Document of The World Bank Public Disclosure Authorized

Report No: 29172

IMPLEMENTATION COMPLETION REPORT (IDA-28340 TF-29222)

ON A

Public Disclosure Authorized CREDIT

IN THE AMOUNT OF SDR 67.3 MILLION (US$100 MILLION EQUIVALENT)

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

SHANXI POVERTY ALLEVIATION PROJECT Public Disclosure Authorized

June 25, 2004 Public Disclosure Authorized

Rural Development and Natural Resources Sector Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 2004) Currency Unit = Renminbi(RMB) Yuan(Y) Y 1.0 = US$ 0.12 US$ 1.0 = Y 8.3

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ACWF All China Women's Federation CAS Country Assistance Strategy ERR Economic Rate of Return FAO/CP FAO/World Bank Cooperative Program FRR Financial Rate of Return ICB International Competitive Bidding IDA International Development Association MOF Ministry of Finance MWR Ministry of Water Resources N.B.F Non-Bank Financed NCB National Competitive Bidding NPV Net Present Value O&M Operation and Maintenance PCD Project Concept Document PLG Project Leading Group PMO Project Management Office PPMO Provincial Project Management Office PRC People's Republic of China PSR Project Status Report QAG Quality Assurance Group SAR Staff Appraisal Report SDR Special Drawing Right TOR Terms of Reference YIS Yuncheng Irrigation System YRCC Yellow River Conservancy Commission WTO World Trade Organization

Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Yukon Huang, EACCF Sector Director: Mark D. Wilson, EASRD Task Team Leader: Juergen M. Voegele, EASRD

CHINA SHANXI POVERTY ALLEVIATION PROJECT

CONTENTS

Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 12 6. Sustainability 13 7. Bank and Borrower Performance 14 8. Lessons Learned 15 9. Partner Comments 17 10. Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix 18 Annex 2. Project Costs and Financing 19 Annex 3. Economic Costs and Benefits 21 Annex 4. Bank Inputs 23 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 24 Annex 6. Ratings of Bank and Borrower Performance 25 Annex 7. List of Supporting Documents 26 Annex 8. Borrowers Comments and Assessment 27 Annex 9. Pictorial Overview of Selected Project Achievements 28

Project ID: P003649 Project Name: Shanxi Poverty Alleviation Project Team Leader: Juergen Voegele TL Unit: EASRD ICR Type: Core ICR Report Date: June 25, 2004

1. Project Data Name: Shanxi Poverty Alleviation Project L/C/TF Number: IDA-28340; TF-29222 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: General agriculture, fishing and forestry sector (68%); Flood protection (11%); Roads and highways (10%); Water supply (10%); Agro-industry (1%) Theme: Rural services and infrastructure (P); Gender (S); Land management (S); Water resource management (S)

KEY DATES Original Revised/Actual PCD: 01/31/1994 Effective: 09/05/1996 09/05/1996 Appraisal: 06/18/1995 MTR: 09/22/1999 09/22/1999 Approval: 03/26/1996 Closing: 12/31/2002 12/31/2003

Borrower/Implementing Agency: CHINA/SHANXI PROVINCE Other Partners:

STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam S. Kaji Country Director: Yukon Huang Nikolas Hope Sector Director: Mark D. Wilson Joseph R. Goldberg Team Leader at ICR: Juergen M. Voegele Juergen M. Voegele ICR Primary Author: Josef Ernstberger

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: SU Bank Performance: S Borrower Performance: S

QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Project's main objective was to help alleviate poverty in 20 of the poorest counties of Yuncheng and Luliang Prefectures in Shanxi Province. The Project included a range of activities aimed at raising incomes for about 3 million poor through rehabilitation of an existing irrigation system, improvements of rural roads and construction of village water supplies, land development, expansion of livestock raising and horticulture, and expansion of primary agricultural processing capacity.

3.2 Revised Objective: There was no change in the Project’s objective.

3.3 Original Components: The original components included: a) the improvement of the Yuncheng Irrigation System commanding an area of 123,000ha, b) the development of some 13,000ha river beach-land along the Yellow River, c) the construction of village water supply schemes, d) rural roads, e) soil and water conservation including terracing, afforestation and check dam construction, f) horticulture development, g) livestock raising, h) expansion of agro-processing, i) targeted support to women households, and j) project management support and training.

This relatively broad mix of components was designed to address short-, medium- and long-term income generating options to achieve the Project objective, and the mix of components took into account the differences in natural resource endowment between the two project areas. Yuncheng prefecture has large areas of flat, fertile land, whereas Luliang prefecture is hilly with few tracts of flat irrigated land. Thus the irrigation and river beach-land development were appropriate for Yuncheng only, while the soil and water conservation component was suited to the upland areas of Luliang.

3.4 Revised Components: No components were dropped or added, however, the relative importance of components was adjusted in response to emerging economic opportunities during the project implementation. When the Project started national food security and grain production was still high on the political agenda, while over time concerns over farm income gained overriding importance. Consequently higher value cash commodities gained importance over irrigated wheat and corn and the respective Yuncheng irrigation component was reduced in favor of the horticulture and livestock components. This process was accelerated by significant improvements in communication infrastructure (such as information systems and roads including a new expressway system), which greatly enhanced the market prospects for high value farm products. This also led to the inclusion of a large number of greenhouses in the horticulture component for production of fresh vegetables.

3.5 Quality at Entry: Quality at Entry was satisfactory. The Project objectives were consistent with the Bank’s CAS in China, which called for sustainable agricultural development in impoverished and environmentally vulnerable areas and for diversified agricultural production; and with the Government's long term policies which focus on increased production, income generation and employment creation in rural areas. Project design incorporated valuable experience and lessons learned from other Bank- and non-Bank financed land and water development projects in Shanxi Province. The Project also fully addressed the Bank's safeguard policies in project design.

- 2 - 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The overall outcome of the Project is rated satisfactory. Most components were completed ahead of the schedule envisaged in the SAR with the main physical targets of many components being exceeded. An estimated 4.1 million people1 directly benefited from the Project as compared to an SAR expectation of 3 million beneficiaries. Farmers’ incomes per capita in constant 1995 prices increased from Y 480 to Y 1,217, which also exceeds the SAR expectation of Y 700 by far. The development objective of the Project is clearly achieved.

The success of the Project was supported by the favorable economic development in the country. However, the broad mix of components in the Project that addressed both short and medium-term income opportunities have proved to be the right choice to take advantage of this supportive overall economic environment. The priority areas such as livestock, high value fruit and vegetable crops, and value added processing together with improved rural infrastructure, proved to be forward looking at the time when this Project was designed ten years ago. It was only much later, when these became priority areas in the restructuring and reorganization of the agricultural sector in China. The Project has timely and flexibly addressed emerging opportunities and challenges from the opening of the Chinese markets and the changing food consumption pattern of a wealthier urban population. Adjustments made during the Mid-term Review have further focused the Project in this direction. The horticulture component was significantly increased, new elements such as greenhouses for fresh vegetable production and new livestock activities like dairy production and deer raising were included in the Project. This made this Project not only valuable by its direct poverty reduction impact in the 20 poor project counties, but the Project also provides lessons for agricultural restructuring and farm income generation in general. The Project demonstrates successful investment opportunities in agriculture using medium- to long-term loans, which can easily be scaled up in other areas.

4.2 Outputs by components: Yuncheng Irrigation System (US$ 17.1 million). This component is rated unsatisfactory, because it was significantly delayed and scaled down due to a lack of counterpart funds. However, the reduced investment effectively solved the irrigation problems of two of the three irrigation districts.

