World Bank WTO World Trade Organization

Vice President James W. Adams, EAPVP Country Director David R. Dollar, EACCF Sector Manager Rahul Raturi, EASRE Task Team Leader Sari K. Söderström, EASRE

The People’s Republic of China

Gansu and Inner Mongolia Poverty Reduction Project

Implementation Completion and Results Report

Contents

Page Number Data Sheet…………………………………………………….………………………………... i

Section 1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes...... 5 3. Assessment of Outcomes ...... 9 4. Assessment of Risk to Development Outcome...... 15 5. Assessment of Bank and Borrower Performance...... 15 6. Lessons Learned...... 17 7. Comments on Issues Raised by the Borrower/Implementing Agencies ...... 19

Annex 1. Project Costs and Financing...... 20 Annex 2. Outputs by Component...... 21 Annex 3. Economic and Financial Analysis ...... 27 Annex 4. Bank Lending and Implementation Support/Supervision Processes...... 29 Annex 5. Borrower’s Comments and ICR Summaries ...... 31 Annex 6. List of Supporting Documents...... 53

Maps: IBRD 29994R (Gansu), IBRD 29995R (Inner Mongolia)

A. Basic Information Gansu and Inner Mongolia Country China Project Name Poverty Reduction Project IBRD-45010, Project ID P046564 L/C Numbers IDA-32550 ICR Date June 26, 2007 ICR Type Core ICR The People’s Republic of Lending Instrument SIL Borrower China Original Total US$160.0 million Disbursed Amount US$146.93 million Commitment

Environmental Category B

The Gansu Provincial Project Management Office Implementing Agencies The Inner Mongolia Regional Project Management Office

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review 04/14/1998 Effectiveness 03/17/2000 03/17/2000 Appraisal 01/07/1999 Restructuring - 02/12/2001 Approval 06/24/1999 Mid-term Review - - Closing 06/30/2006 06/30/2006

C. Ratings Summary

C.1 Performance Rating by ICR Outcomes Satisfactory Risk to Development Outcome Moderate Bank Performance Moderately Satisfactory Borrower Performance Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry Moderately Unsatisfactory Government Satisfactory Quality of Implementing Satisfactory Moderately Satisfactory Supervision Agencies Overall Bank Overall Borrower Moderately Satisfactory Satisfactory Performance Performance

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C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments (if any) Rating Potential Problem Project at any No Quality at Entry - time Problem Project at any time Yes Quality of Supervision - DO rating before Closing/Inactive Satisfactory status

D. Sector and Theme Codes Original Actual Sector Code (as percent of total Bank financing) General agriculture, fishing and forestry sector 83 82 General public administration sector 9 9 Power 2 2 Roads and highways 3 4 Water supply 3 3

Theme Code (Primary/Secondary) Improving labor markets Primary Not Applicable Other rural development Primary Primary Rural non-farm income generation Secondary Secondary Rural services and infrastructure Secondary Secondary

E. Bank Staff Positions At ICR At Approval Vice President James W. Adams Jean-Michel Severino Country Director David R. Dollar Yukon Huang Sector Manager Rahul Raturi Geoffrey B. Fox Project Team Leader Sari K. Söderström Petros Aklilu ICR Team Leader Sari K. Söderström - ICR Primary Authors Sari K. Söderström - Weiguo Zhou - Luc Christiaensen -

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F. Results Framework Analysis

Project Development Objective The project development objective (PDO) defined in the Project Appraisal Document (PAD) was to reduce the incidence of absolute poverty in remote and inaccessible villages of Gansu and Qinghai Provinces and Inner Mongolia Autonomous Region1. The project aimed to empower poor households in the selected poor counties to raise their incomes through increased grain and livestock production sufficient to meet the basic needs of food and clothing and, in many cases, also to generate a marketable surplus to improve living standards. The establishment of alternative income-generation activities in poor rural areas, the improvement of rural infrastructure and the enhanced access to basic social services (such as health and education) was also anticipated to increase the living standards of poor rural households. Key Performance Indicators (KPIs) defined in the PAD to monitor the project’s progress towards achievement of the PDO and the project’s outputs included: (a) the percentage of the provincial population below the national poverty line; (b) crop and livestock yield increases; (c) grazing land management; (d) feed balances; (e) per capita grain production; (f) rates of school enrollment; (g) visits to health centers; and (h) jobs created. Indicators consistent with Annex 1 of the PAD have been monitored. Key PDO and outcome indicators as presented below were adjusted at the start of implementation to enable more effective monitoring.

Revised Project Development Objective Although the project had a significant change in scope (see Section 1.6), the original PDO of reducing the incidence of absolute poverty in the project areas remained unchanged.

1 The statement of the objective of the Project in Schedule 2 of the Development Credit Agreement (DCA) added “… through the promotion of environmentally sustainable agricultural and rural development and improvement of access to infrastructure and basic social services ….” to the PAD definition.

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(a) PDO Indicators Original Target Revised Target Actual Value Achieved Indicator Baseline Value Values Values at Completion The reduction in income poverty measured as the net income of the target group in Indicator 1 RMB per capita GS 757 GS 946 GS 1,200 GS 2,028 (2006) Value: IM 1,128 IM 1,300 IM 2,237 (2005) Date achieved: January 7, 1999 Feb. 12, 2001 June 30, 2005 June 30, 2006 Compared with 1999, the real income growth rate for PV was over 70 percent in Inner Mongolia and close to 60 percent in Gansu. Comments: The actual income increase achieved was 214.4 percent and 172.1 percent of the target value in Gansu and Inner Mongolia, respectively. The actual income increase achieved was 169 percent of the revised target value for Gansu.

The reduction in the total number of absolute poor expressed as a percentage of the Indicator 2 population below the national poverty line (the poverty headcount rate) GS 27.4 (22.2 in NPV) GS 2.7 (2006) Value: IM 16.7 (18 in NPV) IM 5.4 (2004) Date achieved: January 7, 1999 - - June 30, 2006 Compared with 1999, the poverty headcount rate dropped by 11.3 and 24.7 percentage points in Inner Mongolia and Gansu, respectively (compared with 2004 and 2006 Comments: respectively). The poverty line in 1999 was RMB498 and 654 per capita in Gansu and Inner Mongolia, respectively, and was increased to RMB650 in 2006 for Gansu and to RMB698 in 2004 for Inner Mongolia.

The reduction in food poverty measured as a percentage of the population with Indicator 3 grain production below the national poverty line (i.e., below 150 kg per capita) GS 21.1 (17.2 in NPV) GS 7.7 (15.3 in NPV) Value: IM 2.4 (3.5 in NPV) IM 7.6 (7.4 in NPV) Date achieved: January 7, 1999 - - June 30, 2006 The increased share of the population with per capita grain production below 150 kg in Inner Mongolia does not imply a negative outcome; it reflects the shift in production from staple grains to higher-value cash crops (see Intermediate Outcome Indicator 2). Comments: This means that households have achieved full subsistence levels and are now pursuing cash-generating activities. (See Intermediate Outcome Indicator 1 which shows the increased per capita grain production, implying improved productivity of the project households.)

G GS = Gansu IM = Inner Mongolia PV = project villages NPV = non-project villages

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(b) Intermediate Outcome Indicators Original Target Revised Target Actual Value at Indicator Baseline Value Values Values Completion An increase in agricultural productivity measured as kg per capita of grain output of the Indicator 1 target group GS 279 GS 320 GS 420 GS 437 Value: IM 593 IM 884 Date achieved: January 7, 1999 Feb. 12, 2001 June 30, 2005 June 30, 2006 The percentage achieved compared with the baseline: IM 149.1 percent and GS 156.6 percent. Comments: The percentage achieved compared with the target value: GS 136.6 percent. The percentage achieved compared with the revised target value: GS 104 percent.

An increase in agricultural productivity measured as cash incomes in RMB per capita Indicator 2 from farming in the project areas GS 449 GS 731 Value: IM 997 IM 2,168 Date achieved: January 7, 1999 - - June 30, 2006 The percentage achieved compared with the baseline: GS 162.8 percent and IM 217.5 percent. Cash income from farming activities (cropping and animal husbandry) is in nominal prices. Farm-gate prices at project completion did not differ significantly from those at appraisal. Comments: Food prices declined as a result of China’s World Trade Organization (WTO) accession in 2001, but began rising in 2003 as a result of increases in world market prices and domestic demand. The increased net agricultural income was a result of enhanced farm productivity in the project area.

Indicator 3 The percentage of PV with access to a road GS 85.7 GS 100 (2006) Value: IM 86 IM 98 (2004) Date achieved: January 7, 1999 - - June 30, 2006 The percentage of villages with road access at the beginning of the project was lower for PV Comments: than for NPV. At project completion, the percentage is higher for PV than for NPV.

Indicator 4 The percentage of PV with electricity GS 90.5 GS 100 (2006) Value: IM 96.0 IM 98 (2004) Date achieved: January 7, 1999 - - June 30, 2006 Comments: ---

The percentage of project households located less than 100 m from a source of safe Indicator 5 drinking water GS 53.9 (51.8 in NPV) GS 64.8 (64.6 in NPV) Value: IM 77.6 (83.3 in NPV) IM 95 (85.3 in NPV) Date achieved: January 7, 1999 - - June 30, 2006 The access to safe drinking water has varied significantly from year to year depending on the Comments: overall water balance in the area (i.e., rain fall and ground water levels).

The increase in alternative income-generating activities measured as the percentage of Indicator 6 households with non-agricultural income GS 78.3 (82.1 in NPV) GS 87.1 (84.3 in NPV) Value: IM 63.8 (68.3 in NPV) IM 63.8 (63.3 in NPV) Date achieved: January 7, 1999 - - June 30, 2006 The number of households participating in off-farm income-generation activities has increased significantly in Gansu. The lower rate in Inner Mongolia is explained by the fact that, on Comments: average, most of their income is from animal husbandry in which profitability has increased. As a result, incentives for off-farm work are reduced.

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Original Target Revised Target Actual Value at Indicator Baseline Value Values Values Completion Environmental improvement measured as incremental established ground coverage in Indicator 7 ha, including trees and grassland, and terracing and river embankments GS 31,700 + 23,343 + GS 24,798 + 24,103 Value: 3,500 IM 25,580 + 3,592 IM 48,000 + 4,376 Date achieved: January 7, 1999 Feb. 12, 2001 - June 30, 2006 The percentage achieved compared with the target value was (a) in Gansu: 127.8 percent for Comments: trees and grassland, and 111.4 percent for terracing and river embankments; and (b) in Inner Mongolia: 187.6 percent for trees and grassland, and 121.8 percent for terracing.

Indicator 8 The percentage of villages in the project areas with health clinics Value: Date achieved: As explained in the main text, the Health Services sub-component was cancelled (Sections 1.6.4 and 3.2.7). The ICR team, however, wants to share the alarming health indicators in rural China. Comments: 1999 2000 2001 2002 2003 2004 PV 57.6 64.1 63.0 63.4 59.8 63.0 NPV 69.0 79.3 67.2 62.1 70.4 69.0.

G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (US$ million) 1 06/30/1999 Satisfactory Satisfactory 0.00 2 12/21/1999 Satisfactory Satisfactory 0.00 3 06/29/2000 Satisfactory Satisfactory 3.97 4 12/27/2000 Satisfactory Satisfactory 20.91 5 06/28/2001 Satisfactory Satisfactory 28.41 6 12/20/2001 Satisfactory Satisfactory 40.35 7 06/28/2002 Satisfactory Unsatisfactory 56.68 8 12/23/2002 Satisfactory Satisfactory 70.40 9 06/30/2003 Satisfactory Satisfactory 82.82 10 12/09/2003 Satisfactory Satisfactory 94.20 11 06/07/2004 Satisfactory Satisfactory 112.38 12 10/21/2004 Satisfactory Satisfactory 121.18 13 06/21/2005 Satisfactory Satisfactory 135.19 14 04/17/2006 Satisfactory Satisfactory 143.13

H. Restructuring

ISR Ratings Board Amount Disbursed Restructuring at Reason for Restructuring & Key Approved at Restructuring Date Restructuring Changes Made PDO Change (US$ million) DO IP The review by the Inspection Panel caused the Borrower to drop Qinghai March 14, 2001 - S S 23.29 Province from the project. (see paragraphs 1.6.1 and 1.6.2)

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I. Disbursement Profile

vii 1. Project Context, Development Objectives and Design

1.1 Context at Appraisal 1.1.1 This project was the third2 in a series of Bank-assisted, targeted poverty reduction operations in China, supporting the government's Eight-Seven Poverty Reduction Plan (1993). The project aimed to promote the Bank's overall goal of poverty reduction as articulated in the 1997 report "Rural Development from Vision to Action" which identified China as one of the focal countries. 1.1.2 The project was designed to be consistent with the Country Assistance Strategy (CAS) for the period 1998-2003 in supporting human resources development. Specifically, the project was designed to support targeted poverty reduction through selected investments in environmentally-sustainable agricultural and livestock development, the provision of basic rural infrastructure and enhanced access to basic education and health services in the poorest regions in western China. This project was fully in line with the Bank's strategy of shifting resources to China's interior. 1.1.3 The rationale for Bank support to the project was that: (a) the Bank had significant experience in addressing poverty in China in the most difficult environments; (b) the Bank’s intervention in provincial poverty reduction activities would demonstrate that public sector institutions can also be effective when services are needed and delivered horizontally; (c) the Bank’s assistance often leverages additional domestic resources for poor counties; (d) enhanced knowledge transfer would occur during project preparation and implementation; and (e) the Bank’s involvement would ensure more rigorous project implementation quality.

1.2 Original Project Development Objective (PDO) and Key Indicators 1.2.1 The PDO defined in the PAD was to reduce the incidence of absolute poverty in remote and inaccessible villages of Gansu and Qinghai Provinces and Inner Mongolia Autonomous Region3. The project aimed to empower poor households in the selected poor counties to raise their incomes, through increased grain and livestock production sufficient to meet the basic needs of food and clothing and, in many cases, also generate a marketable surplus to improve living standards. The establishment of alternative income-generation activities in poor rural areas, the improvement of rural infrastructure and enhanced access to basic social services (such as health and education) was also anticipated to increase the living standards of poor rural households. 1.2.2 Key Performance Indicators (KPIs) to monitor the achievement of the PDO and project outputs defined at the time of appraisal included: (a) the percentage of the provincial population below the national poverty line; (b) crop and livestock yield increases; (c) grazing land management; (d) feed balances; (e) per capita grain production; (f) rates of school enrollment; (g) visits to health centers; and (h) jobs created. The indicators were adjusted at the start of implementation to enable effective monitoring.

2 The project was preceded by the Southwest Poverty Reduction Project and the Qinba Mountains Poverty Reduction Project. 3 The statement of the objective of the Project in Schedule 2 of the DCA added “… through the promotion of environmentally sustainable agricultural and rural development and improvement of access to infrastructure and basic social services ….” to the PAD definition.

1.3 Revised PDO 1.3.1 Although the project had a change in scope (see Section 1.6), the original PDO of reducing the incidence of absolute poverty in the project areas remained unchanged.

1.4 Main Beneficiaries 1.4.1 The main project beneficiaries were estimated at appraisal to be about 1.7 million people, including a large number belonging to ethnic minorities, living in absolute poverty4 in Gansu (930,000), Inner Mongolia (674,000) and Qinghai (61,800). Although Qinghai Province was dropped from the project (see Section 1.6) and the targeted number of beneficiaries therefore declined by about 4 percent, the actual number of beneficiaries at completion was about the same as the intended number (1.04 million in Gansu and 684,000 in Inner Mongolia).

1.5 Original Components 1.5.1 The project as appraised had eight components. The costs shown here included both physical and price contingency provisions. 1.5.2 Land and Household Development (US$141.0 million, 45.2 percent of appraisal total cost). This component, together with the irrigation and land improvement component, was designed to ensure farmers’ food security and increase their incomes by increasing agricultural output. It consisted of the provision of credit in the form of sub-loans5 to households for improved agricultural and livestock technology packages (e.g., seeds, fertilizer, plastic mulch and breeding/fattening livestock), forestry development and agricultural support services. 1.5.3 Irrigation and Land Improvement (US$86.3 million, 27.7 percent of appraisal total cost). The component was designed to support the enhanced agricultural activities and consisted of: (a) the construction of a new dam, the renovation of an existing dam, and the construction of irrigation and drainage systems on 19,200 ha in Qinghai; and (b) the construction of small irrigation works on 34,050 ha, the terracing of 26,500 ha of slope land, and soil and water conservation works (mainly terracing) in Gansu and Inner Mongolia. 1.5.4 Rural Infrastructure (US$28.7 million, 9.2 percent of appraisal total cost). The component aimed to improve the poor’s access to transport (roads), drinking water and electricity. The project planned to construct 216 kilometers (km) of Class III and IV rural roads (providing access to 289 remote administrative villages), construct drinking water supply facilities to serve 370,000 people in 760 administrative villages, and extend electric power lines to 410 administrative villages. 1.5.5 Rural Enterprises (US$13.6 million, 4.4 percent of appraisal total cost). This component aimed to link farmers with markets through the provision of credit to establish small non-state-owned enterprises and to support household-based rural enterprise activities for the construction of food and fiber processing facilities. No enterprise activities were to take place in

4 A survey of selected project counties at the time of project preparation indicated that an average household in the project areas lived in absolute poverty. It produced a food grain supply adequate to cover household demand for about six months of the year. For the remaining six months, most households had to borrow to supplement the limited welfare ration provided by local governments. 5 Funds intended for farm-level production-oriented activities (such as crops and animal husbandry) have traditionally been on-lent to the final beneficiaries (households and/or enterprises) by the local Finance Bureaus. Households received goods and works but had to sign a loan agreement with the Bureaus. The on-lending terms have, in general, been commensurate with the IDA credit/IBRD loan terms.