The aim of this component was to improve irrigation of some 123,000ha and to reduce pressure on groundwater by providing a reliable water supply from the Yellow River to the existing Yuncheng Irrigation System (YIS). In the 1970s, three pumping stations Jiamakou, Xiaofan, and Zuncun were built to lift water from the Yellow River. These stations serve three independent irrigations areas of 18,400ha, 11,600 ha, and 93,000 ha respectively. The move of the river channel and the high sediment contents caused serious disruption in the water supply. Xiaofan was completely cut off from its water source; the other stations also lost frequently access to the water source and got choked up by sediment and entire sand-banks. This resulted in significant losses by farms incomes, which turned to the use of groundwater causing an over-exploitation of the valuable groundwater resources. The Project was to address these problems by: a) providing a reliable new water intake at Langdian, which is considered a stable site up-stream of the three existing stations and connecting all three stations though a lined and protected feeder canal, b) reducing the costs of sediment clearing by the construction of large-scale sediment ponds along the feeder canal, and c) rehabilitating and expanding parts of the up-stream distribution system.

______1 The number includes double-counting of people, which benefited from several components. Data about people benefiting from several project components are however not available.

- 3 - The implantation of this component has suffered from a severe shortage of counterpart funds throughout implementation, which has led to the elimination of some elements of the Langdian Complex and several years delay in its execution. The Project has nevertheless achieved to provide reliable water to Jiamakou and Xiaofan with the option to eventually connect Zuncun. A 28 cms pumping station (12, 1.25 cms pumps) and the 13.5 km feeder canal was put in operation in 2002, just in time to take the place of a temporary pumping plant that was no longer operable because of a shift in the river channel. The feeder channel was a major undertaking, since it was built along the active river channel and had to be protected from erosion by heavy revetment. The site of the Langdian station is at a point where satellite images show that the river channel has been stable since 1980. In the case of a major flood event there is a possibility that the main channel could move away from this site. The five amphibious dredges procured for use in sediment basin pond would then be used to maintain an intake channel to the pumps. Furthermore, the new pumps are mounted on floating platforms that can be moved to a new site along the feeder channel if necessary.

The sediment basin to protect Jiamakou and Xiaofan was not built because of a shortage of counterpart funds, but there is now a plan to complete this feature by 2005. The 10 km section of the feeder channel from Xiaofan to Zuncun to supply the Zuncun area in part from the Langdian Pumping station has also been deferred because of a shortage of funds. Much of the area served by Zuncun continues to rely on tube-wells.

Although the Langdian Complex was subject to protracted delays due to design changes, and a lack of funds, it is now a secure source of surface water for the Jiamakou and Xiaofan units of the YIS, and eventually the Zuncun unit. The main pumping stations for the Jiamakou and Xiaofan units were rehabilitated as planned and the 18,400 ha of Jiamakou and about 6,000 ha of the Xiaofan are adequately supplied with irrigation water. Both systems are also well managed and grow a large proportion of high value crops, such as cotton, or fruit trees. Grain production there takes currently only 8% of the land in Jiamakou and 22% in Xiaofan.

A key problem with the implementation of this component was a decreasing political commitment during project implementation, which was clearly related to the overall developments in the agricultural sector in China. In the past, the Yuncheng plain was an important grain basket. This strategic role was still very much seen when the Project was appraised. However, during the mid- and late-1990s concerns over China’s national level grain production lost importance. With a high self-sufficiency or even surplus production causing a depression in grain prices, political interest in investment in the irrigation scheme became low. Questions were raised about the appropriateness of using scarce and valuable water resources in a water deficient area for grain production in a country, which had become member of the WTO. These factors have contributed to the difficulties in the mobilization of counterpart funds. Understandably, investment was reduced and focused in those areas, which offered the highest farm incomes producing higher value crops, which was the case in Jiamakou and Xiaofan, but to a lesser extent in the Zuncun area, which is still much more grain oriented. A further concern for the future remains and this is the growing demand for water at all points along the Yellow River. This might in some years cause the Yellow River Conservancy Commission to require Yuncheng and other users to cut back diversions at certain times of the year.

River beach development (US$ 16.9 million). This component is rated highly satisfactory. The Project developed some 16,820 ha (SAR target was 13,000 ha) of highly fertile land along the Yellow River (river beach land) in eight counties of Yuncheng. Much of this land did not exist until the 1950's when a change in the river's course left behind flood plains where the sediment gradually accumulated to form new land that was farmed by the nearby villages. Creation and erosion of land is a feature of the

- 4 - Yellow River. This land was eventually protected by flood embankments and about 80 percent of the land is now under crops and plantations, but only 20 percent was originally irrigated mainly by tubewells (the area has ample groundwater resources). The land is leased to the villages on the high ground bordering the river.

The Project has provided 1,682 tube-wells and associated electrification and constructed 318 km of roads. This investment yields significant incremental income for some 40,117 farm families. The formerly drought-prone land producing single crops is now double cropped and the cropping intensity is as high as 180% with a large proportion of land also used for high value crops (such as asparagus, or fruit trees). The component also included fishpond improvement and aquaculture supporting activities. The significant wealth generated by this component can be seen in the villages on the high ground bordering the beach-lands, where many new farm houses have been constructed and the local economy is particularly vibrant.

Village Water Supply (US$ 11.4 million). This component is rated highly satisfactory. The component addressed the severe shortage of water in many villages in both prefectures. In Yuncheng, wells to produce a reliable supply of good quality water (20-30 m3 /hour) have to be between 150 and 300 meters deep. In Luliang, groundwater can be found in shallow aquifers (10-15 m deep) in the beds of gullies, but these can only be pumped for a few hours at 5-10 m3 /hour. Most villages got their water from pits in the ground (cisterns) filled with storm runoff, and from shallow wells in the beds of gullies. The latter are very low yielding and in the dry season people had to wait for hours for the wells to recharge after the first villagers had filled their buckets. With the villages located at higher elevations close to the plateau the time spent to fetch daily water was often several hours per family. Particularly in Yuncheng water was often sold in the villages by people who had access to a well in their own village. The average family in water-short areas had to spend around Yuan 100 in a year on drinking water - this is about 10 percent of the average family income.

The Project successfully addressed the problem of water supply in many villages. In Yuncheng, 79 systems were built supplying water for 350,000 people, 45,000 animals, and 202 enterprises. In Luliang, 307 project built systems supply 120,000 people, 15,000 animals and 150 ha of land is irrigated. The better water supply had far reaching positive implications such as: (a) expanding possibilities for villagers to own draft animals for farming and transportation; (b) reducing the incidence of water-borne diseases; and (c) allowing for watering of seedlings in orchard establishment.

Adjustments were made to the original design of this component in terms of: (a) replacing three large systems, financed from other sources, with three smaller systems in more poor and difficult areas in Yuncheng, and (b) including a larger number of smaller systems because of other programs financing the larger systems in Luliang. This has resulted in a cost increase of 24%, while the number of beneficiaries was reduced from an expected 684,000 to 470,000. However, this adjustment was well justified as it took advantage of other financial resources, which only became available during project implementation and focused the project funds in more difficult and very needy areas inhabited by particularly poor people. This adjustment had no negative implications on the economic rate of return. Both, people’s willingness to pay and their time spent to fetch water was much higher in the difficult supply areas.

Concerns raised by various IDA missions about appropriate O&M arrangements have been addressed by the local PMOs. Most schemes have management boards and collect water fees sufficient to operate and maintain the systems. The total annual fee collection is Y 3.0 million in Luliang, and Y 4.26 million in Yuncheng, which is enough to maintain the systems. In 2003, a full survey was made of all water supply schemes, which showed that over 90% of the schemes are very well managed and maintained.

- 5 - Rural Roads (US$ 27.2 million). This component is rated satisfactory. The component planned to upgrade existing rural roads and tracks to Class 4 Standard for Rural Roads (7.5 meters wide, a 6 m pavement of 20 cm of compacted gravel, and 0.75 m shoulders). The project plan was to upgrade six roads with a total length of 208 km in Yuncheng and five roads totaling 118 km in Luliang.

All of the roads planned under this component were built already in the first three years of the Project. The design and construction of the roads was entrusted to the Shanxi Highway Department. The original plan was to build the roads to Class 4 standards. But in view of the expected heavy traffic they were provided with an asphalt surface, and in some cases they were built to higher standards than Class 4. The related cost increase of some 59% was fully covered by additional counterpart resources.

The improved roads have: (a) lowered transport costs of inputs and outputs for farmers and the primary and secondary industries; (b) attracted more buyers for farm produce; (c) allowed local products (such as medicinal herbs) access to markets, (d) attracted new bus services, or more frequent services, that expanded access to education, health centers, and opportunities for off-farm employment and education. Road access has led to better market information and cash inflows in the rural areas served. The benefits of the road component have been substantial as revealed by interviews carried out by the monitoring unit as well as the ICR mission. Agriculture has become increasingly mechanized and sideline businesses have increased substantially. Many households own three wheel tractors, and motorcycles are common. A survey shows that the number of cars and small trucks owned by residents along the roads has increased by 3,671.

Shanxi Province is rich in mineral resources and coal and ore mines are common in rural areas. Therefore, some roads have attracted frequent trips of heavily loaded trucks. For example the road in Pinglu county carries bauxite trucks that have damaged the surface. In March 2004, the road was closed to trucks to allow the county to repair and resurface the road by June 2004. The burden of road repair apparently falls on the county budget, but taxes on the bauxite mine are a significant contributor to the budget. This road connects 50,000 people to the county town by a short bus trip compared to a 10 hour trip on a dangerous road served by an infrequent bus service.

There is a need for the counties to enlist the support in periodic repair and maintenance of those companies whose vehicles make frequent and heavy use of the roads. The original plan was to levy tolls, but that has not so far been implemented. A possibility would be a tax surcharge on the enterprises that already pay county taxes on their output.

Soil and Water Conservation (US$ 23.3 million). This component is rated satisfactory. The component was limited to Luliang Prefecture and aimed to implement integrated watershed management on about 20,000 ha. It included terracing on slope land, afforestation on slope land that is too steep for terracing or crop cultivation, and construction of sediment control dams.

The terraces were built on 16,107 ha compared to the target of 13,400 ha. The conversion of slopelands to level fields virtually eliminated erosion and helped maintain soil moisture, allowing higher crop yields and more diversified cropping patterns. Most of the terraces were constructed by local bulldozer operators, with some manual labor for shaping the riser and terrace lips. Roads built by the bulldozer operators to reach the areas that they terraced have proved of value to farmers. With better access mechanized soil preparation became possible and transport of inputs and outputs became easier. The standard of terrace construction was very high. The benefits of the terraces were highlighted in a dramatic way during the drought which affected the area in 1999, 2000 and the first half of 2001. On the terraces farmers obtained

- 6 - good yields while non-treated lands suffered complete crop failures. Over 100,000 poor farm households living in some of the most difficult natural environments in Luliang have benefited from project terraces.

Afforestation (Chinese pine, larch and poplar) was planned for 4,200 ha of steep slopes and wasteland. This sub-component was particularly adversely affected by prolonged droughts during the course of the Project that caused low survival rates for seedlings. Although replanting took place, the area of afforestation was 1,677 ha compared to the target of 4,200 ha.

This component also included plans for the construction of 56 sediment control dams. These are earth dams with heights between 10 and 25 meters built in the gullies. Gross initial storage capacities range between 3 3 100,000 m and 1,000,000 m The dams reduce flooding and sediment loads in the downstream rivers, and the sediment deposits behind the dams create high quality agricultural land. The reservoir sites are in deeply eroded gullies and are devoid of agriculture and human habitation. During the first few years after construction, the water stored behind the dams can be used for irrigation and village water supplies. The number of check dams was reduced to 18 from the target of 56, because the villagers took the view that they should not be asked to pay for the significant downstream benefits in the Yellow River. Instead, it was decided, to repair 123 existing dams that had good local benefits.

Horticulture (US$ 53.7 million) This component is rated highly satisfactory. The component has been the most successful component of this Project with the by far largest contribution to income generation. The original plan was to plant 69,200 ha of fruit and nut trees mainly Chinese date, kernel apricot, prickly ash, chestnut and walnut trees. In Luliang, trees were generally planted on slope land on narrow terraces 1 m wide. In Yuncheng, large quantities of date trees were inter-planted with field crops on flat land. Depending on the tree crop planted, farmers were able to intercrop for 3-7 years before the trees reach maturity allowing for a smooth transition period from low-value grain to high-value fruit production. The choice of varieties and the establishment and management of the plantations drew on successful experience in the past.

During project implementation there have been significant changes on the original design. Plantings of fruit and nut crop varieties has been reduced and replaced by large areas of grafted dates on wild date rootstock. The total area reached 73,914 ha compared to the target of 69,200 ha. Much of the intercropped date planting took place in the first two years of the Project. These seedling trees have been planted out in wheat fields where they do not compete much with the grain crop. The introduction of grafting improved scion wood on to wild date rootstock has led to the significant expansion of the date sub-component. Although not introduced into the Project until 1996-97, farmers have been quick to learn the grafting technique and this has allowed for the rapid growth of the date area. Grafted dates did not displace other crops (they usually grown on waste land) and produce fruit from the first year. Their success has led to a sharp reduction in the planned areas for prickly ash, walnut and chestnut as farmers chose a more easily established, managed and faster producing crop.

At the mid-term review it was decided to support investment for the construction of greenhouses. By the end of the Project 19,344 greenhouses have been built. The greenhouses are typically constructed with mud walls surrounding three sides and covering an area of about 5 m width and 100 to 120 m length with one of the long sides open to the south direction. Concrete or steel frames support a roof made with plastic cover. Access to the house is through a sidewall that usually has a small living/sleeping/storage area built on to it. Construction costs including labor for a 1 mu house are about Y13,000. The average yearly net profit from a 1 mu greenhouse growing vegetables ranges between Y5,000-10,000. There are risks involved: for example some of the greenhouses were damaged by the torrential rains in 2003 and needed

- 7 - significant investment in repair. Nevertheless, intensive use of land and labor provides farmers with highly attractive financial returns.

Greenhouses are usually sited in blocks with as many as 300 in one place. This allows the owners to share the cost of a reliable water supply, usually a deep tubewell, and to benefit from a collective marketing point and extension services. Irrigation is essential for maximizing crop yields and the greenhouses provide an environment for highly efficient water use. Marketing during the main growing season is done on a daily basis with numerous traders directly purchasing crops from individual farmers benefiting from better roads and telecommunications with the markets in surrounding cities in Shanxi and other provinces.

Livestock (US$ 23.6 million) This component is rated highly satisfactory. The component includes a beef cattle component (mainly two animals per household) and components for deer and dairy cattle added during the mid-term review. The Project basically helped financing the initial breeding stock, while the farmers themselves constructed the livestock shelter, water trough, silage pits, and other needed facilities.

Beef cattle raising proved popular with farm families in both prefectures. The model of one or two breeding cows was adopted by 17,171 families in Yuncheng compared to the appraisal target of 9,400. In Luliang, 4,187 families participated compared to the target of 2,100. The Project also provided for improvements to the facilities and the equipment of about 148 existing veterinary service stations, support for the Shanxi Frozen Semen Center in Taiyuan, and a frozen semen and liquid nitrogen production center in Lishi.