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Inner Mongolia, where activities financed under this component were to consist of agricultural tools and equipment and related training. 1.5.6 Labor Mobility – Gansu (US$15.7 million, 5.0 percent of appraisal total cost). This component was intended to increase the poor’s cash incomes by: (a) providing access to off-farm jobs through the organized voluntary placement of about 65,700 surplus rural laborers in off-farm employment in and outside Gansu; and (b) supporting Gansu's Labor Bureau to improve the management and referral services to laborers. 1.5.7 Voluntary Settlement – Qinghai (US$6.5 million, 2.1 percent of appraisal total cost). The voluntary settlement of an estimated 57,800 people was designed to assist poor households to migrate from highly-degraded mountainous areas with no water resources to newly-irrigated, highly-productive farm land. Support was to be provided in the form of grants for transport, housing, fuel and initial subsistence expenses. 1.5.8 Social Sectors (US$8.7 million, 2.8 percent of appraisal total cost). Limited activities were planned to support social sector infrastructure, mainly in the context of the new resettlers in Qinghai Province. Activities were to include the construction and up-grading of basic education and health facilities in Qinghai's new settlement area and in Qinghai’s “move-out” counties, and the improvement of selected basic health clinics in Gansu and Inner Mongolia. 1.5.9 Institutional Building and Project Management (US$10.6 million, 3.4 percent of appraisal total cost). The component was designed to support project implementation and to strengthen the project provinces’ capacity to implement national poverty reduction programs. The component aimed: (a) to establish project management offices at provincial, prefecture and county levels, and township and village work stations; (b) to launch a pilot integrated poverty reduction management program in one county (banner) in Inner Mongolia to coordinate multi- sectoral poverty reduction activities; (c) to implement the project activities under a single management structure; and (d) to establish systems to monitor and evaluate the outcomes of the project and to disseminate the results.

1.6 Revised Components 1.6.1 The Qinghai Component 6. In 1998, the International Campaign for Tibet 7 made a complaint to the Bank’s Inspection Panel (the Panel) concerning the activities to be carried out in Qinghai Province under the then-named Western Poverty Reduction Project. The complaint was reviewed by the Panel and the Bank’s Board of Executive Directors, and was eventually investigated as the first-ever Panel case with a field inspection. After a long investigation, which was concluded in April 2000 (i.e., after the loan and credit supporting the project had been approved by the Bank’s Board in June 1999), the Panel concluded that the project preparation for the Qinghai Component was “in apparent violation of several provisions” of the Bank’s operational policies8. Subsequently, the Bank proposed to the Borrower an ambitious and extremely costly set of remedial recommendations that could have allowed the Qinghai

6 In the DCA, Schedule 2, each Project Province is described as a “Part” of the project and some or all of the eight components of the project were to be implemented in each Province. However, at some point all of the project’s activities in Qinghai province (Part C of the Project Description) confusingly began to be referred to as the “Qinghai Component” and this terminology is used in the Panel’s report and in the documentation supporting the amendments to the legal agreements. 7 A USA-based advocacy non-governmental organization. 8 OD 4.01 (Environmental Assessment); OD 4.20 (Indigenous Peoples); OD 4.30 (Involuntary Resettlement); OP 4.09 (Pest management); OP10.00 (Investment Lending: Identification to Board presentation); and BP 17.50 (Disclosure of Information).

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Component to move forward. Instead of engaging in a lengthy process of remedial studies (that would not have guaranteed that the Qinghai Component could eventually move forward), the Borrower decided to drop the Qinghai Component in order to allow activities in Gansu and Inner Mongolia to proceed. 1.6.2 A formal project restructuring was carried out in 20019 and the Qinghai Component was removed. The project was renamed the Gansu and Inner Mongolia Poverty Reduction Project. With a change in scope, but with an unchanged objective to alleviate absolute poverty, the PDO was not revised. 1.6.3 Gansu Labor Mobility Component. In the context of the restructuring discussions in 2000-2001, the Borrower requested two additional adjustments. The first was to drop the Gansu Labor Mobility Component. This was justified by a comparison of the costs and benefits of the Bank’s financial contribution to the component. At that time, the implementation environment for this component was perceived to have an exceptionally high reputational risk and the supervision costs for the Bank and the Borrower for this component were estimated to become prohibitive. In addition, Gansu’s own existing labor mobility programs were proceeding in parallel, seemingly in a satisfactory manner. 1.6.4 Social Sector Services Component. The second adjustment was to cancel the public health service activities under the Social Sector Services Component10. At the time when the Loan and Credit finally became effective, the government’s strategy on providing rural health services and corresponding funding allocations had changed significantly compared with when the project was prepared, rendering the limited 11 activities planned for village health clinics difficult to implement. Basically, it can be surmised that the limited funds for the planned health sector activities under the project (which were to originate from the government’s health programs at the village levels) would not have materialized. 1.6.5 The Bank funds originally allocated to activities in Qinghai Province were cancelled and US$19.075 million equivalent of IDA funds were reallocated to Gansu and Inner Mongolia, where additional project counties were included in the project. The following project components remained, with some changes from the original formulation: (a) Land and Household Development (b) Irrigation and Land Improvement (c) Rural Infrastructure (d) Rural Enterprises (e) Institution Building and Project Management

1.7 Other Changes 1.7.1 A number of adjustments in project activities took place during project implementation. Instead of a formal mid-term review, continuous adjustments were made in detailed project activities to align with the rapidly-changing markets in China during the project implementation

9 The amendments were approved by the Bank’s Board of Directors on an “absence of objections” basis on March 14, 2001. The “Agreement Amending Development Credit Agreement”, the “Agreement Amending Project Agreement”, and the “Agreement Amending Loan Agreement” were counter-signed (and entered into effect) on March 27, 2003. 10 Education-related activities were already canceled as they were going to take place only in Qinghai. 11 Less than US$5.5 million was allocated for the Health sub-component for both Gansu and Inner Mongolia - all from counterpart funds.

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period that coincided with China’s entry into the WTO and consequent further opening of internal and external markets. Such adjustments took place mainly within the Land and Household Development Component and consisted (for example) of a reduction in grain production (after subsistence level was reached and cash income generation became more of a priority), the introduction of greenhouse-based production, and the increase in pen-fed animal husbandry. Adjustments were also needed to mitigate problems caused by adverse climate conditions. Both Gansu and Inner Mongolia experienced serious droughts during project implementation affecting the outcomes of the project and requiring adjustments to place emphasis on less drought-sensitive activities (e.g., animal husbandry and greenhouses).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 2.1.1 There were no notable shortcomings in the preparation of the Gansu and Inner Mongolia Components of the project. Project objectives were set clearly in the context of the CAS and the government’s strategy for poverty reduction. The broad objective of poverty reduction allowed for sufficient flexibility to adjust the specific activities to changing circumstances and unexpected events but was focused enough to target a specific segment of the population, the absolute poor. 2.1.2 Thorough work by the Borrower supported project design and feasibility assessment together with lessons learned from the previous Bank-financed targeted poverty reduction projects. Comprehensive social assessments, consultations among potential beneficiaries and environmental assessments informed the feasibility studies and implementation plans. Lessons learned from previous projects included: (a) the importance of a flexible and phased implementation approach; (b) the importance of building on existing institutions; and (c) the need to provide input financing to poor, remote rural areas with limited or no access to other financing. These lessons were all incorporated into the design. 2.1.3 Strong government commitment to poverty reduction facilitated the preparation of the project. Leadership at all levels paid great attention to the design ensuring technical guidance to the activities. 2.1.4 No Quality Assurance Group (QAG) review of the project’s quality at entry was conducted.

2.2 Implementation 2.2.1 No QAG review of the project’s supervision quality was conducted. 2.2.2 A number of factors contributed to the successful implementation of the project. Once implementation started and detailed implementation arrangements were established, a number of specific actions were taken in order to further aid in achieving the project’s poverty reduction objective including: (a) promotion of participatory village development planning which would empower the project households to define the detailed project activities; and (b) encouraging the integration of relevant government programs with the Bank’s operation. 2.2.3 A strong positive impact on the project’s implementation, supporting empowerment of households in the project villages in their development planning, was a Japan Policy and Human Resources Development Fund (PHRD) Implementation Grant obtained in 2003. This Grant supported the most innovative aspects of the project, including participatory village development planning and annual planning. Most of the PHRD-financed activities were very successful. The support for participatory village development planning produced positive results through high- quality training material, training of trainers and training at village levels. The impact of this

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additional support went beyond the project, and the Poverty Reduction Offices in both Gansu and Inner Mongolia now utilize participatory village development planning in their own program villages in order to determine the most suitable and farmer-identified poverty reduction interventions. 2.2.4 External Factors. Four important external factors affected project implementation. (a) China’s continued rapid economic growth and liberalization of markets. The country’s strong economic growth and market changes affected the project positively but this fast-paced development put enormous pressures on the project to be flexible and quick to adjust to changing markets. While numerous adjustments in market-sensitive project activities (in both crops and livestock) were made during project implementation in response to changing conditions, it was a challenge as the local governments and project offices did not have the experience or the expertise to analyze market signals adequately and advise farmers accordingly. Consequently, some of the project activities were not as profitable as anticipated (e.g., certain tree crops and Chinese herbs) and others were extremely profitable (e.g., greenhouse-based production). (b) Inspection Panel review of the Qinghai Component. Even though some limited, retroactively-financed activities took place in Gansu and Inner Mongolia before the effectiveness of the Loan and Credit, the Panel review of the Qinghai Component delayed the start-up of the project by about two years. Both provinces worked hard to accommodate the reallocated funds from Qinghai to new counties, preparing additional feasibility studies and assessments. As a result of both provinces’ solid institutional arrangements for project implementation, they were able to catch up the lost implementation time in the new counties and complete the project without an extension of the closing dates of the Loan or Credit. (c) Severe Acute Respiratory Syndrome (SARS). The outbreak of SARS in 2003 stopped movement between and within provinces. Most Bank-supported operations were slowed down as contractors and project staffs in the provinces were unable to travel to counties. County personnel were to a large extent called in to support the control of the outbreak. Both provinces, with their extensive networks of poverty offices at the lower levels, were able to keep the momentum and, immediately after the outbreak, continue the project and make up for lost time. (d) Climatic Conditions. An increasing frequency of droughts affected project activities negatively, requiring flexibility and quick adaptation in the detailed project activities. The project attempted to mitigate the impact of droughts by quickly allowing for adjustments to less drought- sensitive agricultural activities, such as animal husbandry (where feed could be purchased), greenhouse-based production and increased investments in water supply. 2.2.5 Internal Factors. The main internal factor having had a negative impact on project implementation in the beginning was the lack of timely availability of bridge funding and counterpart funds (a common problem in Bank-funded rural development projects in China). According to practice in China, Bank loan proceeds are disbursed to local levels based on reimbursement requests, requiring the local governments to provide the necessary bridge funding. Although project budget approvals should (in theory) be in place by the end of each fiscal year for the following fiscal year, approvals are frequently delayed. The project attempted to mitigate this at the design stage by requiring that annual counterpart fund budgets be prepared disaggregated by the source of funding. However, when one of the major expected sources of counterpart funding, the Agricultural Bank of China (ABC), pulled out from project areas in

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response to a policy change12 made by the central government, the whole counterpart fund plan basically fell apart, requiring new approaches. 2.2.6 The availability of initial financial resources to get project activities started before reimbursements from Bank funds began to arrive at lower-level project accounts was a major problem during the first two years of the project and caused significant delays in implementation. Most counties could not provide the bridge funding and had to struggle to find start-up financing from local banks and/or to delay payments to suppliers and contractors. In some cases, the lack of start-up funds caused “over-reporting” with the purpose of initiating reimbursements – which then, eventually, could be invested in “real” activities. The discovery of this practice in one of the provinces caused the project to be rated as “unsatisfactory” during supervision in 2002. The issue of bridge funding and counterpart funding was basically resolved when both the Gansu and the Inner Mongolia Provincial/Regional Poverty Reduction Offices fully integrated the project into their own poverty-reduction programs, thus ensuring a steady flow of funding. At project completion, total counterpart funding from both Gansu’s and Inner Mongolia’s Poverty Reduction Offices significantly exceeded the anticipated amounts, more than making up for short-falls from other sources.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 2.3.1 The project was supported by a high quality, rigorous, survey-based M&E system including both a baseline and a control group. The indicators originally articulated in the PAD were adjusted to make them more precise and monitorable. Specific monitorable output and outcome indicators were selected for each project component. A sample of 1,500 households from 150 villages in 15 counties was surveyed annually during the period 1999-2004 (eight counties in Inner Mongolia; seven in Gansu; ten villages in each county consisting of six project and four non-project villages). Together this resulted in a six-year panel of 1,500 households. The surveys and survey analysis was carried out by the national-level State Statistical Bureau (SSB) in close cooperation with its provincial and county branches and yielded high-quality data. A comprehensive Poverty Monitoring Report was published annually during the period 1999- 2005, tracking progress on output and outcome indicators and other socio-economic indicators across project and non-project villages. These reports greatly facilitated the discussion of the welfare contribution of the project at completion. In addition, the survey-based nature of the system and the implementation by an experienced independent agency lends credibility to the reported results. Unfortunately, despite their important contributions to the monitoring and evaluation of the project, the data bases generated by the SSB and the Project Management Offices (PMOs) were seriously underutilized, with lost opportunities to inform implementation of the project. 2.3.2 In addition to the M&E system, separate Management Information Systems (MISs) were set up in both Gansu and Inner Mongolia PMOs to monitor the implementation progress of the project, to track outputs and to track sub-loans to households for the activities under the Land and Household Development Component. With the help of the PHRD implementation grant, the Inner Mongolia PMO further computerized its system. While the computerized system became functional only in 2004, it still greatly facilitated the completion of the project, in particular the monitoring of loan reimbursement to households. The PMO indicated that it intends to use the computerized MIS also in the Poverty Reduction Office’s own programs.

12 The ABC was expected to contribute to counterpart funds by lending to households and rural enterprises. During project implementation, ABC’s lending strategy changed and it subsequently ceased lending to farmers completely, focusing only on large- and medium-size enterprise lending.

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2.4 Safeguard and Fiduciary Compliance 2.4.1 The project triggered the Bank’s safeguard policies on environment, pest management, resettlement (land acquisition) and indigenous people. Limited land acquisition took place for the rural roads in Gansu. Satisfactory reports were provided to the Bank detailing compensation procedures complying with the land acquisition framework that was prepared for the project. Beneficiaries’ participation manuals guided the participation process of ethnic minorities in the project. 2.4.2 Environment. The main environmental issues that the Bank’s supervision team focused on were: (a) environmental reporting; (b) pesticide utilization; (c) pollution from plastic mulch; and (d) feed balances. (a) Reporting. While the environmental impacts of the project were mainly positive, there were difficulties in obtaining regular reports on the subject (an issue that was noted in supervision aide memoires). Regular reports were provided on potential problem areas such as water table levels (in Inner Mongolia), pest management, feed balances and utilization of plastic mulch. At completion, a full survey was carried out on the environmental contribution of the project documenting the increased plantation area of annual and perennial crops and tree coverage in the project areas, which significantly contributed to increased water retention and reduced soil erosion. (b) Pesticide Use. In regard to herbicides and pesticides, while the project did not finance such inputs the farmers use them in their production. The project monitored the usage of such inputs, specifically reporting utilization of products lacking World Health Organization approval. The project also developed and provided training to farmers in the proper use of appropriate herbicides and pesticides and discouraged the use of unapproved products. (c) Plastic Mulch. The project financed plastic mulch as an input for cropping. Early on in project implementation, it was noted that large quantities of plastic mulch (project financed and non-project financed) were left behind on the fields, leading to what is called “white pollution.” The project started monitoring the collection of used plastic mulch and requiring regular clean-up by project counties. (d) Feed Balances. During project preparation there was a concern that the project could contribute to over-grazing in project areas, especially in Inner Mongolia if careful monitoring and remedial measures were not practiced. Each project grazing county (banner) in Inner Mongolia regularly prepared feed balances for the Bank’s review. Early in project implementation a national grazing ban was imposed by the central government as a result of continued serious grassland degradation in China’s western provinces that was increasing the frequency of sandstorms. The grazing ban meant that no natural grazing was permitted and livestock was required to be pen fed. Feed balance became more of an economic issue than an environmental one. This had a positive impact on the project’s incentives to improve the technical extension services in order to transfer more knowledge on farm economics and nutrional animal feed balance as opposed to a quantity-based feed balance. More generally, the pen feeding of livestock improved pasture management, and the use of crop residues for forage preparation improved the environmental efficiency of farming systems. 2.4.3 Financial Management. Financial management caused a number of challenges early in project implementation, drawing detailed attention from every mission. Irregularities were discovered during supervision missions and through audits which were carefully reviewed by Bank financial management specialists and followed up by every mission. Such irregularities included “over-reporting” of activities, misuse of funds from the Special Account for payment of interest and/or commitment fees, and use of project funds for non-project activities. The

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discovery of “over-reporting” of project activities in one of the provinces caused the project to be rated as “unsatisfactory” at supervision in 2002. The findings of that mission were taken very seriously by the provincial government, resulting in disciplinary actions and demotions for involved leaders and individuals. All findings were addressed and corrected, and the scale of project progress reporting was adjusted accordingly. The findings of this mission led to an immediate improvement of the availability of counterpart funds and bridge funds for the project. In general, all instances of irregularities were noted in aide memoires and followed closely until resolution.