The opening of a new dairy processing plant in Yuncheng created an opportunity for the Project to finance 1,000 farm families to purchase dairy cows. This sub-component has been an outstanding success. Household units have been established with in-calf Holstein cows that were within 3-4 months of calving. High quality cows have been procured from sources within and outside Shanxi at Y6,000-9,000 per head. The cows are managed at the household with feed provided on a cut and carry basis. Milking is done three times a day and processed concentrate feed is provided to maximize production. Individual cow production is reported to average between 3,000 - 5,000 kg per lactation. Farmers report a net profit of Y4,000–5,000 per cow. One of the reasons for the high success of this component was that an emerging opportunity was picked up by the Project early and very quickly. By now, milk production in China is booming and prices for good Holstein cows are now between Y15,000 and 20,000 with much higher risk and lower profit prospects, when compared to the early producers supported under the Project.

Some 1,245 families were provided financing for deer raising. This sub-component is limited to farmers in Jiangxian County in Yuncheng who have local experience in deer raising. Deer are kept in pens within the house enclosure and fed crop residues and dried grass together with pruned poplar branches. This fodder is supplemented by processed feed with a higher protein content. The targeting of farmer households for this component appears to have captured a significant number of low-income families. Deer raising is feasible for families with no land or small areas of cropland, because the quantity of crop residues needed for feeding is small. The local technical and market intelligence support services are particularly impressive and the farmers interviewed were confident that the service could help any future management problems. The component has made a significant economic impact for the participating low-income households.

The targeting and support of the livestock sub-components in general was done particularly well. Households participated in the selection of animals, received training and technical support by the local animal husbandry bureaus. In many places farmers proudly showed documentation and contracts provided

- 8 - under the Project with photographs from the initial animals received. Some earlier mistakes in the planning of this component were corrected immediately. For example in some of the higher income counties, farmers have sold some of their animals because of other business and farming opportunities. The Project responded quickly in targeting livestock to the poorer areas, where the two animal model that relies on crop residues was most profitable and a good source of income for poor farmers.

Agroprocessing (US$ 18.0 million) Despite some outstandingly successful operations, the results of this component are rated unsatisfactory.

The aim of this component was to provide value added to commodities and provide direct and indirect income opportunities for people in remote rural areas. The individual investments were relatively small (less than $1 million per enterprise).

A total of 22 enterprises (14 in Yuncheng and 8 in Luliang) were included in the Project and only 5 can be rated as commercially successful; three were dropped before any investment was made. The principal reasons for enterprise failure were poor management skills and an inability to adjust to the rapidly changing commercial environment that developed during the project period. Early in the Project there was a significant improvement in communications infrastructure with new road, rail and telecommunication links becoming operational throughout the province. These improvements quickly brought in commercial competition from neighboring provinces and the project enterprises were forced to compete both for their raw materials and for a market share for their outputs. Much of the competition came from efficiently operated and established companies that were able to not only offer better prices to the farmers but better and lower priced commodities to the consumer. Most of the project enterprises had been originally state-owned operations that had not previously faced competition. They were characterized by poorly trained managers with limited business experience, large unproductive workforces and ownership structures with considerable public sector involvement that was slow to respond to commercial realities. These problems became apparent early in the Project, and IDA missions pressed the PMOs and local governments to look closely at the portfolio of enterprises with a view to eliminating those with poor prospects and seeking out suitable amalgamations with larger companies. The use of IDA funds for failed enterprises was about US$ 3.0 million.

However, an exceptionally successful enterprise was the Shanxi Weizhiwang Food Company Ltd. in Jiangxian County. This privately owned company has outstanding management that has developed unique fruit-based products that now sell throughout China with exports to U.S.A., Korea and Japan. Its success was built around identifying what type of products the market required and producing these items under a rigorous quality control system that allowed it access to the most profitable domestic and export outlets. The Weizhiwang Company started from zero and the project funds were instrumental to build up this enterprise. After its initial success the Project financed a second phase expansion with total investment of the two phases of close to US$ 1.5 million. By now the company has reached annual sales close to US$ 10 million employing over 300 mainly local labors from the surrounding rural areas. The main raw material – hawthorn had virtually no market value before the company started. The company buys now annually 30,000 tons of fruits from 2,000 ha production area at a price of nearly Y 2 per kg benefiting some 10,000 households in 4-5 counties with a rapidly growing demand. The company is in the process of establishing a separate fruit production shareholding company partly owned by farmers to produce high quality raw material adhering to organic food production standards. These innovative arrangements in the farmer-company relationship could evolve into a model for other companies, too. A large number of visitors including other company managers and political leaders are regularly visiting this company learning from its success.

- 9 - Similarly, the Xiaxian Flour Mill had a highly competent management team that quickly upgraded its installation with project-financed equipment and produced a range of quality flour and other wheat products. Given the narrow margins in producing flour alone, the company has successfully entered into production of dried bread in various shapes for festivals and different kinds of biscuits. The mill is a major consumer of the output of local wheat farmers but also purchases imported wheat if it is attractively priced. Other successful examples include the dehydrated vegetables plants in Yuncheng producing high quality products with supply contracts with thousands of farmers.

All China Women's Federation (ACWF) (US$ 4.5 million) This component implemented by the All China Women’s Federation (ACWF) is rated highly satisfactory.

In Luliang the Project started helping 2,460 households in establishing poultry, rabbit and pig enterprises and in the building of 44 greenhouses. The financial returns generated by this component were particularly fast in increasing household incomes, often by 100% within one year. More than 11,000 women were trained under the component and each trainee would be expected to conduct outreach training in another 8-10 households. The impact of this component was thus amongst the most successful in the Project. The All China Women’s Federation (ACWF) was a highly effective implementing institution with excellent administrative and technical support systems. Because of these attributes the Project increased the component’s funding to 7.5 times of the original appraisal estimate allowing the ACWF to expand its program in Luliang and also include households in Yuncheng. There some of the funds that became available due to the down-scaling of the irrigation component were used to transfer the positive experiences of the Luliang Women’s component to the Yuncheng area. The project was extended by one year to provide sufficient time for the implementation of this component in Yuncheng, where a total of 2,600 women acquired breeding cows and sheep.

The component created resilience in household income in an environment affected by regular shocks. Individual household benefits were neither influenced by the size of land holding nor seriously affected by the droughts. All enterprises were located at the homestead and managed by women. The ACWF training model not only created competence in the direct recipients but it trained the recipients to train other households in enterprise management. All participating households received regular ACWF professional support. A particularly positive feature about this component is the revolving nature of fund use. By now some of the initial funds are already used up to three times increasing the benefiting women from 2,460 to 4,384 by now with the number still growing.

Project Management Support (US$ 8.6 million) This component is rated satisfactory. The component aimed to provide equipment and facilities for project management, project monitoring and training, and field vehicles. In Luliang, Yuncheng, and Taiyuan, this included upgrading of office buildings. Vehicles and office equipment were provided for supervision, monitoring and evaluation of the impact of project activities.

The Project includes 21 staff months of overseas study tours, 16 staff months of overseas training, and 70 staff months of domestic study tours covering all aspects of project management, monitoring, and technical training and management expertise. Thereby a total of 76 managers and technicians had an opportunity visiting numerous foreign countries to study livestock, forestry, agro-processing, and water management. Also, 289 staff and technicians visited ongoing World Bank supported projects in China to compare monitoring reporting and procurement methods. There were over 112,000 trainees who attended courses in the Project area on subjects such as cattle and deer raising, horticulture techniques, greenhouses, and integrated crop and pest management. The Prefecture PMOs also held numerous courses in project management and monitoring for county and township officials.