2.5 Post-Completion Operation 2.5.1 Post-completion operation of poverty reduction activities and the utilization of techniques introduced through this project (e.g., participatory village development) are well ensured through the integration of the project’s activities into the provinces’ regular poverty reduction programs. Such integration ensures the sustainability of project institutions and continued efforts in multi- sectoral poverty reduction programs at the grassroots levels. Bank-financed follow-up projects focusing even more on community-driven development are now being implemented and further developed in other places in China. 2.5.2 The main challenge in post-completion operation lies in obtaining repayment of sub- loans by project beneficiaries. Institutional arrangements for sub-loan collection vary between the provinces and among the different counties. A variety of collection systems is in place through local Finance Bureaus, lower-level Poverty Offices and local financial intermediaries functioning as collection agents in return for a fee. Sub-loan collection and its monitoring will be a challenge in Gansu in particular as no centralized arrangements have been made to ensure either. In Inner Mongolia, a sub-loan collection monitoring system is in place and can be used to monitor post-completion operation. 2.5.3 In the meantime, the Bank is intensively discussing with the government how to proceed with the financing of income-generating activities in future projects. It is clear that the system that has been in place for on-lending funds to beneficiaries through Finance Bureaus has become outdated. Collection rates on sub-loans are, in general, quite low and the selection of the most profitable project activities by local government entities is a challenge.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 3.1.1 The project remains consistent with the Bank’s new Country Partnership Strategy 2006- 2010 for China by aiming to reduce poverty, inequality and social exclusion through promoting sustainable income increase in rural areas. The design of the project is fully consistent with the government’s 11th five-year plan13 and the 2005, 2006 and 2007 “Document No. 1” issued by the State Council that all focus on the need to consolidate and intensify support to farmers and to agriculture. The project objectives remain highly relevant to the government’s thrust to construct a “new socialist countryside14,” through targeted support to the poorest areas and empowering the poor in taking part in local development decisions through various forms of participation.

13 The plan covers economic areas and also those concerning people’s lives, social development and the environment. 14 The concept of building a “new socialist countryside” incorporates investments in infrastructure, health, education, and social development, and the use of a grassroots participation process.

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3.2 Achievement of Project Development Objectives 3.2.1 The PDO – to reduce absolute poverty in the project areas – was met. The project’s targeting of the poorest villages was successful. The M&E shows that, compared with non- project villages, the project villages at the outset of the project had more backward rural infrastructure and social services, more adverse natural conditions and a larger number of absolute poor households. The targeting of the poorest households within the poor villages was also good. 3.2.2 The average poverty head count rate in project villages declined from 22 percent in 1999 to 8.2 percent in 2004. In the project areas of Inner Mongolia, the poverty rate declined from 16.7 percent in 1999 to 5.4 percent in 2004, while in the project areas of Gansu the reduction in the poverty rate was even more significant – from 24.7 percent in 1999 to 2.7 percent in 2005. 3.2.3 In addition, the project aimed to “empower” the project households to raise their incomes. This objective was also reached. As the “feeding and clothing” problem (i.e., absolute poverty) was largely resolved, households started to focus on increasing their cash income-generation activities through cropping and, increasingly, through animal husbandry. This was reflected in the increasing use of farm land for the production of animal fodder. The net per capita income in project villages increased by RMB750 to RMB2,237 in the project areas of Inner Mongolia (2005) and to RMB2,028 in the project areas of Gansu (2006). The project’s per capita income targets were RMB1,300 for Inner Mongolia and RMB946 and RMB1,200 for Gansu (for the original counties and the new counties added after the cancellation of the Qinghai Component, respectively). A more detailed discussion as to how much of the reported welfare gains and income increases could reasonably be attributed to the project is provided in Section 3.5. Empowerment was achieved mainly through the introduction of participatory village development planning where the project households could take part in forming the detailed development decisions affecting them. 3.2.4 The project also aimed to increase the living standards of the project households by promoting alternative-income generation activities, improving rural infrastructure and enhancing access to basic social services. In this context, the project’s legal agreements emphasized “environmentally sustainable” agriculture and rural development. The environmental sustainability of the activities are reflected in the increase of terraced land (by about 21,783 ha) and increased areas for tree crops and shelter belts (by about 72,275 ha) and perennial forage, all greatly contributing to soil and water conservation. 3.2.5 The project also improved rural infrastructure in the project areas. At the completion of the project, close to 100 percent of project villages have road access compared with about 90 percent of non-project villages. Through participatory village development planning, the originally planned quantity (km) of roads was increased; more importantly, the quality of the roads built was much higher than originally planned (responding to a higher than anticipated utilization rate and to the villagers’ wishes). About 85 percent of project households now have access to safe drinking water at a distance of less than 100 meters compared with about 66 percent at the outset of the project. The rate of project village access to electricity is now about 98 percent compared with about 90 percent in 1999. 3.2.6 As the Labor Mobility Component in Gansu was cancelled, the project did not greatly support provision of alternative employment opportunities except through the rural enterprise activities in Gansu that created about 4,442 new jobs in the project counties. The proportion of off-farm income was monitored as part of the M&E system, confirming at project completion that Gansu’s own labor mobility activities indeed went successfully ahead without the Bank’s involvement. The proportion of households with additional off-farm income increased from about 70 percent in project villages in 1999 (compared with 75 percent in non-project

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households), to over 75 percent in 2004 in project villages slightly surpassing the percentage in non-project villages. 3.2.7 Even though the social services activities were cancelled, school enrollment rates in project villages kept increasing annually, reaching about 97 percent in 2004 for children 7-15 years-old; this was mainly the result of the increase in household incomes. The enrollment rate surpassed the rate achieved in non-project villages (about 93 percent in 2004). Unfortunately, the progress in basic health services did not have the same rate of improvement. Most of the indicators, such as the availability of health facilities and the number of qualified health workers, deteriorated. At the outset of the project (1999), about 60 percent of project villages had health clinics. By 2004, this rate had decreased by about 4 percentage points. The percentage of project villages with qualified health workers dropped from about 85 percent in 2002 to below 80 percent in 2004. Whether it was a right or wrong decision to drop the Health sub-component from the project is difficult to say even with the benefit of hindsight. However, in view of the daunting problems facing the sector, it is unlikely that the very limited funding originally planned for the activities – to be financed exclusively through counterpart funds – would have been able to make an impact on the negative trend that is currently occurring in the health sector in China’s rural areas.

3.3 Efficiency 3.3.1 The economic rate of return (ERR) at project completion is estimated at 18.7 percent for the project as a whole, 17.7 percent in Gansu and 20.0 percent in Inner Mongolia. The ex post ERR is comparable to the ERR estimated at appraisal for Inner Mongolia and somewhat lower for Gansu for reasons elaborated in Annex 3. Annex 3 provides a comparison of the ERRs of the project components at appraisal and completion. The benefit of separate calculations of a financial rate of return was considered negligible as markets in China are now well integrated, and financial and economic prices are well aligned. 3.3.2 Overall, the ERR estimates suggest robust returns to the project's investments, though sensitivity analysis implies that success critically depends on a small number of activities. In particular, the Land and Household Development Component (which also accounts for the investment in irrigation and land improvement) made up 75 percent and 81 percent of the overall project investment in Gansu and Inner Mongolia, respectively. In each province, three activities15 under this component make up around 40 percent of the total reported investment and the success of these three activities is critical for the overall success of the project. The ERR of the Land and Household Development Component is simulated to fluctuate between 11-28 percent in Gansu and between 10-28 percent in Inner Mongolia, given a simultaneous 10 percent decrease/increase of the gross revenues of these three activities (resulting from output price or yield changes). A 25 percent increase in the labor cost for these three activities yields an ERR of 12 percent and 15 percent in Gansu and Inner Mongolia, respectively. By way of reference, wages in Inner Mongolia doubled during the project period. 3.3.3 While these rates of return remain at acceptable levels even when prices decline, they also underscore that the profitability of the project's investments vary substantially with the evolution of product and factor markets. They further highlight the critical importance of effective farming and animal husbandry to ensure sustained benefits. The less-productive farmers with a limited coping capacity are vulnerable to fluctuations in the product and factor markets.

15 Plastic mulch corn cultivation, ewe-raising and pig-fattening in Gansu; and virus-free potato cultivation, ewe-raising and fat-tailed sheep-raising in Inner Mongolia.

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Future poverty projects could include modules to help vulnerable farmers cope with adverse natural, economic or health shocks to prevent them from falling back into poverty.

3.4 Justification of Overall Outcome Rating

Rating: Satisfactory

3.4.1 The PDO was met and the efficiency achieved is satisfactory. Positive poverty impacts, gender aspects and social development were reported. 3.4.2 While the project was designed by the provinces almost ten years ago, its objectives remain highly relevant both to the government’s current plans to construct a “new socialist country-side” and to the Bank’s approach to reduce poverty in Western China. It is difficult in China’s rapid growth environment to determine exactly how much of the benefits can be attributed to the project as opposed to the overall economic growth (see section below). While the project scope changed somewhat, the total number of absolute poor beneficiaries remained the same and at completion the efficiency of the project investments reached the expected high level. In view of these achievements, the overall outcome of the project is rated as “Satisfactory.”

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 3.5.1 Poverty. Dramatic improvements in household welfare and poverty rates were recorded. In the project villages, average per capita incomes increased by 78 percent and the poverty headcount dropped by 14 percentage points. While incomes increased even more in Inner Mongolia, poverty declined faster in Gansu (albeit starting from a 10.7 percentage point higher base). While significant improvements in poverty reduction were achieved compared with Chinese poverty thresholds, a large portion of the project beneficiaries continue to live below the World Bank’s poverty line of US$1 per day (equivalent to about RMB2,800 per capita per year).

Table 1. Net per capita income and headcount poverty in project and non-project villages, 1999-2004

Gansu Inner Mongolia Total Project Non- Non- Non- Project project Difference Project project Difference Project project Difference Net annual income per capita (RMB) 1999 757 989 232 1168 1235 67 955 1108 153 2004 1256 1394 138 2204 2015 -189 1705 1673 -31 Difference 7499 405 94 1036 780 256 750 565 184 Poverty Headcount (percent) 1999 27.4 20.7 6.7 16.7 14.9 1.8 22.2 18.0 4.2 2004 10.8 12.4 -1.6 5.4 3.7 1.7 8.2 8.5 -0.3 Difference 16.6 8.3 8.3 11.3 11.2 0.1 14.0 9.5 4.5

3.5.2 However, caution must be taken when attributing these significant improvements only to the project. While data limitations force most project evaluations to be based on either a “before- and after-project” comparison or a “with- and without-project” comparison, proper evaluation requires that the changes in the welfare indicators of interest before and after the project be corrected for the changes which would have happened in the absence of the project (i.e., a

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“difference in difference” - DID - evaluation). Such a correction is especially important in a rapidly expanding economy such as China’s. 3.5.3 Average net per capita income increased by about RMB565 in the non-project villages and about RMB750 in the project villages, implying that the net increase in income per capita attributable to the project was RMB184 (about US$23)16. Similarly, the poverty headcount in the non-project villages declined by 9.5 percentage points compared with 14 percentage points in the project villages, a net decrease of 4.5 percentage points attributable to the project. However, while the project accounted for a RMB256 increase in average per capita incomes in Inner Mongolia, almost no poverty reduction could be attributed to the project. In Gansu, on the other hand, where average incomes have now reached the level that obtained in Inner Mongolia at the outset of the project, the net contribution of the project to poverty reduction was estimated to be 8.3 percentage points although the net increase in average per capita incomes was only RMB94. 3.5.4 Nevertheless, the project impact on beneficiaries is likely to have been larger than that indicated in Table 1 because the households in project villages were poorer, especially in Gansu, compared to the non-project villages. As a result, investments undertaken in non-project villages may not have generated the same reduction in poverty. Moreover, the use of project funds complemented (rather than offset) other investments in the project villages as indicated by the officials. The project may well have contributed more than the DID estimate of 4.5 percentage points. The “before and after” estimate (14 percentage points) and the DID estimate (4.5 percentage points) should, therefore, be considered as the upper and lower bounds of the estimated impact. A larger poverty reduction was observed in Gansu, while in Inner Mongolia the project helped the beneficiaries to increase their per capita incomes to levels exceeding the average in non-project villages. 3.5.5 The ICR analysis concludes that even though poverty drastically declined in both project provinces, the amount which could be attributed to the project appear substantially less17. The ICR analysis demonstrates that it is critical to learn more about the impact and effectiveness of poor area programs in reducing poverty, and more in-depth multivariate analysis of the SSB data for this project is called for: (a) to assess more accurately the actual contribution of the project (the number of people lifted out of poverty per dollar spent); (b) to understand better the forces behind the strong decline in poverty and the increase in incomes among households in remote rural areas (both project and non-project); and (c) to understand how these contributions and forces differed across Gansu and Inner Mongolia, two provinces at different levels of development. 3.5.6 Gender Aspects. While the project focused on enhancing household welfare in general, it also helped women and girls in the project area to improve their well-being. To increase the likelihood that men and women would benefit equally from the project, women were consulted during the development of the different farm models of the Land and Household Development component and the gender division of labor was taken into account in the choice and development of these activities.

16 An income increase of US$23 equivalent annually is largely consistent with the ERR. However, the ERR measures the return on capital. The return to the beneficiaries is reduced by the interest they have to pay on the capital they use. It is possible that the US$23 equivalent of income increase is an over-estimate. 17 These results are similar in magnitude to those reported by Ravallion and Chen (2005) for the Southwest Poverty Reduction Project. They also found a limited impact of the project on consumption and on the incidence of “$1 a day” poverty at the end of the project despite an average increase in income of about 20 percent. Fan and Rao (2006) using different econometric techniques found similarly limited effects of poor area programs in China and India.

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3.5.7 There were two tangible improvements of women’s well-being. First, the construction of drinking water facilities helped reduce the work load for women. In the project villages, the number of households within 100 meters of the water source increased by 14.5 percentage points (from 66.8 percent in 1999 to 81.3 percent in 2004). In the non-project villages, this increase was 7.2 percentage points, a net contribution of the project of 7.3 percentage points. Second, gender inequality in schooling outcomes was reduced substantially. The ratio of school completion rates at age15 for girls and boys increased from 0.78 in 1999 to 1.01 in 2004 in the project villages and from 0.85 to 0.97 in the non-project villages, a net increase in the ratio of 0.11. While this does not prove causality, schooling expenses during the project implementation period were substantial, and the overall increase in household income is likely to have contributed to the decline in the gender gap in schooling outcomes. Disaggregated gender outcome indicators would have allowed a better gender-specific analysis of project outcomes. 3.5.8 Social Development. A variety of ethnic minorities benefited highly from the project. Ethnic minorities were especially “over-represented” in project participation in Gansu, where 78 percent of the project counties’ minority households participated in the project compared with an overall project participation rate of 19 percent for all households in the project counties. This “over-representation” resulted from an explicit targeting of minority counties in the selection of project counties. The ethnic minority population makes up about 12.5 percent of all households in Gansu. 3.5.9 In Inner Mongolia, ethnic minority households (mainly Mongol) were slightly under- represented in project participation. About 11 percent of the minority households participated in the project compared with an overall participation rate of 13 percent for all households in the project counties. The ethnic minority population makes up about 16.5 percent18 of all households in Inner Mongolia.

(b) Institutional Change/Strengthening 3.5.10 In general, substantial institutional strengthening took place at various levels of the Poverty Reduction Office structure, starting from the provincial levels and occurring all the way down to the villages. The Poverty Reduction Offices’ own project preparation, implementation, supervision and monitoring practices were reportedly changed as a result of the project. Both provinces now utilize supervision methods similar to those of the Bank in the supervision of their own programs. Inner Mongolia has adapted the computerized MIS that was developed under this project for its own programs. Various types of management training (e.g., project management, accounting and financial management, and monitoring) significantly increased the capacity of the leadership and staff of the project, so much that frequent promotions of project staff turned into a problem during implementation requiring project leading groups intervention to stabilize project staff. 3.5.11 The main institutional achievements of the project were: (a) the introduction of intensive beneficiary participation in project implementation and participatory village development planning; and (b) the integration of the project activities into the local governments’ own development programs. While the introduction of participatory approaches was not initially included in the project design, both provinces introduced participation as a tool to facilitate achievement of project objectives. While the detailed activities planned for the early targeted villages were not designed in a particularly participatory manner, the degree of participation increased over time, with the latest targeted villages' activities being fully determined through participatory village development planning (resource mapping, poverty mapping, provision of

18 15 percent of all households in Inner Mongolia are Mongol households.

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funding envelope, activity prioritization, and implementation). This was evidenced by the Bank’s supervision missions; videos, booklets and manuals produced by the provinces, and national recognition of Gansu Poverty Reduction Office as a leader in this area. The concept of participatory village level development planning was eventually streamlined into the project (with Gansu being better at it than Inner Mongolia). Currently, both provinces utilize this tool in their internal poverty reduction programs. 3.5.12 By integrating the project activities into the local governments’ own programs and activities, the project was able to demonstrate the benefits of integrated project funding and implementation at the grassroots level (e.g., avoiding duplication of efforts, maximizing funds utilization and a wider absorption of lessons learned).

4. Assessment of Risk to Development Outcome

Rating: Moderate

4.1.1 The risk to development outcome is considered to be “moderate”. The government’s commitment to reduce poverty further and to construct a “new socialist countryside” continues to be one of the most important policy agendas. Increasing funding is being channeled to the Western areas, including large sums being allocated for village level development and infrastructure. 4.1.2 The main risk posed to the development outcome is that households that have been able to climb over the poverty line may be pulled back into poverty by natural disasters (mainly drought in the project areas) or sickness. The households’ vulnerability to natural disasters was mitigated in the project through production diversification (including emphasis on pen-fed animal husbandry), training, and the provision of reliable water supply for household use and irrigation. 4.1.3 There is also a risk of changes in the market incentives. This risk is considered to be low for the project households as the project emphasized market risk mitigation through production diversification.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Moderately Unsatisfactory

5.1.1 No QAG “quality at entry” review of the project has been carried out. The IP reviewed the Qinghai Component of the project and concluded that its preparation was “in apparent violation of several provisions” of the Bank’s operational policies. With this background, it is assumed that the Qinghai Component alone would be rated as unsatisfactory. However, based on the ICR team’s assessment, the Gansu and Inner Mongolia Components were thoroughly prepared and were fully consistent with the government’s poverty reduction strategy and the Bank’s CAS. The large preparation and appraisal teams consisted of experienced Bank specialists covering all required areas of expertise, including environment and social. In view of the IP review’s findings, and assuming an unsatisfactory rating for the Qinghai Component, the Bank’s performance in ensuring quality at entry for the whole project must therefore be considered to have been “moderately unsatisfactory.”

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(b) Quality of Supervision

Rating: Satisfactory

5.1.2 No QAG “quality of supervision” review of the project has been carried out. The Bank’s performance during the implementation of the project is rated as having been satisfactory. Significant capital and human resources were put into the project launch and to get the project implementation started smoothly. The approach was to provide implementation support along with supervision. While technical experts changed during implementation, the core supervision team remained unchanged. Particular technical expertise was drawn in to resolve bottlenecks and problems (e.g., in the Rural Enterprise Component). Environmental and social safeguards were supervised regularly by the core team and by specific technical experts as required. Participation activities in the project were supported early on in project implementation by two Bank contracted specialists. Two comprehensive supervision missions were carried out during each fiscal year.

(c) Justification of Rating for Overall Bank Performance

Rating: Moderately Satisfactory

5.1.3 As the Qinghai Component was dropped before project launch, and in view of the satisfactory supervision of the project and the satisfactory achievement of the PDO, the overall Bank performance is rated as having been moderately satisfactory.

5.2 Borrower Performance

(a) Government Performance

Rating: Satisfactory

5.2.1 Poverty reduction and extensive and direct support to a variety of poverty reduction programs has been a government priority during the past decade, culminating in special programs for the Western regions and specific support for the “New Socialist Countryside”. Even though this project had a different institutional set up compared with the previous poverty reduction projects - the Leading Group for Poverty Reduction having a coordination role rather than an implementation responsibility - the central government, through the Leading Group, paid close attention to this project, providing guidance and assistance through its Foreign Fund Management office. Staff from this office participated in every supervision mission and carried out internal supervision missions between Bank missions, actively disseminated lessons learned from the other poverty reduction projects and this project through workshops and publications. 5.2.2 Lack of timely allocation of counterpart funds at the outset was overcome with the strong political support and high attention to the project given by the provincial leadership. The early problems with over-reporting and misuse of funds were also addressed rapidly and strongly, once discovered. The ICR Task Team would like to note that higher than planned management funds were provided to both provinces, which is directly linked with improved implementation quality. In general, management funds for projects in China tend to be too low (always provided through counterpart funds).

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(b) Implementing Agencies Performance

Rating: Moderately Satisfactory

5.2.3 While the project preparation was of high quality (see Section 2.1) enabling smooth appraisal, the performance of the implementing agencies, the Gansu and Inner Mongolia Poverty Reduction Offices, demonstrated a number of shortcomings. Early in the project implementation, it was noted that project management offices located “outside” the Provincial Poverty Reduction Offices were not able to function effectively; they were not able to exert the required level of authority in implementation and had difficulties in accessing required counterpart funds. The shortage of counterpart funding and bridge funding (see Sections 2.2.5 and 2.4.6) resulted in “over-reporting” of project progress in some counties early on in the project. These implementation difficulties, however, were discovered, acknowledged and addressed in a speedy manner. The project offices were integrated into the regular poverty reduction office system at all levels, and qualified staffs at all levels were appointed for the project. The counterpart funding issue was largely resolved by merging project activities into the local governments’ own poverty reduction programs, thus optimizing fund utilization while at the same time ensuring cross- fertilization of lessons learned. In the context of the overall implementation, these shortcomings are considered to have been moderate. 5.2.4 Similarly, the financial management shortcomings in terms of misuse of funds from the Special Account (see Section 2.4.6), while clearly in breach of sound financial management, were small in size and, when discovered in audits, were immediately and forcefully addressed. These remedial actions were only possible because of the “hands-on” attention and proactive guidance from various levels of leadership (Provincial Vice Governor/Vice Chairman, county mayors, and in particular, county party secretaries).

(c) Justification of Rating for Overall Borrower Performance

Rating: Satisfactory

5.2.5 In view of the “satisfactory” rating for the government’s performance, the “moderately satisfactory” performance of the implementing agency, and the “satisfactory” achievement of the PDOs, the overall Borrower performance as rated as “satisfactory.”

6. Lessons Learned

6.1.1 The main lessons learned from this project relate to: (a) securing bridge funds and counterpart funding; (b) institutional arrangements; (c) leadership attention; (d) flexibility in project implementation; (e) on-lending to households; and (f) monitoring and evaluation. (a) Securing Bridge-Funding and Counterpart Funds. Timely availability of adequate counterpart funding seems to be a chronic issue in Bank-financed rural projects in China. To resolve this issue in future projects, a number of different approaches should be considered: (i) the Bank and the Borrower should agree on a more realistic proportion of counterpart funds (less than the current practice of 50 percent); (ii) the central government and provincial governments should ensure at least part of the counterpart funds from their budgets; and (iii) bridge funding and counterpart fund need to be arranged and firmly secured prior to project start-up in order to avoid delays in project implementation. Integrating project activities with the borrower’s own programs and arranging up-front pre-financing of project activities (bridge funding) is a key enabler for smooth project start-up. Integration ensures that annual counterpart fund budgeting takes place in the context of the other programs’ planning cycle and not as an extra-budgetary

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item. For bridge funding, in the future the Bank and the borrower should consider using the Bank’s ability to provide up to 90 days of funds advance for project activities from the Special Account. This would ensure that start-up funds are available at the county levels. (b) Institutional Arrangements. Integrating project activities with the borrower’s own programs and project implementing units within the existing institutional system ensures a higher degree of ownership, enabling better delivery of funding and technical services. It also ensures more sustainable post-completion operations. (c) Leadership Attention. Close leadership attention at various levels and in various forms, especially at the provincial and county levels by the responsible vice governors, county mayors and county party secretaries is fundamental to successful project implementation. Such attention is a key prerequisite for putting in place suitable institutional arrangements and ensuring the availability of for project funds in a timely manner (and making swift modifications, if required). Examples of effective leadership attention are: (i) requests for regular progress and problem identification reports from lower levels; (ii) attending reporting sessions; (iii) personal review of annual funding requests and recommendation for approval; (iv) issuing circulars to lower levels in regard to project actions that need to be taken; and (v) chairing awards ceremonies to best performing project counties. (d) Flexibility in Project Implementation. For successful implementation of projects with agricultural activities, it is important to have enough flexibility in implementation allowing responses to natural disasters and market conditions in particular. (e) Monitoring and Evaluation. The right concept of defining and measuring efficiency and performance is important in order to be able to monitor and evaluate a project’s poverty impact. In an environment as dynamic as China’s, this becomes even more important. Future poverty reduction projects should carry out poverty impact assessments by using modern econometric techniques. This implies greater support from the Bank to the client in designing and supporting M&E systems. Future projects should put more emphasis on capacity building in the analysis of project monitoring data and improving the feed-back from data to project implementation. (f) On-lending to Households. On-lending of Bank funds as sub-loans for agricultural production activities to final beneficiaries through local Finance Bureaus has not been successful in terms of repayment. On average, collection rates on sub-loans - if monitored - are low and, in addition, the local authorities are frequently unable to appraise sub-projects adequately. Although the rate of repayment of sub-loans was never meant to be a success criterion for this poverty reduction project, this is true for this project as well. The system for on-lending Bank funds to beneficiaries through Finance Bureaus for income-generating activities has been in place since China started borrowing from the Bank in the early 1980s, but has become out-dated. In addition to problems with repayment and selection of activities to be financed, below-market on-lending rates create economic distortions and wrong incentives, at least at the local levels, and possibly crowd out local financial institutions which are just starting to develop. In line with international practice and general practice for domestic financing in China, loans for private investments (e.g., for income-generating purposes such as agriculture) should be channeled through financial intermediaries. If a shortage of credit is an impediment in project areas, this could be addressed by finding qualified financial intermediaries interested in borrowing and on-lending World Bank loans.

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7. Comments on Issues Raised by the Borrower/Implementing Agencies

7.1.1 The preparation of the implementing agencies’ internal implementation completion reports was initiated at the end of project completion. The finalization of those reports and the preparation of the Bank’s ICR took place in close cooperation, allowing for in-depth discussions on various issues. As a result, the ICR Task Team does not have any additional comments on the Borrower’s summary reports as presented in Annex 5.

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Annex 1. Project Costs and Financing

1.1 Total actual project costs were US$293.21 million equivalent, about 94 percent of the total costs estimated at project appraisal. This reduction was the result of the dropping of the Qinghai Component. A project adjustment was made in both Gansu and Inner Mongolia upon reallocation of the IDA credit originally allocated to Qinghai (SDR19.71 million) to the two provinces. 1.2 Against the adjusted project cost estimate in 2001 (2001 estimate), the actual project costs are slightly higher (about 1 percent). The actual project cost for Inner Mongolia was about 4 percent higher and for Gansu was about 2 percent lower than the 2001 estimate. By project component, the investments for the Land and Household Development, Rural Enterprises, Labor Mobility, and Institutional Building and Project Management components exceeded the 2001 estimate while those for other components (i.e., the Irrigation and Land Improvement, and Social Sector Services components) were lower than the 2001 estimate as a result of project adjustments because of market and policy changes. The total actual project costs include the investment costs of both Gansu and Inner Mongolia. The following principles were used in data collection: (a) comparison was made against the 2001 estimate; (b) working capital was included; and (c) the front-end fee was excluded (but included in the total financing required).

(a) Project Cost by Component Appraisal Estimate Actual Percentage of Components (US$ million) (US$ million) Appraisal Land and Household Development 124.54 196.07 157.44 Irrigation and Land Improvement 74.16 42.72 57.61 Rural Infrastructure 24.45 27.79 113.66 Rural Enterprises 13.53 14.13 104.43 Labor Mobility (Gansu) 13.79 1.36 9.86 Voluntary Settlement (Qinghai) 6.54 0.00 - Social Sector Services 8.12 0.45 5.54 Institutional Development and Project Management 10.17 10.69 105.11 Total Baseline Cost 275.30 293.21 - Physical Contingencies 17.58 - - Price Contingencies 18.22 - - Total Project Costs 311.10 - - Front-end fee 0.00 0.00 0.00 Front-end fee IBRD 0.60 0.47 0.60 Total Financing Required 311.70 293.68 -

(b) Financing Appraisal Estimate Actual Percentage of Source of Funds (US$ million) (US$ million) Appraisal Borrower 151.70 147.48 97.22 IBRD 60.00 46.70 77.83 IDA 100.00 99.50 99.50

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Annex 2. Outputs by Component

2.1 Project output targets for each component were set at project appraisal. While the Qinghai funds were reallocated between Gansu and Inner Mongolia and per project component (i.e., Land and Household Development; Irrigation and Land Improvement; Rural Infrastructure, and Rural Enterprises), no revised output targets were set in either province as the specific activities needed time to be developed with each new county carrying out participatory detailed designs of the activities. Therefore, the output information presented in this annex consists of actual results based on data provided by Gansu and Inner Mongolia. 2.2 No formal mid-term review of the project took place as there was a need for continuous adjustment of activities in view of the rapidly changing market conditions and the locality- specific environmental conditions. Project adjustments were also initiated as a result of government policy changes and the launch of the government’s Western Development Program during project implementation. The actual project outputs as presented below reflect these adjustments. The overall project implementation in terms of outputs is rated as “satisfactory.”

2.3 A. Land and Household Development Component (US$196.07 million, 120 percent of 2001 adjusted cost estimate). This satisfactory component was designed to provide improved agricultural and livestock technology packages and up-graded agricultural and livestock support services through four sub-components. Successful implementation of this component greatly contributed to the achievement of the project objective to reduce absolute poverty in the project areas with per capita income, grain production and livestock production in both provinces exceeding the original targets. (a) Crop Production. The project supported a total of 153,000 ha of crop production (97,000 ha in Inner Mongolia and 56,000 ha in Gansu) including 124,000 ha of grain crops and 29,000 ha of cash crops. The area of grain crops and vegetables was slightly under the target. The area under vegetable production did not reach the target, mainly because of drought conditions. However, the total established area for crop production exceeded the project target by 7 percent. In spite of the frequent droughts, crop production combined with the use of plastic mulch (for retaining moisture) and irrigation greatly facilitated the introduction of new crop activities to project households, including green-house vegetables and virus-free potato seed breeding. Frequent “micro” adjustments of annual plans allowed activities to be changed in response to changing market conditions and the participating households’ desires. However, these adjustments were labor intensive both to the project counties and the Bank’s supervision team, raising the question whether providing directed credit through Bank loans is an efficient way to support the farmers in their income-generating activities or whether improved access to regular credit to farmers would be better. (b) Livestock Production. The project supported household-based livestock breeding and fattening activities. The actual number of animals financed by the project reached 1.34 million (0.74 million in Inner Mongolia and 0.6 million in Gansu) including beef cattle, dairy cows, pigs, sheep, goats, rabbits and poultry. This sub-component was extremely successful, reflecting the positive aspect of the government’s thrust to promote pen-feeding of animals to reduce grazing pressure on grasslands. Animal husbandry was preferred by the project households to cropping activities as animal husbandry is less drought sensitive than cropping. Animal feed can be stored and purchased if needed. The total number of animals financed under the project exceeded the appraisal target for Gansu and Inner Mongolia by over 25 percent. Almost all freshwater aquatic production was dropped, mainly because of increased production costs and strong market

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competition. In response to market opportunities and project households’ wishes, dairy production was added to project activities in Inner Mongolia. (c) Forestry and Grassland. A total of 78,000 ha of forests and forage production (48,000 ha in Inner Mongolia and 30,000 ha in Gansu) were financed under the project. This included fruit trees (28,800 ha), timber forest (2,500 ha), shelter-forest (28,100 ha) and forage development (18,600 ha). The latest estimate of annual production of fruits was about 4,086 tons. Though not yet at final cut, the latest estimated timber production was about 344,000 cubic meters. Implementation of this sub-component had a great environmental impact including improved water conservation, reduced water and soil erosion, and reversed grassland degradation. (d) Support Services. The project aimed at improving the quality of farm-level technical services through skill up-grading of technicians at county, township and village levels, and developing improved and more economical and environmentally-sound technologies through adaptive research, on-farm demonstrations and farmer training. More generally, “soft” components of the project (such as technical assistance, extension services, training, and applied research) were all a challenge to get started. In general, in Bank-funded projects in China this is difficult. If intended to be financed by Bank loan proceeds, then these components usually do not disburse well because of the Chinese practice that “who benefits pays.” However, it is difficult for the project management offices to find an entity willing to be responsible for loan repayment. On the other hand, if these components are meant to be paid through counterpart funds, often the funds do not materialize. In the context of this project, while all planned soft activities were carried out, the quality and especially the impact of these activities varied at different localities.