- 10 - 4.3 Net Present Value/Economic rate of return: A recalculation of the economic returns of the project investment shows an Economic Rate of the Return (ERR) of the Project of 27%, which is close to the SAR estimate of 28%. Returns for most components met or exceeded SAR estimates, and in particular returns generated by the horticulture (fruit and nut trees, and greenhouses) and livestock component have far exceeded SAR expectations. Horticulture became due to its financial attractiveness to farmers the by far largest component under the Project. Its high economic returns particularly from greenhouses drive the overall return of the Project. A notable difference to the SAR projection is the lower IRR for the investment in the irrigation system due to its major downscaling. However the IRR of 23% still makes this an attractive investment.

Component SAR ICR Irrigation system 40 23 Soil and water conservation Terraces 18 19 Dam structures 14 10 Afforestation 13 13 River beach development 29 31 Rural Roads 25 26 Rural water supply 22 21 Horticulture 25 33 Livestock 20 25 Women livestock raising N/A 28 Total Project 28 27

4.4 Financial rate of return: As per the SAR approach, the calculation of a financial rate of return for the Project is not considered applicable. The financial impact on individual farms and households was directly measured in field surveys showing a significant increase in per capita income (from Yuan 480 at baseline to current Yuan 1,217 against SAR target of Yuan 700, see Annex 1).

4.5 Institutional development impact: Project implementation and management involved a large number of government offices and staff at all levels. Extensive training and study tours both locally and abroad were provided in such areas as general project management, monitoring and evaluation, procurement, financial management, and technical subjects such as water resource management, forestry, horticulture and livestock, marketing, etc. A lot of this knowledge and skills were applied in various aspects of the Project, as demonstrated by the following examples: i) the tight management and control system introduced by the Project in the form of detailed recording of project progress on maps and tables (see section 5.3 below) has been further developed by the PMOs. The PMO staff in the two project areas mutually controlled physical implementation, quality of works and lessons learned in the Project by exchanging staff between the areas; ii) to better manage and identify the beneficiaries and avoid misuse of funds under the livestock component photographs of the purchased animals were made part of the contract between farmers and PMOs; and iii) the PMOs constantly were looking for new or improved investment activities under the various components to better achieve the Project objective. Almost at every mission the IDA team was presented with new ideas. Most of them have been included in the Project and turned out to be most successful such as the grafting of dates on wild rootstock, the construction of simple greenhouses, deer raising, and dairy cattle.

- 11 - Some of the PMO staff will return to regular government services and will inject their skills and experiences into the Government and public administration, other PMO staff will continue to work for the Project in post-management. Most of the project funds are on-lent to the farmers and re-payment for several components has started already with the PMOs playing a key role. The maturity of the IDA credit is 35 years and the PMO together with the finance offices are currently working on options to re-use the IDA funds for a second- or third-round investment broadening the impact of the Project to more farmers. In one component the All-China-Women’s Federations has already successfully demonstrated a way to revolve the funds. It would be a great success, if such arrangements could be implemented in other components as well.

5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: From 1999 to 2001 consecutive droughts over three years have significantly impacted the afforestation and horticulture components particularly in Luliang. Efforts have been made to replant some of the drought affected areas. However, the wide range of project components allowed for a shift in project investment towards less drought sensitive activities such as livestock development. Also productivity of terraces showed remarkable resilience in these stressful years.

5.2 Factors generally subject to government control: Macroeconomic and sector policies have been generally supportive of the aims of the Project. Since the Government allowed prices to be determined by the free market, the farmers are able to enhance their income by responding to price signals. Also, Government financing of the dramatic growth of new highways has opened new markets for the farmers in the project area. The administrative arrangements made at each level from province to county have been proved efficient and effective.

While the general market liberalization has been supportive for most project components, two components were less flexible in adjusting: a) the agro-processing component faced a situation of changing policy support and protection for smaller state owned enterprises. In addition new environmental restrictions were introduced preventing small enterprises, which generally couldn’t meet the standards (e.g. the leather tannery in Luliang) from receiving approvals. Low flexibility of local government in responding to these policy changes caused failures of several agro-processing plants; and b) the irrigation component was confronted with a gradual departure from a policy giving high priority to national grain production. This lowered the political commitment to mobilize and provide adequate counterpart funds for the irrigation component.

5.3 Factors generally subject to implementing agency control: Project Management: The Project was managed by Project Management Offices at the provincial, prefecture, county and township levels. The project management was effective and contributed to the successful project implementation. The accountability of the project management system adopted by the PMOs at different levels ensured discipline in the use of project funds, guaranteed the strict monitoring of project activities and achievements, and ensured the beneficiary involvement. The training component was effectively used to acquire modern data processing tools that significantly contributed to project management efficiency.

Procurement and Disbursement: Civil works for the irrigation facilities, rural roads, water supply, project buildings, and the beach-land were awarded in accordance with National Competitive Bidding procedures. ICB was followed for materials and equipment. The largest item to be procured by ICB was a contract for US$ 7 million of fertilizer. It became apparent that it was a mistake to procure in bulk so much fertilizer that had to be used by tens of thousands of individual farmers over a period of seven years. None

- 12 - of the project offices had the storage and distribution facilities to allow them to act, in effect, as fertilizer merchants. This was soon realized and the fertilizer was sold and the funds returned to the Project accounts for use on other components. Bulk procurement is a problem not only for fertilizer but also for items such as pipes, small pumps, and electrical goods that have to be used over years in widespread locations. It is far better for such goods to be procured by the direct users as and when needed on the local market. The users have a strong interest in quality and price. Thus, IDA staff made decisions during the Project to waive bulk procurement under NCB for some items. The soil and water conservation and horticulture components were executed by individual farmers or by specialists that they employed. The farmers procured animals themselves from nearby villages. Unit prices for each activity were agreed with the Bank and used a basis for disbursement.

Quality Control and Physical Checking: The Project applied a tight system of quality control and physical checking with clearly assigned responsibilities within the PMOs management structure. Standards were set for all works such as plant densities of trees and shrubs, survival rates in relation to planting time, size and depth of water harvesting pits, height and width of terrace lips, maximum slope tolerance. Frequent and well recorded checking systems which also carried the names of the responsible officers were defined for each management level and each disbursement was subject to following those rules.

Compliance with Credit Agreements: The Borrower and the Project Executing Agencies and Management Offices essentially complied with all the credit agreements and recommendations, except for the timely and adequate provision of counterpart funds for the Yuncheng Irrigation Component.

5.4 Costs and financing: The SAR projected total project costs at US$ 182.8 million with IDA’s contribution at US$ 100 million. The actual project costs were US$ 204 million, thus about 12% over the SAR estimates. However, due to a significant devaluation of the SDR against the US$, IDA disbursements amounted to only US$ 91 million (91% of SAR estimates), while the counterpart funds including farmers’ contribution totaled US$113 million (137% of SAR estimates). Counterpart funds had to cover for the lower than expected IDA contribution. These incremental funds mainly came from higher farmers’ contributions. Overall Government financing was somewhat less than appraised. The Government’s increased contribution to the Rural Roads component was outweighed by reductions in the Irrigation and Support Service components. Detailed project costs and financing are contained in the Annex 2. As of April 4, 2004, the full amount of the Credit of SDR 67.3 was disbursed from the various categories of the credit agreement.