(e) B. Irrigation and Land Improvement Component (US$42.72 million, 96 percent of 2001 adjusted cost estimate). This satisfactory component provided support to various project activities. At project completion, an additional total of 57,182 ha of land (25,949 ha in Inner Mongolia and 31,300 ha in Gansu) including about 5,200 ha of rain-fed lands, benefited from irrigation provided by small works constructed under the project including 28,233 water cisterns, 11,100 wells, and 333 km of irrigation canals, numerous pumping stations, sprinkler schemes and small irrigation storage ponds. The project also supported the terracing of 26,719 ha of sloping land and 3,500 ha of river embankment schemes for soil and water conservation purposes. Provision of irrigation and terracing greatly improved crop productivity, contributing to the overall success of the project. In addition, the terracing activities greatly contributed to water conservation and reduction of soil erosion.

2.4 C. Rural Infrastructure Component (US$27.79 million, 93 percent of 2001 adjusted cost estimate). This satisfactory component provided support to three sub-components. (a) Rural Roads. The project supported the construction of a total of 533 km of rural roads in Gansu, mostly all-weather gravel roads to Class IV standards to link administrative villages to the existing network of county and township roads. About 57 km of the roads were constructed to Class II or Class III standards in Lixian County and Tanchang County which was derived from increased demand of local population and extra counterpart funds secured. Roads constructed under the project were generally of good quality. In Inner Mongolia, the originally planned 45 km of Class III road in Damao Banner was cancelled as a large national roads program provided significant funding for roads in the project areas, including for the completion of the planned road in Damao. The roads provided access to villages that previously had only limited (part of the year) road access, if any. This has improved the marketability of village produce and has opened up new markets (e.g., dairy in Inner Mongolia). In addition, the villagers’ access to health care and children’s ability to attend middle and high school was greatly improved.

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(b) Rural Water Supply. A total of 353,000 local residents (11,000 in Inner Mongolia and 342,000 in Gansu) in the project areas benefited from clean water supply through the construction of both piped and non-piped water supply facilities supported by the project. About 163,000 head of large and small animals (68,000 in Inner Mongolia and 95,000 in Gansu) also benefited from the facilities. The constructed rural drinking water supply facilities included 6,777 shallow wells, 850 deep tube wells, and 5,581 shallow tube wells, 21,035 sites of piped and non-piped water supply systems which tapped water from springs, utilized ground-water, diverted or pumped water from streams, and collected rain water. The provision of water supply greatly mitigated the effects of drought in both provinces, greatly improving the reliability of drinking water supply compared with before project. (c) Rural Electrification. The project supported installation of 1,360 km of rural electrification lines including main transmission lines, distribution lines and accessories. A total of 316 administrative villages (30 in Inner Mongolia and 286 in Gansu) have been connected to and are receiving reliable electricity for use mainly by households, agro-processing, irrigation, and schools. About 75 percent of the benefiting villages are in Gansu province. All villages in Gansu and most villages in Inner Mongolia19 now have electricity supply. 2.5 D. Rural Enterprise Component (US$14.13 million, 113 percent of 2001 adjusted cost estimate). This component was designed to provide credit to establish non-state owned and household-based rural enterprises for construction of food- and fiber-processing facilities based on agreed criteria. Two distinct investment packages were designed for Gansu and Inner Mongolia at project appraisal which remained unchanged through out the project implementation. The overall rating of this component is moderately satisfactory. (a) Gansu. The objective was to promote commercially-viable investments for opening markets and generating employment opportunities for project area households. Specific investments were intended to support small rural enterprises and small village enterprise activities by individual households and household groups. By project completion, a total of 70 small village-level enterprise activities, six small-scale rural enterprises and three rural trading markets had received project funding. The overall implementation of this sub-component is considered unsatisfactory. For a number of reasons, mainly market conditions and poor business administration, many of the village-level enterprise activities failed to complete construction or stopped operation after the completion. Project support to the six small-scale rural enterprises (most of them at county levels) was, from a financial point of view, basically satisfactory; however, the component's objective to generate employment opportunities for project area households was not achieved. It is unlikely that these enterprises contributed in any major way to poverty reduction in the project areas. (b) Inner Mongolia. The objective of the “rural enterprise activities” in Inner Mongolia was to increase farm labor productivity and improve transport for goods and people. Actual investments followed the design agreed at project appraisal but at a much-increased scale. A total of 3,100 forage cutters (for feed chopping, milling and threshing) and 1,800 small tractors (for transport, general farm work and powering farm machinery) were purchased. A total of 7,600 farm households in 497 villages of 11 counties benefited from this component. Activities are rated satisfactory.

19 Individual households in Inner Mongolia might still be without electricity if they live isolated from a village infrastructure on the grassland. Such households rely mainly on small portable wind mills and/or solar systems that charge a truck battery which provides electricity to TV and radio.

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2.6 E. Labor Mobility Component (US$1.36 million, 107 percent of 2001 adjustment cost estimate). This component was designed for Gansu only and was originally intended to provide support to organized and voluntary placement of about 65,700 surplus rural laborers in off-farm employment and to Gansu's Labor Bureau to improve the management and referral services. In 2001, the provincial government advised the Bank that: (a) it would cancel the remaining implementation of this component; (b) it would return reimbursed Bank funds to the Special Account; and (3) it required the reallocation of the total Bank Loan proceeds originally budgeted for this component to other project activities within the scope of project design. By the time the Bank concurred with this request, a total of 5,543 persons had already been placed (1,607 within Gansu and 3,936 outside the province). Training in relevant technical skills, the urban living and labor environment, relevant labor laws and workers’ safety were provided, together with funding equivalent to initial settlement expenses for all these placed rural laborers. Support for Gansu Labor Bureau was cancelled after agreement with the Bank once minimal expenses had occurred. The component is not rated.

2.7 F. Voluntary Settlement Component (US$0). This component was designed for Qinghai only and was not implemented as a result of the withdrawal of Qinghai from the project in 1999. The component is not rated.

2.8 G. Social Sector Services Component (US$0.45 million, 19 percent of 2001 adjustment cost estimate). This component was to provide support to two sub-components. (a) Education. This sub-component was for Qinghai only and designed to address the basic education needs related to the Qinghai Component’s voluntary resettlement program. The sub- component was not implemented because of the withdrawal of Qinghai from the project in 1999. The sub-component is not rated. (b) Health. This sub-component was designed to improve the quality of and access to basic health services in selected project villages. In the early stages of implementation, the government requested that this sub-component be dropped based on a policy change of the government. Since project preparation, the government’s health care strategy in rural areas had been revised to cover all project counties by national support in health care directly through the provincial Health Bureau. In addition, health care was supposed to be consolidated at township and county levels instead of village levels. This change in strategy made project activities under this sub- component no longer consistent with the national policy; since the planned activities were small in scope and with minimal funding through counterpart funds only, the Bank concurred with the request in 2001 (at the time of completion of the project restructuring). In Inner Mongolia, limited investments had already taken place mainly in up-grading medical equipment. The sub- component is not rated. 2.9 H. Institutional Building and Project Management Component (US$10.69 million, 111 percent of 2001 adjustment cost estimate). This component was designed to strengthen project management through a variety of training activities and the establishment of project monitoring systems. This component supported three sub-components which all were implemented satisfactorily. (a) Institutional Building. An institutional development program was implemented in each province aimed at the strengthening of PMO capability and staff competence for project implementation. Various activities were carried out throughout project’s implementation period including training, study tours, workshops, technical assistance and provision of office facilities. Through project implementation, more than half of project staff were recognized as project implementation specialists in certain fields and about 30 percent of staff at various levels were promoted, including to management positions. Difficulties in coordination, and uneven

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institutional and technical capacity, in particular at county levels, posed a challenge especially in the beginning of the project. Integrating the project activities into the Poverty Offices’ own programs eventually resolved a large part of the challenges. (b) Independent Poverty Impact Monitoring. The project's poverty impact was monitored, evaluated and disseminated by the SSB on a yearly basis. Seven monitoring reports (1999-2005) were prepared by the SSB covering all project areas in both Gansu and Inner Mongolia (see Section 2.3 in the main text). (c) Project Management. The project management structure was generally strong in both provinces. Under the project, a total of 54 Project Leading Groups and the same number of PMOs were established in both provinces at provincial, prefecture and county levels. Working stations (405) were set up in all project townships. Project implementation groups (3,674) were set up in all project villages. Technical Advisory Groups at provincial, prefecture and county levels were set up and, in cooperation with line government agencies, provided technical support for project implementation. At the central level, the State Council's Leading Group for Poverty Reduction and Development of the State Council and the Foreign Capital Project Management Center played an important role in coordination, guidance, monitoring and provision of services with regard to project implementation. It should be noted that higher-than-planned management funds were provided to both provinces and counties, and this is directly linked with improved implementation quality. In general, management funds for projects in China tend to be too low (always provided through counterpart funds). 2.10 Detailed outputs by component are presented in Table 2 below.

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Table 2 Percent of Appraisal 2001 Indicators Actual estimate20 adjusted target GS: 107 A. Land and Household Development IM: 138 annual production of grain (tons) 269,000 74,617 annual production of cash crop products (tons) 150,000 79,412 annual production of fruits (tons) 70,000 4,086 annual production of animals (million head) 3.2 1.34 timber at final cut (million m3) 1.5 0.34 GS: 111 B. Irrigation and Land Improvement IM: 83 new reservoir of 40 m height and 26 million m3 storage constructed 1.0 - existing reservoir of 10 m height renovated 1.0 - lands irrigated for agricultural production (ha) 53,250 57,182 GS: 107 C. Rural Infrastructure IM: 39 Class III/IV roads constructed (km) 216 533 shallow wells constructed (no.) 5,060 6,777 deep tube wells constructed (no.) 821 850 shallow tube wells constructed (no.) 5,641 5,581 piped/non-piped water supply sites constructed (no.) 21,035 villages connected & receiving reliable electricity (no.) 410 316 GS: 111 D. Rural Enterprises IM: 122 facilities constructed/upgraded – Gansu (no.) 264 agricultural equipment - Inner Mongolia (no.) n/a 4,900 E. Labor Mobility - rural workers placed in off-farm employment (No.) 65,700 5,543 - F. Voluntary Settlement n/a people voluntarily settled in Balong, Qinghai (no.) 57,600 - herders/farmers voluntarily participate in the project (no.) 4,000 - new townships established 2 - new villages established 21 - G. Social Sector Services n/a establishment of primary/secondary schools (no.) 21 - establishment of health centers (no.) 23 - GS: 106 H. Institutional Building & Project Management IM: 121 established Provincial PMOs (no.) 3 2 established Prefecture PMOs (no.) 6 12 established County PMOs (no.) 34 40 established township workstations (no.) 609 405 established village implementation groups (no.) 6,078 3,674 established Technical Advisory Groups (no.) 37 46 farmers/herders trained (no.) 526,347 968,786 (GS= Gansu, IM=Inner Mongolia)

20 Including Qinghai Province.

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Annex 3. Economic and Financial Analysis

3.1 Methodology and Assumptions. The economic rate of return (ERR) at completion has been recalculated using new household surveys conducted by the PMOs in project villages. The methodologies and assumptions used are similar to those adopted at appraisal to maximize comparability. The ERR was calculated for each of the five project components and the overall project ERR was obtained as the investment-weighted average of the five ERRs. Investment in Irrigation and Land Improvement was incorporated as a cost in the Land and Household Development component because the benefits from these investments are hard to isolate and are broadly reflected in the increased revenues of the different activities of that component. Costs and benefits of each activity have been projected over a period of 20 years using constant 2006 prices. 3.2 In Inner Mongolia, estimates of the ERR of the Land and Household Development Component are based on the reported scale of each of the different activities and the median of the county estimates of the yields, output prices, operation and labor costs for each of the different activities. In Gansu, given data limitations, the average yield, output price, operation and labor costs of the nine most important activities in the component from two representative counties were used. These nine activities accounted for 76 percent of the total investment in this component. Actual investments reported by the project were used to calculate the investment cost. In calculating the ERR for the component, investment in overall institution building was incorporated on a pro rata basis as a cost. It should be noted that the ERR estimate for the rural road investment in Gansu is a lower bound. It is based on savings in transport cost and does not include its contribution to increased market access, market development and economic growth. The water and electricity prices, as well as the number of beneficiaries and wage information, were up-dated from appraisal though the same assumptions were used otherwise. 3.3 Economic Rate of Return. The ERR was estimated at 17.7 percent for the project in Gansu and at 20.0 percent for the project in Inner Mongolia. The Inner Mongolia ERR estimate is similar to the one at appraisal, but the estimate for Gansu is lower. This is because of both methodological and economic reasons, as explained below. 3.4 At appraisal, the project in Gansu included the Labor Mobility Component accounting for about 10 percent of the total investment had an estimated ERR of 35.7 percent. This component was dropped at the time of project restructuring, lowering the anticipated ERR of the total project in Gansu. In addition, the ERR for the rural enterprise activities (7.4 percent of the total anticipated investment) is much lower than the appraisal estimate because the “without- project” benefits were not deducted at appraisal and because the sales price of some of the products has substantially declined since appraisal. The ERR for rural roads was also lower, largely because of a significant increase in costs (estimated at RMB 33,752/km at appraisal compared with a reported cost of RMB 166,361/km at completion). This increased actual completion cost is partly the result of the up-grade of the type of roads constructed. Higher class roads were constructed, as required by new government strategy and regulations. Given that the calculation of the ERR used estimated savings in transport costs (but not the benefits from increased connectivity, market participation and specialization) the estimated ERR for rural roads, at 8.2 percent, is probably a significant under-estimate 3.5 The value of separate calculations of the financial rate of return was considered negligible, as markets in China are now well integrated.

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Table A3.1: ERR (percent) of project components at project appraisal and completion. Gansu Inner Mongolia Appraisal Completion Appraisal Completion Project Components ERR ERR ERR ERR Land and household development1 19.5 19.3 22.0 19.2 Rural infrastructure 15.3 10.3 14.4 16.5 - rural roads 19.1 8.2 16.4 n/a - rural water supply 13.4 10.3 13.3 16.6 - rural electrification 13.5 15.8 14.2 16.4 Rural Enterprises 50.7 16.0 50.1 47.5 Total project 2 28.4 17.7 20.6 20.0 1. Land and household development includes irrigation and land improvement. 2. ERR of overall project in Gansu at appraisal also includes the Labor Mobility component with an individual estimated ERR of 35.7 percent.

3.6 Sensitivity Analysis. While the estimated ERR suggests a robust return to the project, the estimates also appear sensitive to potential fluctuations in certain product and factor markets. The overall project ERR was derived from the investment-weighted average of the ERRs of the four project components (Land and Household Development, Irrigation and Land Improvement, Rural Infrastructure and Rural Enterprises Development). Given that the Land and Household Development Component makes up 75 percent and 81 percent of the total investment in Gansu and Inner Mongolia, respectively, the project's overall ERR critically depends on the ERR of this component. Moreover, in each province, three specific activities make up around 40 percent of the total reported investment in the component. These activities are plastic mulch corn cultivation, ewe-raising and pig-fattening in Gansu; and virus-free potato cultivation, ewe-raising and fat-tailed sheep-raising in Inner Mongolia. 3.7 The estimated ERR of the Land and Household Development Component fluctuated between 11-28 percent in Gansu and between 10-28 percent in Inner Mongolia, given a 10 percent decrease/increase of the gross revenues of these three activities. A 25 percent increase in the labor cost for the three activities yields an ERR of 12 percent and 15 percent in Gansu and Inner Mongolia, respectively. By way of reference, wages in Inner Mongolia doubled during the project period.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/Specialty Lending Petros Aklilu Task Team Leader EASRD Rural development Vincent Ashworth Consultant Crops and agricultural services Benu Bidani Poverty analysis, monitoring & evaluation Chup Lim Cheong Consultant Water conservation, infrastructure Christer Cronberg Consultant Rural enterprises Robert Crooks Peer Reviewer EASES Environment Nicolette DeWitt Legal Advisor Cornelis De Haan Peer Reviewer Livestock Sandra Durham Financial management and control James Goering Peer Reviewer Rural development (World Vision) Mengjie Han Consultant Health Wenbin Hu Consultant Education Hyung Min Kim Disbursement Specialist Disbursement Zongcheng Lin Anthropologist EASES Social, minorities, gender Alex Schumacher Consultant Environment Dennis Sheehy Consultant Livestock Kalanidhi Subbrao Peer Reviewer Poverty Lang Seng Tay Peer Reviewer Irrigation and infrastructure Xiaolan Wang Financial Analyst EASRE Financial management and control Weiguo Zhou Operations Officer EASRE Costing, procurement, financial analysis Zhengxuan Zhu Co-Task Team Leader EASRD Organization and management Supervision Sari Söderström Lead Operations Officer EASRE Task Team Leader (environment., M&E) Abraham Brandenberg Animal Husbandry Specialist EASRD Animal husbandry Chup-Lim Cheong Consultant Rural infrastructure, water conservation Financial Management Yi Dong EAPCO Financial management Specialist Achim Fock Senior Economist EASRE Economic analysis Martti Lariola Consultant Rural enterprises Julia Li Economist Consultant Labor mobility Zong-Cheng Lin Social Development Specialist EASRE Social, resettlement, ethnic minorities Wanlong Lin Agricultural Economist Consultant Economic analysis Gayane Minasyan Environmental Economist EASRE Environment Pawan Patil Senior Economist EASRE Labor mobility Rutger-Jan Schoen Consultant Social, participation Jinan Shi Procurement Specialist EAPCO Procurement Bruce Trangmar Consultant Agriculture, environment Jianping Wu Consultant Agriculture, animal husbandry Zhengxuan Zhu Agricultural Specialist EASRD Institutions Weiguo Zhou Operations Officer EASRE Institutions, procurement, financial analysis ICR Sari Söderström Lead Operations Officer EASRE Luc Christiaensen Senior Economist EASRE Weiguo Zhou Operations Officer EASRE

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b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle US$ thousands Staff weeks (including travel and consultant costs) Lending FY97 31.59 FY98 250.01 FY99 304.96 Total 586.56 Supervision/ICR FY99 2.51 FY00 32 146.43 FY01 36 188.99 FY02 19 116.94 FY03 18 98.8 FY04 14 88.28 FY05 12 80.43 FY06 12 51.08 FY07 15 86.05 Total 158 859.51

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Annex 5. Borrower’s Comments and ICR Summaries

Leading Group for Poverty Reduction under the State Council Foreign Capital Management Office March 2007

China Gansu and Inner Mongolia Poverty Reduction Project (the Project) is the third large and trans-regional project directly supporting farmers with comprehensive measures implemented in China in cooperation with the World Bank after the Southwest Poverty Reduction Project and Qinba Poverty Reduction Project. Overall, design of the project has carried on the concept of the previous two projects and reflected the mainstream thinking for fighting against poverty at the time of design. The Project has increased China’s financial inputs in poverty reduction and development and offered effective support to the implementation of “Ten-Year Program for Poverty Alleviation and Development”. The successful experience of the Project has provided a useful reference for the development of China’s poverty reduction and development during the new stage and has set a good example for poverty reduction cause worldwide.

Although during the implementation of the Project, China’s western areas were hit by successive major droughts and experienced decline of prices for agricultural produce, poverty situation in the project areas has been remarkably improved, the society and economy have been developed in an all-round way, the productive capacity of project farmers especially poor farmers has been evidently improved. Through joint efforts of various parties, all of the project objectives have been achieved.

1. Main Results/Outcomes of the Project

1) The alleviation of poverty is faster than the national average level with the number of poor reduced by 225,000. In 1999, poverty incidence in the project villages was 22.2%, which was 4 times of China’s rural average level, but by 2004 it declined to 8.2%. In comparison with the average poverty incidence of 2.8% in China’s rural areas, the gap has been narrowed by a large margin.

2) Significant increase has seen in the average per capita net income in the project villages and the increase is faster than the national average. In 2004, average per capita net income in the project areas reached 1,705 Yuan, 58.9% higher over that in 1999 and with an annual average growth of 9.7%, which is about 4% higher than the average annual growth of per capita net income for China’s rural residents.

3) Remarkable results have been achieved in infrastructure construction. The Project has played an effective role in promoting the improvement in the infrastructure of project villages. By 2004, the majority of project villages had got access to electricity, roads and television and the number of villages with access to telephone had increased from 31.5% in 1999 to 82.6% in 2004.

4) The self-development capacity and risk-prevention capacity of poor households have been improved by a large margin. Through participating in project activities, receiving various training on practical technologies, farmers have had significant progress in their productive

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skills and self-development awareness; their sources of income have become more diversified; the implementation of basic farmland construction components has resulted in increases of terraces, irrigated land and land productivity and significant increases in farmers’ cash income and grain reserves.

2. Extensive Impacts of the Project

1) The Project has further demonstrated the effectiveness of integrated poverty reduction models. The Project has adopted integrated poverty reduction and development models, which have not only increased farmers’ income, improved basic productive and living conditions of poor households, promoted the transfer of surplus labor, but also improved the overall skills and self-development capacity of poor households.

2) The Project has produced positive impacts on poverty reduction and development activities within China. Through drawing on the lessons of Southwest and Qinba Poverty Reduction Projects, the Project has achieved improvements in many aspects including project design, management and farmers’ participation. During project implementation, the Project explored many new practices and created some successful models. As a result, practitioners from the poverty alleviation system of many provinces conducted a number of field visits to the project areas to learn the successful experience of the project.

3) Participation by households has been deepened. In contrast to the Southwest and Qinba Poverty Reduction Projects, poor households of the Project have participated in a more extensive and deeper manner in the whole process of the Project including project preparation, implementation and monitoring and evaluation. As a result of project implementation, farmers’ sustainable development capacity has been enhanced while their income increased.

4) Project implementation has produced positive impacts on women in the project areas. The implementation of rural water supply component has reduced women’s labor intensity, improved sanitation conditions and lowered the incidence of diseases. Through participating in project activities and various targeted training programs, women have enhanced their productive skills and management capacity, and with the implementation of the project, they have become one of the main sources of household income. As a result, the status of women in rural economy and life has been enhanced.

5) Impacts on the environment. In general, project impacts on the environment are positive. During project design, project activities targeted at ecological rehabilitation and environmental pressure mitigation were designed. Through transferring slope land to flat land and thinly-layered land to thickly-layered land, soil and water have been conserved and vegetation in mountainous areas rehabilitated. As a result, soil erosion has been significantly reduced, environmental deterioration checked and environmental quality improved.

3. Lessons Learned during Project Design and Implementation

1) More attention should be paid to the importance and timeliness of “software” components. Like other projects, the phenomenon of management staff and farmers of the Project favoring more on “hardware” than “software” remains prominent. People were very proactive towards “hardware” components and the funds they received were firstly used for the activities such as construction of terraces and pig farming. However, they lacked

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sufficient understanding of the importance of skills training. As a result, some “software” components had been delayed, the timeliness of skills training lost and project benefits were hard to be maximized.

2) Poverty reduction effectiveness of Rural Enterprises Development Component is yet to be further studied. Drawing on the lessons of Southwest and Qinba Poverty Reduction Project with less ideal implementation effectiveness of rural enterprises components, the Project had comparatively small investments in rural enterprises and supported a limited number of enterprises. Although the benefits of enterprises supported by the Project have been good, it is hard to evaluate the role of enterprises in poverty alleviation and their impacts on poor households.

3) Provision of domestic counterpart funds was difficult. As a provincial project, counterpart funds of the Project were shared in proportion by provincial, municipal and county governments as well as project farmers and there had been no provision of central poverty alleviation funds as the Project’s counterpart funds. Overall, provision of provincial counterpart funds had been good, but county governments had difficulties in meeting the requirements for their corresponding counterpart funds since all of these counties are key state-designated counties for poverty alleviation and development with very difficult fiscal situation. Inadequate provision of government counterpart funds would inevitably increase the share of farmers’ self-financing.

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Gansu Provincial Project Management Office October 2006

1. OVERVIEW 1.1 Project Background Gansu is located in the junction area among the Loess Plateau, the Inner Mongolia Plateau, and Tibetan Plateau, belonging to the basins of the Yellow River, the Changjiang River and inter-locked rivers with the total area of 454,403 km2. By the end of 1996, there were totally 4.29 million households in 1,532 townships of 87 counties under 14 prefectures. There were totally 19.75 million rural populations with 8.87 million rural labor forces. The total arable land was 3.5 million ha, with an average of 0.18 ha per rural population. The total grain production was 7.99 million tons 404.52 kg per capita. Per capita net income was 1,100 RMB in rural area. There were 41 nationally-designated poverty counties in the province including 3.75million of poor population. Gansu has been regarded as one of the poorest and least-developed provinces in China. To promote the economic development in the western poverty areas in China, and ensure the achievement of the National Eight-Seven Poverty Reduction Program objectives, the State Council Poverty Reduction Leading Group, the Minister of Finance, the State Planning and Development Committee jointly approved the Western Poverty Reduction Project in Gansu, Inner Mongolia and Qinghai (withdrawn in 1999). Upon completion of two years of hard work for the project preparation, the proposed poverty reduction project was formally launched in December 1999 with some activities retroactively financed from January 1999. 1.2 Basic Information in Project Area Based on the selection criteria, a total of 12 counties (Wudu, Tanchang, Lixian, Kangxian, Wenxian, Xihe in Longnan prefecture; Qinan, Qinshui, Wushan, Zhangjiachuan, Gangu in Tianshui Municipality and Minxian in Dingxi prefecture) with 185 project townships and 2,234 project villages were selected as project area. In May 2001, due to the withdrawal of Qinghai province from the project, 7 new counties (Huixian, Chengxian, Liangdang in Longnan prefecture, Qincheng, Maiji in Tianshui Municipal, Weiyuan in Dingxi prefecture, and Zhuanglang in Pingliang prefecture) were added as new project area with 57 project townships and 313 project villages. This adjustment brought the project area to include 19 counties, 242 townships and 2,547 villages, with a total of 230,000 households and 1.08 million project beneficiaries. 1.3 Project Objectives The overall project objective is to reduce the incidence of absolute poverty in remote and inaccessible villages of the project provinces. The project would empower poor households in the selected poor counties to raise their incomes, through increased grain and livestock production sufficient to meet the basic needs of food and clothing and, in many cases, also generate a marketable surplus to improve living standards, establishment of alternative income generation activities in poor rural areas, improvement of rural infrastructure and enhanced access to basic social services such as health and education would also increase the living standards of poor rural households. For the 12 original project counties, the specific project target was to reach per capita income of 946 RMB, per capita grain of 320 kg, with a total of newly developed terracing of 21,151 ha, 0.067 ha (1 mu) of orchard per household, and with drinking water access for both project households and animals. It also planned to ensure over 90% of project households to learn at lease one type of agriculture production skill, 100% of project townships to have the access to

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the country road at class IV level or above, and 95% of project villages to have the road access for motor vehicles. For the adjusted new project counties, the specific project target was to realize per capita income of 1,200 RMB, per capita grain of 420 kg, with a total of newly developed terracing of 3,385 ha, 3,933 ha of new orchard, and 1,171 ha of newly irrigated land. It also planned to fundamentally resolve the problem of drinking water access for both farmers and animals; ensure over 95% of project households to learn at lease one type of agriculture production skill; 100% of project townships to have the access to the country road at class IV level or above, and 95% of project villages to have the road access for motor vehicles. 1.4 Project Component and Investment The total investment of the project was estimated at 1,385 million RMB, including US$87.45 million (equivalent to about 716 million RMB) of the World Bank loan. Based on the project proposal approved by the State Planning and Development Committee and the feasibility study report approved by the Provincial Planning and Development Commission, the counterpart fund also include 49.96 million RMB of interests during the project implementation period. Thus the total financing requirement was 1,435 million RMB, including 719 million RMB of counterpart fund. Land and Household Development Component. Through the extension of advanced agriculture production skill, it would further increase grain, cash crops and cash tree plantation, and livestock production, so as to improve the comprehensive agriculture productivity. The investment of this component was estimated at 710 million RMB, accounting for 51.3% of the total investment. Irrigation and Land Improvement Component. It planned to construct water cannels, water cisterns, wells, spring irrigation, pumping irrigation, small-scaled irrigation facility; and terracing so as to increase arable land. The investment of this component was estimated at 199million RMB, accounting for 14.4% of the total project cost. Rural Infrastructure Component. The project activities mainly include rural road construction, rural water supply, rural power line construction etc. The investment of this component was estimated at 178 million RMB, accounting for 12.8% of the total project cost. Rural Enterprise Component. The project activities include the construction of the small- scaled forage processing, Chinese herb medicine processing, Tea processing factories etc, and the construction of agro-products trading markets. The investment of this component was estimated at 89.99 million RMB, accounting for 6.5% of the total project cost. Labor Mobility Component. The project activities include technical training, mobilizing the surplus rural labor forces 70,000 out of the poverty area. The investment of this component was estimated at 135 million RMB, accounting for 9.8% of the total project cost. Social Sector – Education and Health Component. The investment of this component was estimated at 19.08 million RMB, accounting form 1.4% of the total project cost. Institutional Building and Project Management Component. The investment of this component was estimated at 53.14million RMB, accounting for 3.8% of total project cost.

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1.5 Project Adjustment The adjustment of the project activities. Labor mobility component was terminated in 2001, and the unused budget was reallocated to the Land and Household Development Component, which brought the investment of this component to about 60% of the total project cost. As for the Irrigation and Land Improvement Component, the scale for tube wells and pumping irrigation was reduced, while the scale of cannel construction, water cisterns, spring irrigation and river bank embankment was increased. As for the Rural Infrastructure Component, the scale of rural road construction, rural water supply, and rural power line construction was all increased. For the Rural Enterprise Component, the scale of small-scaled processing plants construction was much reduced, while the investment to Jindadi Starch Processing Plant reconstruction in Dingxi prefecture was increased. In addition, 5 enterprises in Tianshui Hi-tech Agriculture Demonstration Garden were added to this component. The Health Component was dropped and the original budget was reallocated to the Rural Infrastructure Component. The adjustment of the unit cost. The unit cost for river bank embankment activity in Tanchang county was increased to 44,492 RMB/ha from 32,952RMB/ha; the unit cost for the rural road construction was also increased to 293,000 RMB/km from 150,000 RMB/km in Tanchang and Lixian. The adjustment in the procurement and disbursement. As approved by the World Bank, the procurement method for plastic mulch was changed to NCB from ICB, the procedures for procurement of seeds; seedling, farm tools, animals etc. were simplified by using “Image Receipts”. Starting from 2001, disbursement was also adjusted accordingly due to annual adjustment of project activities. Table 1: Project Adjustment Unit: ’0000 RMB The Project 12 Old Counties 7 New Counties Project Component Adjusted % of Total Adjusted Adjusted Investment Investment Investment Investment Land and Household Development 84,153.27 60 70,532.26 13,621.00 Irrigation and Land Improvement 19,177.45 14 16,281.30 2,896.15 Rural Infrastructure 20,588.56 15 16,435.06 4,153.49 Rural Enterprise 9,148.16 7 9,148.16 Labor Mobility 1,248.08 1 1,248.08 Health Institutional Building and Project 5,560.77 4 4,134.89 1,425.88 Management Total Investment 139,876.28 117,779.75 22,096.52

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2. PROJECT IMPLEMENTATION PROGRESS 2.1 Project Progress As of the end of June 2006, the cumulative investment under the project has reached 1,400 million RMB or 100.1% of the adjusted project cost estimate of 1,399 million RMB, including 1,171 million RMB or 99.4% of the adjusted cost estimate in 12 old project counties and 229 million RMB or 103.7% of the adjusted cost estimate in 7 new project counties. The completed investment under Land and Household Development Component was 853 million RMB, or 101.4% of the adjusted cost estimate of 841 million RMB. For the 12 old project counties, the completed investment has reached 710 million RMB, or 100.7% of the adjusted cost estimate of 705 million RMB. For the 7 new project counties, the completed investment has reached 143 million RMB, or 105% of the adjusted cost estimate of 136 million RMB. At the project completion, a total 34,347.54 ha of grain crops, 21,466.13 ha of cash crops, 29,568.02 ha of tree crops were newly developed. In addition, a total of about 600,000 heads of livestock animals were procured by project household. The completed investment under Irrigation and Land Improvement Component was 190 million RMB, or 99.0% of the adjusted cost estimate of 192 million RMB. For the 12 old project counties, the completed investment has reached 161 million RMB, or 99.4% of the adjusted cost estimate of 162 million RMB. For the 7 new project counties, the completed investment has reached 28 million RMB, or 96.6% of the adjusted cost estimate of 29 million RMB. At the project completion, a total of 333.15 km of water channels for irrigation was newly constructed, which has greatly ensured the irrigation for crops particularly the newly planted orchard. The controlled river bank embankment has reached 209.74 ha. The controlled small river basins have amounted to 3,482.84 ha. The newly-increased terracing amounted to 23,343.19 ha, which provided improved water and soil conditions for quality plantation of crops and cash tree crops. The total completed investment for Rural Infrastructure Component was 204 million RMB, or 99.0% of the adjusted cost estimate of 206 million RMB. In which, the completed investment in 12 old project counties was 161 million RMB or 98.2% of the adjusted cost estimate of 164 million RMB; the completed investment in 7 new project counties was 43 million RMB or 102.4% of the adjusted cost estimate of 42 million RMB. At the project completion, the cumulative numbers of constructed water cisterns for both farmers and animal reaches 27,506, which have significantly, solve the problem of the safe water access for 340,000 project beneficiary in the project area. It also has completed the construction of 533.05 km of rural road, 1,022.51 km of rural power lines. The total completed investment for Institutional Building and Project Management Component was 56.19 million RMB, or 101% of the adjusted cost estimate of 55.61 million RMB. For the 12 old project counties, the completed investment has reached 41.04 million RMB, or 99.3% of the adjusted cost estimate of 41.35 million RMB. For the 7 new project counties, the completed investment was 15.14 million RMB, or 106.2% of the adjusted cost estimate of 14.26 million RMB. The completed investment for Labor Mobility Component was 10.62 million RMB, or 85.1% of the adjusted cost estimate of 12.48 million RMB. The component was terminated in October 2001, and the unused component budget was reallocated to other project components. Since the beginning of implementation of Public Health Component, the public health policies in project area have been adjusted. All designed project activities would be directly implemented by local health sectors. The World Bank mission agreed to stop implementation of this component in 2001.