6. Sustainability 6.1 Rationale for sustainability rating: The sustainability of the Project is rated highly likely. The horticulture and livestock components involve techniques well established in the farming communities, and the buoyant markets provide strong prices incentives. All farm based components are financially attractive to the local farmers as well as economically viable (to the society as a whole). Cost are to be recovered from the households whose productive activities were financed by the Project, in line with the usual practice in China, and the households signed loan agreements for their portion of the IDA Credit. Signals of growth and a continuation of investment after the Project for such investments as greenhouses, livestock raising (in particular beef cattle and dairy), and new fruit orchards can be observed all over in the project areas. These investments have substantially improved the livelihood of farmers and are very likely to be maintained. Cost recovery is not considered problematic, and if a similar source of medium- to long-term funding becomes available, they could be expanded.

- 13 - Components of a public or common good nature involving specific O&M arrangement include the irrigation and drinking water supply schemes, and the rural roads. The Jiamakou and Xiaofan irrigation units have a well established water management system with strong participatory arrangements of water users. During project implementation special studies and irrigation system management reform arrangements have been carried out also involving an exchange with experts from the neighboring irrigation systems in Shaanxi Province. In Yuncheng a special management system has been introduced with a close working relationship between operators and the farmers, who pay for water often in advance of delivery. The drinking water supply schemes have been recently surveyed showing that water fee collection and O&M arrangements are adequate to maintain the benefits from the project schemes. Some of the roads have been damaged by heavy vehicles, but complete repair is well under way on one road and is planned for other roads subject to heavy traffic.

6.2 Transition arrangement to regular operations: All Project components are in regular operation.

7. Bank and Borrower Performance Bank 7.1 Lending: The Bank’s performance in identification, assistance in preparation, and appraisal is rated as satisfactory. The Project identified was consistent with the Government's and the Bank's strategies to develop environmentally sustainable agriculture, increase employment and income, and help alleviate poverty. The Project was well prepared in terms of technical specifications. The project preparation process was highly participatory and the borrower took the lead in the preparation process. The Bank's inputs in terms of staffing and skill-mix were adequate for the preparation. The combined FAO/CP and IDA preparation team was presented with a large number of components to consider. The livestock proposal involving large flocks grazing communal pasture was ruled out as socially and financially impractical. The two breeding cattle model was proposed by the team, and this has proved to be a success providing income for a large number of individual households. The idea of integrated watershed management for some poor areas in Luliang was based on models adopted successfully in other parts of Shanxi Province in the IDA- financed Loess Plateau Watershed Rehabilitation Project. In retrospect, some of the problems of the county-owned agro-processing plants might have been foreseen earlier in project preparation.

7.2 Supervision: IDA supervision is rated highly satisfactory. The supervision missions were composed of a broad mix of international and local professionals, who were not only technically competent but also responsive to the client’s views and needs. The core supervision team was maintained throughout project implementation and an excellent working relationship was maintained with their counterparts. Implementation progress was adequately reported and problems were identified early and addressed proactively. IDA missions gave prompt attention to requests for changes within components and decisions were made without delay. Two major issues related to: a) the delay and lack of counterpart funding for the Yuncheng irrigation scheme, and b) the management problems of several agro-processing plants, were identified by the IDA supervision missions early on and realistic proposals were made to overcome these issues, albeit with a limited success.

7.3 Overall Bank performance: The overall IDA performance is rated satisfactory.

- 14 - Borrower 7.4 Preparation: Project preparation by the borrower is rated highly satisfactory. The Langdian Pumping Complex presented the challenge of finding a solution to the migration of the Yellow River channel from the irrigation pumping stations. This involved numerous technical discussions with experts from the Yellow River Conservancy Commission and the mission’s experts, including a consultant from the Mississippi River Commission. The site selected has been stable for many years, and the operators could if necessary move the pumps to a new location. Also, the large amphibious dredgers provided by the Project could be used to excavate an approach channel even if it has to extend several kilometers.

7.5 Government implementation performance: The Government implementation performance is rated satisfactory. As stated above the government’s macro-economic and sector policies have been highly conducive to the development objectives and significantly supported implementation and outcome of most components. The performance of the agro-processing component would have benefited from a higher flexibility of local government in privatizing some of the state owned project enterprises. A shortcoming was also the inability to provide timely and adequate counterpart funds for the Irrigation Component. As of April 2004, an amount of RMB 18 million was still owed to contractors.

7.6 Implementing Agency: The performance of the implementing agency is rated satisfactory. As discussed in Section 5.3, the PMOs at all levels are well staffed and highly effective. The transparency and accountability of project management ensured rigorous monitoring and evaluation, and strict compliance with disbursement and procurement rules and regulations. The management and institutional capacity of PMOs has been progressively strengthened through the technical assistance and interaction with the Bank’s supervision missions. This enabled the implementation of such a technically complex and geographically wide project slightly ahead of SAR projection, and allowed the Bank to reduce its inputs for supervision.

A particularly positive feature was the remarkable awareness of the PMOs of emerging market opportunities and their flexibility in responding to these opportunities by making proposals for new project activities such as greenhouses, diary cattle, deer raising or new fruit and nut tree varieties or production techniques. All of these activities have proven highly successful.

7.7 Overall Borrower performance: The overall borrower’s performance is rated overall as satisfactory. If it were not for the failure to provide enough counterparts funding for the irrigation component, a higher rating would be justified.

8. Lessons Learned On the basis of the above review and assessments of the Project, the following lessons can be drawn for similar projects:

(1) Flexibility in addressing emerging market opportunities is a key success factor. The Project design provided a framework for each project component with clear principles in terms of targeting, ownership and implementation arrangements. Related to its specific contents much flexibility was applied. At the design stage many of the emerging market opportunities could not be anticipated. Over the relatively long implementation period of 7.5 years significant market challenges and opportunities emerged, such as a strong growth in demand for high quality livestock, fruit and vegetable products accelerated in the project

- 15 - areas by improved physical and information access. Even external markets opened up by China’s access to the WTO had a significant impact on the Project and were addressed well. The PMOs together with the IDA team took advantage of such changes and designed new project investment activities that became some of the most successful components under the Project.

(2) Multiple objectives of components carry a potential risk of conflict. In such case objectives should be sharply defined and priorities agreed upon. While the primary objective of the Project was poverty alleviation with most components exclusively focused on this objective, the irrigation component was at the same time designed for its contribution to the overall grain output and a positive impact on the protection of valuable groundwater resources. During the design of the Project these multiple objectives seemed to be achievable at the same time. However the country moved towards a grain surplus situation and grain prices dropped. Increased grain production thus would have contributed little to poverty alleviation. Also the use of surface water for protection of groundwater was not in the immediate financial interest of many farmers as many of the financially most attractive crops needed to be supplied with groundwater. E.g. greenhouses or vegetables need regular irrigation all around the year for which surface water is less suitable.

(3) Investment in agro-processing can only be successful, if management and ownership structures are equipped to commercially compete in today’s business environment. The Project supported highly successful privately owned and managed processing enterprises, while all the state-owned enterprises failed to enter into commercial operation. Those difficulties were foreseen and pointed out both by the IDA team as well as the PMOs and higher level Government offices early in the Project. However, at the county level, where most of these enterprises were owned, the understanding and commitment to change ownership and management came in many cases too late.

(4) Effective project management with rigorous monitoring and evaluation contributes to the successful project implementation. Despite its large scale and scattered nature this Project remained well managed. The key elements for successful project management include: (i) making use and developing local capacity and institutions for implementation, (ii) applying simple but strict and transparent procurement and disbursement mechanisms with a high degree of beneficiaries self-control, and (iii) imposing a strong and transparent monitoring system that allows efficient and cost-effective internal and external control like the system of ‘maps and tables’ introduced in this Project. Physical progress was checked against maps provided for each project area showing the project plan and completed areas, with a table for each map listing all completed investments with their location, sizes and dates of implementation. The IDA team helped to introduce and maintain a strict project management system and supervision in the field with random spot-checking at all levels. The rules were rigorously enforced at the beginning to establish a precedent, and were maintained throughout project implementation.