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The completed investment in Rural Enterprise Component was 86.17 million RMB, or 94.2% of the adjusted cost estimate of 91.48 million RMB. Project enterprises include 5 enterprises located in Tianshui Hi-tech Agriculture Demonstration Garden, Jindadi Starch Processing Plant in Minxian, and some small-scaled plants such as forage processing, Chinese herb medicine processing, tea processing etc. The total completed investment for Institutional Building and Project Management Component was 56.19 million RMB, or 101% of the adjusted cost estimate of 55.61 million RMB. For the 12 old project counties, the investment was 41.04 million RMB, or 99.3% of the adjusted cost estimate of 41.35 million RMB. For the 7 new project counties, the investment was 15.14 million RMB, or 106.2% of the adjusted cost estimate of 14.26 million RMB. 2.2 Project Procurement The agreed procurement plan for the original project proposal for 12 project counties was 1,117.07 million RMB, and the procurement plan for the 7 new project counties was 242.05 million RMB. As of June 30, 2006, the completed procurement in the original procurement plan was 1,162.92 million RMB, or 104% of the original procurement plan, and the completed procurement in the procurement plan for the 7 new project counties was 225.03 million RMB, or 93.0% of the procurement plan. By procurement method, the completed procurement by ICB was 2.21 million RMB in original project area, and 1.09 million RMB in the new project area. The completed procurement by NCB was 16.10 million RMB in original project area, and 4.66 million RMB in the new project area. The completed procurement by other procurement method was 1,045.81 million RMB in original project area, and 203.46 million RMB in the new project area. About RMB 98.80 million in the original project area and RMB 15.81 million in the new project area was non- Bank financed. By expenditure category, the completed procurement of civil works was 465.83 million RMB in the original project area, and 80.00 million RMB in the new project area. The completed procurement of goods was 617.47 million RMB in the original project area, and 134.69 million RMB in the new project area. The completed selection of consulting services was 18.90 million RMB in the original project area, and 8.77 million RMB in the new project area. The other completed procurements were 61.93 million RMB in the original project area, and 1.57 million RMB in the new project area. 2.3 The World Bank Loan and Credit The total amount of the World Bank Loan and Credit for the project was US$87.45 million, equivalent to 716 million RMB including US$23.4 million of IBRD Loan and SDR46.21million of IDA Credit. As of October 31, 2006, both Loan and Credit amount were fully reimbursement in 52 applications. Table 2: Disbursement Credit (SDR) Loan (USD) By category Original Amount after Original Amount after amount adjustment amount adjustment 1-a Civil works 17,391,961 19,109,000 1-b Goods 24,512,848 24,971,283 16,126,000 22,698,493.91 1-c Consultation 3,308,778 1,983,000 1-d Monitoring 248,000 200,000 1-e Labor settlement 7,040,000 467,506.09 1-f Frond-end Fee 234,000 234,000 Total 45,461,587 46,263,283 23,400,000 23,400,000

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2.4 Project Counterpart Fund As of June 30, 2006, the cumulative counterpart fund provided was 839.68 million RMB, or 116.7% of the original plan. In which, the national poverty reduction grant was 228.50 million RMB, or 140.2% of the original plan; the work for food fund was 40.48 million RMB or 46% of the original plan; the national poverty reduction loan was 218.21 million RMB or 84.6% of the original plan; the counterpart fund from municipal and county governments was 26.54 million RMB or 41.4% of the original plan; and the counterpart fund from line agencies was 58.61 million RMB, or 319.7% of the original plan; the farmer’s contribution and self-raising fund amounted to 267.33 million RMB, or 209.7% of the original plan.

3. PROJECT ASSESSMENT 3.1 Assessment of Project Objectives and Implementation The coverage of project fund and activities to the poverty villages and households gradually increased annually. Based on the Poverty Monitoring Report prepared by the National Statistical Bureau, as of the end of 2005, 2,547 villages have been involved in the project implementation. About 95.6% of project households with a total of 1.04 million of beneficiaries participated in two or more project activities with an average per household investment of 1,387.2 RMB. Poverty population was also significantly reduced. Based on the poverty monitoring statistics from the National Statistical Bureau, the poverty population in project villages was reduced to10.8% in 2004 with a reduction of 16.6%age points from 27.4% in 1999, while the poverty population in non-project villages was reduced to 12.4% with a reduction of 8.3 percentage points from 20.7%. The reduction of poverty population in project villages is greater than that in non-project villages. In 2004, the poverty gap indicator in project villages dropped to 0.4% from 5.4% in 1999 with a reduction of 5 percentage points. Per capita net income and grain production in rural area have increased steadily. In 2004, the per capita net income reached 1,256 RMB in project villages, with 66% increase from 756.6 RMB in 1999 which is 25 percentage points higher than that of non-project villages. The designed project targets of 946 RMB per capita for the 12 original project counties and 1,200 RMB per capita for the 7 new project counties have been achieved. In 2005, the average grain production in project villages reached 361 kg, with 53.6% increase from 235 kg in 1999. The designed project target of per capita grain production of 320 kg in project area has been achieved. During the 7 years period from 1999 to 2005, the per capita grain production for low-income households in the project villages increased at an average rate of 7.4% annually. The basic production and living conditions in project area have been significantly improved. In 2005, 47.9% of project households in project villages had access to safe drinking water, with an increase of 18.6 percentage points from that in 1999. Of which, 64.8% lived within 100 meter from the water sources. 100% of project villages were covered by rural electricity network. The newly increased terracing land amounted to 23,343 ha (350,000 mu) with an average of 1.5 mu per household. The newly increased orchard reached 29,567 ha (444,000 mu), with an average of 1.9 mu per household. The newly increased irrigated land reached 31,333 ha (470,000 mu), with an average of over 2 mu per household. The ecological environment has been effectively protected in the project area. During the 7-year project implementation, the plantation area increased by 31,313 ha for grain crops, 19,347 ha for cash crops and 29,567 ha for cash tree crops, which has greatly increased the green coverage in the project area. Meanwhile, the large scale cash tree plantation has significantly improved reservation of water sources, reduced water and soil erosion, and greatly improved the

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efficiency of resource use. The newly increased number of livestock reached about 600,000 heads. The pen-fed practices, forage growing alongside house, road, river and field, improved management of pastures and crop stalks brought positive impact on the agriculture ecological system. Farmers’ skills on science and technology have also been improved. By the technical training under the project, over 92% of project households received various kinds of technical training, and learned at least one kind of practical skill for cropping in addition to grain production. The skill of production and capacity of self-management for household were significantly improved. 3.2 Assessment of Project Economic Benefit Cash flow analysis of the main production activities showed that the net present value of the project is 821.86 million RMB, and the financial IRR is 20.5% which is about 2.3 percentage points lower than the PAD estimate of 22.8%. This was mainly due to the reduced contribution from the Labor Mobility component (52%) which was terminated in 2001. From the project financial analysis point of view, the project in general is very successful with an IRR 8 percentage points higher than the discount rate of 12%. 3.3 Assessment of Environmental Impact The overall process of project design and implementation was based on poverty reduction, focused on the comprehensive agricultural development activities, and integrated rural infrastructure improvement including rural road, water cisterns, terracing, watershed control etc. All technical standards adopted in the project were in line with the environmental protection criteria. The implementation of the project has increased the forestland area and surface vegetation, which has greatly improved the forest coverage, reserved water resources, reduced water and soil erosion. More importantly, it also has promoted the comprehensive treatment of ecological system, improved the quality of environment, and finally realized the harmonized development and balance between production and environment. 3.4 Assessment of Project Management During the project preparation and implementation, Gansu carried out independent project management with support and guidance from the State Poverty Reduction Leading Group Foreign Capital Poverty Reduction Project Management Center (FCPPMC) and the World Bank consultants. To ensure the successful implementation of the project management, a three- dimension project management structure was established i.e. Project Leading Group (at provincial, municipal, county and township), PMO (township stations, village implementation group) and Technical Advisory Group with PMOs as the main body in the vertical project management system. The PMOs at all levels played a very important role in coordination with the relevant agencies such as Planning and Development Commission, Financial Bureau etc. to integrate vertical and horizontal efforts and ensure smooth project implementation. Project management agencies involved in specific management work at all levels took their respective responsibilities in the areas such as project planning, procurement, financial management, and document recording etc. They performed well in project supervision, project inspection, monitoring, providing technical training and demonstration, and encouraging farmers’ participation. 3.5 Assessment of the World Bank Performance The World Bank task manager and task team played an important role during the project preparation and implementation. They introduced the advanced and modern international anti- poverty theory and concept to adapt them to the local actual conditions within project area and

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develop a localized and more adaptive poverty reduction theory and approach in Gansu. They also introduced the advanced and scientific management theory and practices from the World Bank to establish and improve project operation mechanism and management procedures. Through supervision, the Bank team identified issues, made recommendations and reached agreements with the Chinese counterparts to resolve problems, improve project management and ensure smooth project implementation. The Bank team’s diligent and pragmatic working style, the working attitude of seeking truth from the facts and devotion set an excellent example and model for project management entities in Gansu. This has greatly contributed to the improvement of overall project management, quality and efficiency. With the change of market demand, some of the planned project activities became less prospective than expected and some project households were unwillingly to implement those project activities. Unit cost of some rural infrastructure activities was set too low at appraisal. The effectiveness and efficiency of the project implementation, procurement and reimbursement were thus constrained. The project was planned during project preparation, implemented through several years, and adjusted once at the mid-term review. Since 2002, based on the actual condition in Gansu, the World Bank has agreed to annual project adjustments. This practice allowed project counties to make project adjustments in line with sector development and market demand and significantly improved the economic benefit. The World Bank developed a set of standardized and efficient procurement guidelines which integrated the principles of openness, fairness, justice, efficiency into the whole procurement process. There guidelines greatly ensured the transparency and competition and also achieved the economy and efficiency for procurement during the project implementation. Although procurement through shopping and bidding was scientific and well established, this was not suitable for procurement of live goods such as seedling and livestock. Requested by Gansu province in 2002, the World Bank agreed to modify the procedures for procurement of live goods. Consequently, Gansu designed so called “Image Receipt” for project households to participate in the shopping procedures which has brought great convenience to the project procurement, accelerated the project progress, improved the quality and efficiency of the project implementation, and increased enthusiasm of farmers in the project. The World Bank team has been attaching great attention to the opinions from Chinese counterpart with clear response and feedback. However, it usually took too long for us to receive such response and feedback.

4. EXPERIENCES AND LESSONS 4.1 Main Successful Experiences Great attentions from leadership to ensure a successful project implementation; Well established project management structure and close cooperation among government line agencies to ensure the smooth project implementation; Investigation, identification, analysis of and resolution to problems as the main practice to improve project management skills; Establishment of demonstration villages (sites) and dissemination of experience to bring project implementation forward; Being practical and localizing international experiences to implement the project with flexibility; Improving skills of project management staff at all levels through training; Increasing capacity of project households’ participation in project through technical support;

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Exploring the improved mechanism for management of poverty reduction fund; Exploring the participatory whole-village approach model for poverty reduction programs; Integrating World Bank supervision missions, learning activities, guidance, training, and capacity building to jointly improve the capacity of project management and implementation. 4.2 Main Lessons Too dispersed project locations, too complex and wide-range project activities, too difficult tasks and too high costs; Increased difficulties in financing due to failure in delivery of some committed counterpart fund; Lack of institutional set-up for post-completion project management and operations as a result of unstable project management offices. In general, implementation of the project in Gansu has reduced poor population year by year, increased farmers’ incomes steadily, significantly improved the basic living conditions, effectively protected the ecological environment, and basically achieved the expected project objectives. This not only promoted the all-around social development in the project area, but also laid a solid foundation for poverty reduction, development and construction of new socialist countryside in the new century.

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Inner Mongolia Project Leading Group Office October 2006

Inner Mongolia Autonomous Region (IMAR) was confirmed as a project Region for China Western Poverty Reduction Project in July 1997. The project area comprised 15 original project banners/counties and 6 added project banners/counties. The project preparation was carried out from 1997 to 1999. The project activities under retroactive financing started in 1999. The project implementation period was 2000-2005. Additional IDA Credit was added to the project in 2001 and the added project activities have been under implementation since 2002. The mid-term review was carried out in 2002 according to the requirements of the project construction. Wengniute Banner and Huade County were chosen as project pilot banner/county for ICR preparation in June 2005. The ICR preparation for the overall project was carried out in 2006. 1. PROJECT DESIGN 1.1 Project Scope According to the selection criteria of project area, 15 banners/counties were selected as project area: Damao Banner, Guyang County, Wuchuan County, Siziwang Banner, Chayouzhong Banner, Chayouhou Banner, Shangdu County, Huade County, Taipusi Banner, Duolun County, Keshenketeng Banner, Linxi County, Balinyou Banner, Wengniute Banner and Keyouzhong Banner. 6 banners and counties were added as new project area in 2001. They are Zhungeer Banner, Helingeer County, Qingshuihe County, Kulun Banner, Aiman Banner and Aohan Banner. Table 1: Project Coverage No. Poverty No. Population Poverty Poverty League/ Project Banner/ project population project in project Household population Municipality County township in project village area covered covered / sumu area Guyang 6 42 91,415 53,688 10,494 39,877 Baotou Damao 8 45 74,242 26,500 7,760 31,816 Eerduosi Zhungeer 4 28 23,159 9,848 3,612 13,628 Wuchuan 10 19 170,317 49,800 8,688 33,796 Hohhot Helingeer 6 13 187,646 48,256 3,210 12,845 Qingshuihe 7 15 76,602 17,698 3,168 13,305 Chayouhou 8 32 214,576 45,792 11,448 45,792 Chayouzhong 5 27 54,955 37,164 9,389 38,037 Wulanchabu Shangdu 8 13 147,741 48,168 12,598 38,788 Huade 4 15 161,261 62,226 10,353 36,681 Siziwang 9 43 98,288 44,331 16,707 51,558 Duolun 5 23 52,881 32,000 8,848 34,508 Xilinguole Taipusi 7 57 211,632 33,668 10,386 35,946 Balinyou 9 46 68,587 35,894 9,627 39,346 Keshenketeng 9 25 46,156 30,874 8,775 33,098 Chifeng. Wengniute 17 93 179,089 47,788 16,682 64,777 Linxi 12 38 236,377 96,380 7,948 30,675 Aohan 6 14 24,464 16,017 3,844 15,389 Kulun 5 25 19,748 14,760 3,823 15,828 Tongliao Aiman 5 19 17,451 14,368 3,507 14,620 Xingan Keyouzhong 7 51 39,575 33,025 9,199 43,249 Total 21 163 1127 2,285,905 784,187 180,066 683,559

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1.2. Project Component and Investment Project components were finalized based on the project design, the project objectives, and current poverty situation through household survey, comprehensive appraisal and rectification at the Regional level. Project components comprised: (1) Land and Household Development, the project’s key component including mainly cropping, animal husbandry, forestry forage and relevant training; (2) Irrigation and Land Improvement including mainly development and utilization of water resource to support the sustainable development of cropping and animal husbandry in the project area; (3) Rural Infrastructure; (4) Rural Enterprises; (5) Public Health; and (6) Institutional Building and Project Management. These components included 62 project activities. The comprehensive project adjustment was carried out in 2002. Table 2: Investment by Project Component (Unit: ’0000 RMB) Component PAD Target Added Target Adjusted Target in 2002 Land and Household Development 42,423.85 13,222.09 67,800.68 Irrigation and Land Improvement 16,098.75 3,857.22 20,064.00 Rural Infrastructure 5,201.92 1,842.72 Rural Enterprises 2,225.20 161.64 3,067.60 Public Health 2,000.00 381.34 Institutional Building and Project 2,403.23 332.05 2,716.94 Management Total Base Cost 70,352.95 17,573.00 95,873.00 Total Cost 83,000.00 18,913.00 98,736.00

1.3. Project Objectives The overall project objective is to reduce the incidence of absolute poverty in remote and inaccessible villages of the project provinces. The project would empower poor households in the selected poor counties to raise their incomes, through increased grain and livestock production sufficient to meet the basic needs of food and clothing and, in many cases, also generate a marketable surplus to improve living standards, establishment of alternative income generation activities in poor rural areas, improvement of rural infrastructure and enhanced access to basic social services such as health and education would also increase the living standards of poor rural households. The main specific targets of the project included the following: the per capita net income of farmers (herders) of over 1,300 RMB; per capita annual grain production of over 500 kg in farming areas with 2-3 mu of base farmland including 0.5 mu of newly increased irrigated land; over 90% of farmer (herder) households in the project area with 1-2 labor/household who learned 1-2 technical skills to improve farming and livestock production; and further improved environment and infrastructure for farming and livestock production in the project area. 1.4 World Bank Loan/Credit and Project Investment The original allocation of World Bank Loan/Credit was SDR19, 705,000 and US$23,300,000 with 17 years of maturity including 5 years of grace period for the Credit and 20 years of maturity including 5 years of grace period for the Loan. In 2001, an additional allocation of SDR7, 881,000 was made available to IMAR and the implementation of the added project activities started in 2002. The condition of the added Credit was 15 years of maturity including 3 years of grace period. Therefore, the total World Bank Loan/Credit amounted to SDR27,586,000 and US$23,300,000.