(5) Consistency in the composition of a competent core Task Team greatly enhances Bank-Client cooperation. The core task team that was composed of a small but committed, and productive team of experts was maintained thought the Project. It worked closely with the Project management, and its working style and commitment stimulated the same spirit on the Borrower’s side and has resulted in an open, cooperative and mutually respective working relationship between the Bank and Borrower with a high level of mutual trust. This working relationship made possible the necessary flexibility and rapid decision making described above.

- 16 - 9. Partner Comments (a) Borrower/implementing agency: ‘After carefully reading the whole report and discussing the relative problems, we concluded that this contents-detailed and simply-structured ICR made an apt and proper evaluation to the project, and reflected the achievements made by the people in the project areas over ten years efforts in an all-round way. The report also gave an objective and fair evaluation to the performance of the Bank and the Implementing agencies. We also noticed that the report pointed out some difficulties and problems existed in the project, which required our special attentions. Therefore, our evaluation to the ICR is satisfactory.’ (For more detailed comments see Annex 8.) (b) Cofinanciers: N.A. (c) Other partners (NGOs/private sector): N.A.

10. Additional Information

- 17 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Increase in per capita income (Y480)1'2' Y 700 Y 1,217 Per capita grain production (320kg)3' 400 kg 287 kg Improved cropland irrigation 125,000 ha 24,400 ha Diversified production (non-grain area) 70,000 ha 90,500 ha People served by safe drinking water 684,000 470,000 People served by road access 355,000 443,000 Number of direct beneficiaries 3 million 4.1 million

1' Expressed in constant 1995 prices. 2'. Numbers in parenthesis indicate actual estimate at project appraisal. 3'.At appraisal increased grain production was seen as a positive indicator. However, as grain prices dropped non-grain based income became much more effective in generating household income.

Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Yuncheng Horticulture 47,900 ha 61,148 ha Animal Husbandry 9,400 households 17,171 households Dairy Households* - 1,000 households Deer Raising* - 1,245 households Greenhouses* - 19,344 Water Supply 78 79 Rural Roads 208 km 204 km Beachland Wells 1,603 1,682 Roads 90 km 318 km Canals 1,603 km 1,682 km Land Leveling 13,000 ha 16,820 ha Fish Ponds 533 ha 533 ha Women Livestock Raising* - 2600 households Luliang Terracing 13,400 ha 16,107 ha Horticulture 21,300 ha 12,766 ha Afforestation 4,200 ha 1,677 ha Animal Husbandry 2,100 households 4,187 households Sediment Control Dams 56 new 18 new, 123 improved Water Supply 141 307 Rural Roads 118 km 114 km Women Livestock Raising 2,460 households 4,384 households

1 End of project *Activity was newly introduced during project implementation.

- 18 - Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Yuncheng Irrigation System 35.10 17.10 0.49 River Beachland Development 15.40 16.90 1.1 Rural Water Supply 9.20 11.40 1.24 Rural Roads 17.10 27.20 1.59 Soil & Water Conservation 14.70 23.30 1.59 Horticulture 26.70 53.70 2.01 Livestock 14.50 23.60 1.63 Agricultural Processing 17.30 18.00 1.04 All China Women's Federation 0.60 4.50 7.52 Support Services 13.50 8.60 0.64

Total Baseline Cost 164.10 204.30 Physical Contingencies 9.00 Price Contingencies 9.70 1.12 Total Project Costs 182.80 204.30 Total Financing Required 182.80 204.30

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB 2 N.B.F. Total Cost NCB Other 1. Works 0.00 11.44 56.84 0.27 68.55 (0.00) (5.77) (28.42) (0.00) (34.19) 2. Goods 20.36 0.00 12.13 0.00 32.49 (20.36) (0.00) (12.13) (0.00) (32.49) 3. Services 0.00 0.00 2.15 14.09 16.24 (0.00) (0.00) (2.15) (0.00) (2.15) 4. Miscellaneous 0.00 0.00 57.65 7.91 65.56 (0.00) (0.00) (31.17) (0.00) (31.17) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 20.36 11.44 128.77 22.27 182.84 (20.36) (5.77) (73.87) (0.00) (100.00)

- 19 - Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB 2 N.B.F. Total Cost NCB Other 1. Works 0.00 18.88 20.38 0.00 39.26 (0.00) (9.44) (10.19) (0.00) (19.63) 2. Goods 9.55 0.00 16.11 0.00 25.66 (9.55) (0.00) (16.11) (0.00) (25.66) 3. Services 0.00 0.00 1.97 6.61 8.58 (0.00) (0.00) (1.97) (0.00) (1.97) 4. Miscellaneous 0.00 0.00 84.44 46.43 130.87 (0.00) (0.00) (43.65) (0.00) (43.65) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 9.55 18.88 122.90 53.04 204.37 (9.55) (9.44) (71.92) (0.00) (90.91)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. Yuncheng Irrigation 23.22 12.84 7.35 9.73 31.7 75.8 System River Beachland 11.16 6.70 7.76 9.17 69.5 136.9 Development Rural Water Supply 5.27 5.22 4.35 7.07 82.5 135.4 Rural Roads 6.95 11.01 9.36 17.83 134.7 161.9 Soil & Water Conservation 9.19 7.81 15.38 7.95 167.4 101.8 Horticulture 15.36 13.43 19.46 34.23 126.7 254.9 Livestock 12.45 7.47 13.78 9.81 110.7 131.3 Agricultural Processing 11.85 7.02 8.18 9.86 69.0 140.5 All China Women's 0.39 0.39 2.14 2.38 548.7 610.3 Federation Support Services 4.17 10.92 3.16 5.42 75.8 49.6 Total Costs 100.00 82.80 90.92 113.46 90.9 137.0

- 20 - Annex 3. Economic Costs and Benefits A recalculation of the economic returns of the project investment shows an Economic Rate of the Return (ERR) of the Project of 27%, which is close to the SAR estimate of 28%. Details are shown in the table below.

The calculation is based on the economic net returns for all main components. For the land based production components such as irrigation, beachland, horticulture, and soil conservation crop models have been estimated comparing the ‘with’ and ‘without’ project situation. Together with the estimated cropping pattern the total cash flow was calculated. For the livestock activities household models were used and aggregated to the overall cash flow. The benefits from the drinking water are based on an average 3 willingness to pay of Y 5 per m. The benefits from rural roads are based on transport cost saving of Y 0.75 per ton per km.

While prices and technical parameters about inputs, outputs and other operational costs are based on the recent monitoring information, the methodology applied in the ICR is very close to the method used in the SAR to make the results comparable. However, the following differences have been used: l In contrast to the SAR no world market price adjustments have been made and financial prices for all inputs and outputs are considered to be a fairly good reflection of economic costs and returns of goods and products in China. l Economic opportunity costs of labor are estimated at Y 10 per day in the SAR it was Y 8. l The economic benefit of rural road construction in the SAR was based on three elements: a) transport cost saving, b) efficiency improvement in the local economy, and d) a development impact. Lacking adequate data the ICR calculation is limited to the transport cost saving effect, which however underestimates the true impact of rural roads for the development of the local economy.

- 21 - - 22 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 03/10/1995

Appraisal/Negotiation 01/16/1996

Supervision

12/02/1996 4 Water Resources Specialist (1); S S Agronomist (1); Senior Economist (1); Agricultural Economist (1) 08/29/1997 4 Water Resources Specialist (1); S S Agronomist (1); Senior Economist (1); Monitoring/ Financial Analyst (1) 06/01/1998 8 TTL (1); Senior Livestock S S Specialist (1); Economist (1); Monitoring/ Financial Analyst (1); Water Resources Specialist (1); Agronomist (3) 09/22/1999 4 TTL (1); Consultants (3) S S 05/19/2001 4 TTL (1); Agronomist (1); S S Engineer/Procurement Specialist (1); Horticulture Specialist (1) 09/07/2003 4 TTL (1); Consultants (3) S S

ICR 06/04/2004 2 Economist (1); Water S S Resources Specialist (1)

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 699.28 Appraisal/Negotiation Supervision 366.42 ICR 13.6 Total 1,079.30

- 23 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA

Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA

- 24 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU

6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU

- 25 - Annex 7. List of Supporting Documents Detailed ERR Calculations (Farmod and Spreadsheet Files) Borrower’s ICR

- 26 - Additional Annex 8. Borrowers Comments and Assessment

1. Assessment of the project objective, design, implementation and operation experience

The design for the project objective, construction contents and adjustment thinking has fully reflected the principle of poverty alleviation, and full consideration for the existing resources, markets, the optimized structure, the needs of conforming to market changes and the project construction. The mid-term review reduced those unprofitable contents, and added some reasonably designed contents with good prospects and potential market development, thus ensured the integration of the realization of the project construction targets and economic, social, and ecological efficiency.

The project implementation collectively input various agricultural development elements such as funds, technology and management to the project areas, improved the backward agricultural infrastructure and agricultural production conditions, promoted the reasonable utilization of the agricultural natural resources and good circulation of the agricultural ecological environment, pushed forward the rural industrial structure adjustment in the project areas, updated the local farmers’ production concept and enhanced the overall social and economic development level in the project areas. Therefore, the project implementation is of very importance to the promotion of poverty alleviation work and the social and economic development in rural areas of the whole province.

The project has produced a positive and widespread influence to the ability construction. 1) The management technology training provided by the project has improved the quality and ability of the management teams at the different levels, which has laid a solid foundation for the project follow-up operation; 2) the improvement of the infrastructure and agricultural production conditions in the project areas has enhanced the economic developing ability in the project areas. Meanwhile, the ability of the officials at the grass level has been intensified. These have ensured the social and economic sustainable development in the project areas; 3) The farmers in the project areas have improved their production operation ability through the project implementation, and absorbed the modern market economic awareness and advanced production concept, thus laid a solid foundation for realization of shaking off poverty at the root level.

During the project implementation, some sub-projects suffered the delay of the engineering design and approval, the difficulty of the counterpart funds allocation, the imperfect system of construction and operation not conforming to the market changes etc. and these have directly impacted the project construction progress and project efficiency. Moreover, part of sub-projects with obvious social benefit and unoptimistic economic benefit has to face the risk of loan repayment. In addition, with the end of the project construction period, obvious increase of the unstable factors in the project management departments has brought some potential impact to the project follow-up management and project roles, which requires the high attention from the governments at different levels.

2. Evaluation of the performance of the Bank

The Bank’ performance in identification, assistance in preparation, appraisal and implementation stages is rated as highly satisfactory.Based on the Bank’s "Country Assistance Policy" and the Chinese government’s supportive priority, the Bank made a scientific and correct decision---choosing Shanxi Poverty Alleviation Project to be financed, realizing the effective integration of the Bank’s "Country Assistance Policy" and Chinese government’s economic development priority, making the project implementation a successful sample.

- 27 - During the stages of the project identification, preparation, appraisal and implementation, the Bank had conducted a lot of arduous but effective work, which played a key role to the project successful implementation. In the work of the field supervision and follow-up guidance, the Bank paid much attention to the consultants’ skill-mix and continuity, thus providing to the borrowers high quality technological guidance and assistance. Particularly worth to be mentioned is the project manager---Mr. Voegele, who had given intensive attention and strong assistance to the project whole implementation process, played a very important role in addressing those key problems.

The Bank’s strict and standard project management procedure, flexible and practical working style has not only ensured the realization of the project objectives, but also provided a very important and valued model for us to organize and implement other projects in the future. In addressing the concrete problems existed in the project implementation, the Bank demonstrated their high combination of principle and flexibility by proposing positive and practical measures based on full consideration of the actual situation and good communications with their partner, thus promoted the project smooth progress.

The supports from the Bank to human resource nurturing and the project management team construction have not only improved the quality of the project management team and their working efficiency, but also helped the farmers in the project areas mastering agricultural production practical technology, updating the production operation concept, thus laying a solid foundation for the sustainable operation of the project. We suggest that the Bank intensify supervision to the whole course of the study tour and training tour in the future so as to guarantee the expected outcome.

During the project implementation, the positive attention to the weakness group in the project areas from the Bank has made obvious social benefits. Particularly, the successful implementation of women project has greatly improved their social and economic status and brought their positive role into full play in the social and economic life.

3. Evaluation of the performance of the borrower

Performance of the borrower and the project implementation agency is rated as satisfactory. At the stage of the project preparation, with the governments’ strong support and the relative departments’ active cooperation, in accordance with the requirements from the Bank, the borrower/ the implementing agency finished a series arduous preparation work like the project Feasibility Study, the Environmental Impact Assessment and the project design, thus ensuring a successful preparation work for the project. In combination with the actual situation in Shanxi province, the management model of making the Project Management Office system as main managing body coordinated and cooperated by other related departments was adopted, thus realizing the vertical management model from province to county, ensuring the horizontal cooperation between the relative departments at the same level, and maintaining the consistency of the project objectives and the overall progress of the project construction.

After the project initiated, at the requirements of the Bank, the borrower, by learning from the domestic similar projects’ experience, mapped out a series effective engineering implementation management regulations, making the project to be implemented by following the rules, thus effectively regulated the project management and engineering implementation.

The PMOs at the different levels and the project construction agencies had established a strong awareness to the quality, with a special focus on the engineering quality in terms of engineering plan, design,

- 28 - implementation and acceptance, meanwhile, intensified the supervision and inspection methods, thus ensuring improvement of the engineering quality and the project efficiency, resulting in many contents becoming the model of the local production activities. The borrower had been focusing on the allocation of the domestic counterpart funds. The proper increase of the proportion of the domestic counterpart funds made up for a loss of the Bank loan due to changes of foreign exchange rate, thus guaranteeing realization of the project construction targets with the maximum limit. However, problems still existed albeit with so much strenuous efforts, most obvious problem was imperfect counterpart funds raising system, leading to untimely or not fully allocation of part of the project counterpart funds.

- 29 - Additional Annex 9. Pictorial Overview of Selected Project Achievements

Picture 1: Picture taken in May 2002 shows a temporary pumping facility, which fell dry because of a shift in the Yellow River channel.

Picture 2: Project invested in mobile floating pumping units at Langdian located at a site with stable water supply. Picture taken during installation in May 2002.

- 30 - Picture 3: Over 19,000 simple greenhouses have been constructed by the project. Without heating these greenhouses allow year-round production.

Picture 4: Off-season production of strawberries offers attractive prices. Prices are highest at the Chinese New Year.

- 31 - Picture 5: Intercropped date trees in Yuncheng allowed for a smooth transition from field crops to tree crops without cashflow interruption for the farm households.

Picture 6: The Weizhiwang Candy Fruit Company is an engine for the local economy; it provides jobs for some 300 rural people, is a major tax payer to the county and adds value to locally produced hawthorn, which had no value before the processing company was operating.

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