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The total planned investment was 1,019 million RMB (actual investment at 987 million RMB due to fluctuation of exchange rate) including 506.7 million RMB from the World Bank and 512.3 million RMB as counterpart fund. Project cost estimated for the original project banners/counties was 830 million RMB, including 415 million RMB financed by the World Bank and 415 million RMB contributed by the counterpart fund. Project cost estimated for the new added project banners/counties was 189 million RMB, including 91.7 million RMB financed by the World Bank and 97.3 million RMB contributed by the counterpart fund (of which, 12.518 million RMB was for dairy enterprise in Helingeer County).

2. PROJECT IMPLEMENTATION 2.1 Project Progress Implementation of the Poverty Reduction Project in Inner Mongolia war carried out from 1999 to the end of 2005. By the end of 2005, the cumulative investment was 1,012.35 million RMB, 102.5% of the mid-term review target. The investment is detailed in the following tables.

Table 3: Investment by Component (Unit: ’0000 RMB) % of PAD Added MTR Component Actual MTR Target Target Target Target Land and Household Development 42,423.85 13,222.09 67,800.68 76,405.11 113 Irrigation and Land Improvement 16,098.75 3,857.22 20,063.99 16,233.53 81 Rural Infrastructure 5,201.92 1,842.72 2,047.64 111 Rural Enterprise 2,225.20 161.64 3,067.60 2,898.49 94 Public Health 2,000.00 381.34 371.34 97 Institutional Building and Project 2,403.23 332.05 2,716.94 3,278.87 121 Mgt. Total Base Cost 70,352.95 17,573.00 95,873.26 101,234.98 Total Project Cost 83,000.00 18,913.00 98,736.00 101,234.98 102

Table 4: Investment by Year (Unit: ’0000 RMB) Year 1999 2000 2001 2002 2003 2004 2005 Total Investment 7,708.3 16,903.2 17,723.3 18,712.3 17,803.7 16,350.8 6,033.4 101,235 % of the total 7.6 16.7 17.5 18.5 17.6 16.2 6.0 100.0 investment

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Table 5: Investment by Project Banner/County (Unit: ’0000 RMB) Project PAD Added MTR Actual % of MTR Banner/County Investment Investment Investment Investment Investment Guyang 5,067.21 5,229.72 5,347.42 102.3 Damao 4,185.34 4,388.69 4,663.23 106.3 Zhungeer 2,241.01 2,241.01 2,369.31 105.7 Qingshuihe 2,241.00 2,253.63 2,222.63 98.6 Helingeer 3,492.82 4,905.22 4,695.17 95.7 Wuchuan 4,648.00 4,767.15 4,592.01 96.3 Siziwang 6,847.50 336.15 6,597.75 6,360.94 96.4 Chayouhou 6,804.92 336.15 7,224.42 6,459.15 89.4 Chayouzhong 5,262.96 6,246.91 5,912.89 94.7 Huade 4,921.99 336.15 5,795.00 5,516.21 95.2 Shangdu 6,519.16 336.15 7,438.13 7,264.96 97.7 Duolun 4,171.84 4,416.40 4,336.68 98.2 Taipusi 4,906.80 5,318.52 5,040.08 94.8 Keshenketeng 4,651.12 4,567.25 4,542.66 99.5 Linxi 5,123.36 336.15 4,865.37 5,128.59 105.4 Wengniute 7,999.39 426.91 7,665.90 8,004.71 104.4 Aohan 2,241.00 2,081.52 2,103.21 101.0 Balinyou 5,096.20 4,893.53 4,887.71 99.9 Kulun 2,240.99 2,241.02 2,243.01 100.1 Aiman 2,241.00 2,417.50 2,322.45 96.1 Keyouzhong 6,142.15 6,142.15 6,198.75 100.9 Total 82,347.94 101,696.80 100,211.80 98.5

2.2. Household-based Project Investment There were 683,559 people in 180,066 households in 1,127 villages and 161 townships in project area, that were 27.5% and 29.7% respectively of total households and population in IMAR. The investment for production-related components was all made to the households. The fund directly invested to the household amounted to 98,521,000 RMB during the over-7-year project implementation period. The average investment intensity was 1,441.3 RMB/person including 665.9 RMB of World Bank loan, 310.9 RMB of grant, 193.1 RMB of domestic loan and 271.4 RMB of farmer’s own contribution. Of the total beneficiary households, 53,873 households implemented 1 project activity accounting for 29.9%; 46,046 households implemented 2 project activities accounting for 25.6%; 80,147 households implemented 3 or more project activities accounting for 44.5%. The households that implemented 3 or more project activities are in the majority which strengthened the risk tolerance capability of these households and was conducive to exerting comprehensive benefits through implementation of multiple project activities.

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2.3 Project Procurement The total value of procurement after mid-term adjustment was 959.46 million RMB (base cost) and 987.361 million RMB (total cost). The actual procurement under the project amounted to 1,012.62 million RMB by end of 2005.

2.3.1 Procurement by expenditure category

Table 6: Procurement by Expenditure Category Unit: ’0000 RMB % of MTR Expenditure Category PAD Target Actual MTR Target Target 1. Works 25,984.93 28,642.70 27,263.21 95.2 2. Goods 37,895.33 60,929.22 69,475.02 114.0 3. Training and Study Tour 1,985.44 2,653.25 2,404.28 90.6 4. Working Capital 226.40 715.32 13.00 1.8 5. Health 2,000.00 682.67 371.34 54.4 6. Management fee for Village and 557.57 685.15 379.40 55.4 Township 7. Other management fee 830.00 946.20 993.64 105.0 8. Monitoring 872.36 691.76 309.17 44.7 9. Total 70,352.03 95,946.28 101,209.05 105.5

2.3.2 Procurement by procurement method

Table 7: Procurement by Procurement Method (Unit: ’0000 RMB) Procurement Method PAD Target MTR Target Actual % of MTR Target 1. International Competitive Bidding 462.00 691.13 1,102.36 159.5 2. National Competitive Bidding 3,066.39 9,949.72 7,064.85 71.0 3. National Shopping 39,816.49 53,662.02 63,798.80 118.9 4. Direct Contracting 4,458.57 4,757.18 4,912.46 103.3 5. Force Account 15,466.07 19,209.81 18,824.03 98.0 6. Other 7,082.50 7,676.43 5,506.55 71.7 7. Total Base Cost 70,352.03 95,946.28 101,209.00 105.5 Total Cost 83,000.00 98,736.11 101,209.00 102.5

2.4 Application of Project Fund

2.4.1 Reimbursement The total investment in IMAR was 1,012.35 million RMB. By the end of October 2006, a total of SDR27.535 million (equivalent to US$36.915 million) and US$23.3 million have been reimbursed.

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Table 8: Disbursement (Unit: ’0000 RMB) Allocated Applied Amount % of Applied Expenditure Category Amount Amount Received Amount Work 27,263.00 7,852.90 4,205.51 54 Goods 69,475.00 35,767.70 38,021.41 147 Consultants’ Services & 2,404.00 2,753.90 1,901.70 69 Training Monitoring Activities 309.00 290.00 49.65 17 Total 10,129.00 46,664.00 44,178.27 95

The exchange rate between SDR and USD and between USD and RMB has been fluctuating during the 7 years of the project implementation period since 1999. By the end of 2005, the total loss due to exchange rate fluctuation has amounted to 10.63 million RMB. This caused certain negative impact to the post-completion project management and sub-loan recovery.

2.4.2 Counterpart fund The total planned counterpart fund for the project was 529.67 million RMB and the actual amount contributed reached 544.60 million RMB, 102.8% of the plan. The detailed information is shown in the following table.

Table 9: Counterpart Fund Unit: ’0000 RMB Source MTR Target Actual % Financial poverty reduction fund 8,481.58 7,621.41 89.86 Work for Food Fund 8,623.58 5,406.96 62.70 Loan (Agriculture Bank of 7,193.24 4,378.90 60.88 China) Loan (RCC) 9,203.32 Fund from League/Municipality 2,479.40 2,009.84 81.06 Fund from Banner/County 7,744.69 6,565.58 84.78 Farmer/Herder Contribution 15,768.00 19,273.83 122.23 Total 52,966.90 54,459.84 102.82

2.4.3 Sub-loan recovery The project began to collect interest in 2000 and principal in 2005. The government at all levels in the project area pays great attention to sub-loan recovery. They shortened the repayment period of those sub-loans for cropping and livestock activities with higher returns, increased investment to project activities with larger investment and difficulties in repayment, such as infrastructure activities, and used government fund for repayment to exempt or reduce debt of farmer/herder households. By the end of December 2005, the total amount of principals and interests due was 52.80 million RMB and 12.40 million RMB respectively. Actual recovered amount was 52.27 million RMB of principals and 10.88 million RMB of interests with a recovery rate of 99% and 88% respectively for the principals and interests due.

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3. ACHIEVEMENT OF PROJECT OBJECTIVES 3.1 Achievement of Project Targets The per capita net income, grain production and number of livestock in the project area were all above the projected targets upon the completion of project implementation.

Table 10: Main Project Targets (Unit: RMB, kg, su [sheep unit]) Projected Target Actual % of Project Target Net Income Grain Livestock Net Income Grain Livestock Net Income Grain Livestock RMB/pc kg/pc su/pc RMB/pc kg/pc su/pc RMB/pc kg/pc su/pc

1,128 500 1,996 829 4.83 177 166 153

3.2 Reduced Poverty Population and Poverty Incidence After the implementation of the project, the total number of absolute poverty population was reduced by 530,772 persons from 784,200 pre-project to 253,400.

Table 11: Absolute Poverty Line (1999 - 2003) Unit: RMB/person Year 1999 2000 2001 2002 2003 Project household 654 634 637 649 672

Viewing from 1999 to 2003 as a whole, the poverty incidence in project villages decreased by 10.3 percentage points from 16.4% in 1999 to 6.1% in 2003 in comparison to a decrease of 8.9 percentage points in non project area. This indicated the more effective reduction of poverty population due to improved production conditions through project investment in project villages and the effect of poverty reduction as a result of the project implementation. However in the severe drought year of 2002, the poverty degree pricked up in both project and non project villages. This indicated an insufficiency of the project in dealing with natural disasters. The poverty incidence in both project and non-project villages has decreased steadily since 2000 and the poverty incidence was almost the same in 2003 in project and non-project villages.

Table 12: Poverty Incidence (%) Year 1999 2000 2001 2002 2003 Project villages 16.4 19.4 18.5 13.3 6.1 Non project villages 14.9 18.4 19.9 12.8 6.0

3.3 Improved Living Conditions 3.3.1 Living expenses: Based on survey data in 2003, the living expenses was 1,633 RMB/person in project villages. Of which, expenses for transportation, communication, education, entertainment increased significantly. The proportion of Food expenses reduced to 47.1% which showed an improved living condition of farmer/herder households in the project area. 3.3.2 Food consumption. The average per person food consumption in the project villages in 2003 was 227.8 kg of grain, 44.3 kg of vegetable, 4.2 kg of edible oil, 23 kg of meat and poultry, 2.8

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kg of eggs, and 10.4 kg of fruits. Compared with consumption in the previous year, consumption of meat, poultry and eggs increased significantly while other consumptions decreased to some extent. 3.4 Improved Infrastructure 3.4.1 Rural electrification. By 2003, 98% of the project villages have been connected to local power grids.

Table 13: Basic Infrastructure in Villages Indicator Project Village Non-project Village % of villages with electrical lights 98.0 100.0 % of villages with access to roads 94.0 80.0 % of villages with access to telephone service 82.0 70.0 % of villages with cable broadcasting service 34.0 43.3 % of villages with TV coverage 100.0 96.7

3.4.2 Drinking water. By 2003, 76.8% of households in the project villages have gained access to safe drinking water.

Table 14: Household Drinking Water Supply (% access) Year Project Village Non-project Village 1999 64.8 64.7 2000 63.8 71.0% 2001 74.2 71.3 2002 73.8 65.3% 2003 76.8 75.3

3.4.3 Public Health. The survey in 2003 showed poor indicators in the public health sector such as % of clinics, % of qualified health worker, % of qualified midwife, immunization rate of children under age 5. This demonstrated that public health service was still the weakness in the poverty reduction programs which required further improvement.

Table 15: Public Health Services Indicator Project Village Non-project Village % of villages with clinics 56.0 70.0

% of villages with qualified health worker 86.0 83.3 % of villages with qualified midwife 64.0 60.0

Immunization rate of children under age 5 100.0 100.0

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4. EXPERIENCES AND LESSONS Through 7 years of project implementation, PMO staff at all levels learned valuable experiences and lessons from their exploration and practices which are summarized below. Sufficient attention of the leaderships and strong support by the line government agencies are the keys to a successful project implementation; A well established project management structure and competent project staff are the foundation for a successful project implementation; Provision of counterpart fund in full amount and in a timely manner is the primary guarantee for a smooth project implementation; Strengthened project management is the important security for a smooth project implementation; Creative approach with open mindset is an effective way to improve project implementation effects; Close cooperation and mutual trust between the World Bank and Chinese counterpart is a critical condition for project success.

5. PROJECT ASSESSMENT 5.1 Assessment of Project Sustainability Project sustainability is highly likely through successful implementation of project components. The sustainability is ensured by structural change of cropping, improvement of farmers’ production skills, industrial development in local agricultural sector, improvement of livestock raising models, improved infrastructure for agriculture production and livelihood, integration of irrigation and agriculture, increased income of participating farmer households, and over 800 project management staff at regional, league, banner, sumu and gacha levels. 5.2 Assessment of Models and Management Mechanism for Poverty Reduction Project implementation provided excellent opportunity for exploring new models and management mechanism for poverty reduction. These include poverty reduction in whole-village approach, farmer participation, house-hold based technical training, provision of facilities for project management, development and application of management information system and effective internal and external project monitoring. 5.3 Assessment of Impact on Ethnic Minority Development 86.7% of the total ethnic minority population in project areas is project beneficiaries. Through project implementation, their needs for basic food and clothes, education and health are satisfied, their willingness to participate is enhanced, and their production and management skills are improved through training and practice. 5.4 Assessment of Woman Development About half of the total project beneficiaries are women who benefited from women specific project training and production activities such as cropping and livestock raising. Women’s increased income through project participation improved their social status in respective households as well as in local communities.

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5.5 Assessment of Institutional Development and Capacity Building The project has a major impact on capacity building of officials involved in project management at all levels. They played a key role in project implementation and became the most valuable personnel in many local government poverty offices. Some are promoted to local leaders. The project also improved development capacities of project villages in project management and in coordinated economic, social and environmental development. 5.6 Assessment of Environmental Impact Based on results of environmental monitoring, the project’s overall impact on environment is positive and meets the targets set in the Project Appraisal Document. Specially, remarkable achievements have been made in the areas of feed balance and vegetation coverage. Environmental impact caused by application of pesticide and plastic farm mulch has been limited. 5.7 Assessment of the World Bank Performance World Bank performance has been very satisfactory throughout the project preparation and implementation. World Bank officials and consultants played a critical and guiding role during all stages of the project. Their practical and serious working style left all Chinese counterparts a good impression; their dedication and commitment ensured project progress and quality; and their recommendations on issues ensured a smooth project implementation. However, frequent change of the World Bank’s project officials during the project period caused discontinuation in providing consistent project guidance. In addition, official feedback from the World Bank usually took too long.

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Annex 6. List of Supporting Documents

1. Project Appraisal Document 2. Legal Agreements and Amendments 3. Supervision Mission Aide Memoires, 1999-2006 4. Poverty Monitoring Reports of World Bank Western Poverty Reduction Project (1999- 2005), State Statistical Bureau of China. 5. Implementation Completion Report, Inner Mongolia PMO, November 2006 6. Implementation Completion Report, Gansu PMO, November 2006 7. Implementation Completion Report (in Chinese), Gansu Tianshui Zhongxing Company (Edible Fungus Production and Processing), September 2006 8. Implementation Completion Report (in Chinese), Gansu Tianshui Yuyou Company (Rabbit Breeding and Processing), September 2006 9. Implementation Completion Report (in Chinese), Gansu Tianshui Xingchen Company (Lili Bulb Breeding), September 2006 10. Implementation Completion Report (in Chinese), Gansu Tianshui Lupeng Company (Potted Flower Breeding and Extension), September 2006 11. Implementation Completion Report (in Chinese), Gansu Linfeng Ornament Company (Grass and Flower Breeding and Extension), September 2006 12. Implementation Completion Report (in Chinese), Gansu Minxian Jindadi Starch Company (Starch Processing), September 2006 13. Implementation Completion Reports (in Chinese), 21 Participating Counties/Banners of Inner Mongolia, August 2006 14. Implementation Completion Reports (in Chinese), 19 Participating Counties of Gansu Province, August 2006 15. Financial and Economic Analysis Working Note, November 2006 16. ICR Review Report on Rural Enterprise Sub-projects, Lin Wanlong, October 2006 17. Participatory Village Development Planning (in Chinese), Gansu Poverty Reduction Office 18. PRA Manual (in Chinese), Gansu Poverty Reduction Office

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