Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 18893

IMPLEMENTATION COMPLETION REPORT

RURAL HEALTH AND PREVENTIVE MEDICINE PROJECT(LOAN 2723-CHA / CREDIT 1713-CHA)

January 29, 1999

Health, Nutrition and Population Sector UnitEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Renminbi (RMB)

At the time of appraisal: US$1 = RMi 3.20At the time of project completion mission: US$1 = RMB 8.27

FISCAL YEAR

January I - December 31

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

CAPM - Chinese Academv of Preventive MedicineCMS - Cooperative Medical SvstemDPT - Diptheria-Pertussis-Tetanus Associated VaccineEF - Engineering FirmEPI - Expanded Program on ImmunizationEPS - Epidemic Prevention StationFLO - Foreign Loan OfficeGMP - Good Manufacturing PracticesHIV - Human lmmunodeficiencv VirusICR - Implementation Completion ReportIDA - International Development AssociationMCH - Maternal and Child HealtlMOF - Ministry of FinanceMOH - Ministrv of HealthNCD - Non-Communicablc DiscascOPV - Oral Poliomvelitis VaccinePHC - Primarv Health CarcSAR - Staff Appraisal ReportSDR - Special Drawing RightSTD - Sexuallv Transmitted DiseaseTT - Tetanus ToxoidUNICEF - United Nations Children's FundVPO - Vaccine Project OfficeWHO - World Health Organization

Vice President Jean-Michel Severino, EAPVPCountry Director Yukon Huang, EACCQSector Manager Maureen Law, EASHNTask Manager Herbert Boehm, EASHN

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

CHINA

RURAL HEALTH AND PREVENTIVE MEDICINE PROJECT

LOAN 2723-CHA CREDIT 1713-CHA

CONTENTS

PREFACE .......................... , . ... .

EVALUATION SUMMARY .................... ......

PART 1: PROJECT IMPLEMENTATION ASSESSMENT................................... . .. 1...........A. Background .... IB. Project Objectives................... 3.... :3C. Achievement of Project Objectives .4D. Implementauon Record and Major Factors Affecting the Project .6E. Project Sustainabilit .9F. Perfornance .12G. Assessment of Outcome .16H. Future Operation .171. Kev Lessons Learned .18

PART II: STATISTICAL TABLES . . . 21

Table l: Summarv of Assessments .21Table 2: Related Bank Loans/Credits .22Table 3: Project Timetable .24Table 4: Loan/Credit Disbursement: Curnulative Estimate and Actual .24Table 5: Studies Included in Project .24Table 6a: Project Costs (US$) .25

Table 6b: Project Costs (RMB) .25Table 6c: Project Financing .25Table 7: Status of Legal Covenants .26Table 8: Complianece with Operational Manual Statements .26Table 9a: Bank Resources: Staff Inputs (Actual Staff Weeks). 27Table 9b: Bank Resources: Staff Inputs (Actual US$) .27Table 10: Bank Resources: Missions .28

ANNEX A: BORROWER'S CONTRIBUTION TO THEI: ........................................... 29Part I: Rural Health and Other Non-Vaccine Production Components . .29Part 11: Vaccine Production Component .. 32Part HI: Bonower's Comments on Bank's ICR .. 37

Map No. IBRD 29543

This document has a restricted distribution -and may -be used by recipients oaly in theperformance of their official duties. Its contents may not. otherwise. be disclosed withoutWorld Banlc authorization.

IMPLEMENTATION COMPLETION REPORT

CHINA

RURAL HEALTH AND PREVENTIVE MEDICINE PROJECT

LOAN 2723-CHA / CREDIT 1713-CHA

PREFACE

This is the Implementation Completion Report (ICR) for the Rural Health and Preventive

Medicine Project in China, for which Loan 2723-CHA in the amount of US$15.0 million, and

Credit 1713-CHA in the amount of SDR 57.2 million (US$65.0 million equivalent) were

approved on June 19, 1986 and made effective on May 26, 1987. The loan and credit were

closed on June 30, 1996. Both were fully disbursed. The last disbursement took place on

October 10, 1996. An associated Grant from Rotary International in the amount of US$15.0

million, which was administered by the Bank, closed on June 30, 1997.

The ICR was prepared by Herbert Boehm and David Dunlop, Consultants, with assistance

by Darren Dorkin, Operations Analyst, in the Health, Nutrition, and Population Sector Unit of the

East Asia and Pacific Region. It was reviewed by Alan Ruby, Acting Sector Manager, Jagadish

Upadhvay, Senior Operations Officer, and Janet Hohnen, Senior Public Health Specialist,

EASHN, and by Yukon Huang, Country Director, China. The Borrower's contribution is

included as Annex A to the report.

Preparation of this ICR was initiated during discussions between the Bank and the

Ministry of Health in 1993 for the rural health and other non-vaccine production components of

the project. However, the Bank and the Ministry of Health agreed to postpone completion of the

ICR until the ongoing work under the vaccine production component was completed. A project

completion workshop was held in Beijing in April 1998. The ICR is based on materials in the

project file, including extensive summary and analyses prepared by the Borrower and the project

teams, and comments by members of Bank task teams, the United Nations Children's Fund

(UNICEF), and the World Health Organization (WHO).

IMPLEMENTATION COMPLETION REPORT

CHINA

RURAL HEALTH AND PREVENTIVE NIEDICINE PROJECT

LOAN 2723-CHA / CREDIT 1713-CHA

EVALUATION SUMMARY

Introduction

I . The Bank began working with China on health issues with the launching of the rural healthand medical education mission in 1982. That mission led to a sector study in 1984, China: TheHealth Sector, and formed the basis of a sector lending program starting with the Rural Healthand Medical Education Project (Health L Cr. 1472-CHA), approved by the World Bank Board onMay 3, 1984. The Rural Health and Preventive Medicine Project (Health II) extended the workbegun through the first health project. A project brief was presented to the Bank in July 1984,and the project was appraised in July 1985 and approved by the Board in June 1986.

2. The 1984 health sector report also provided the basis for crafting the design of Health IIwhose objective was to strengthen and expand the efforts of the Ministry of Health (MOH) to: (i)improve rural health care; (ii) improve the efficiency, coverage, and quality of the nationalimmunization program for children; (iii) initiate improved drug quality control; and (iv) developnew communicable and chronic disease preventive strategies and health care financing systems inrural areas. To address this set of objectives, which primarily focused on the health of the ruralpoor, Health II was designed with four components: (i) rural health care deliverv improvement;(ii) vaccine production improvement; (iii) drug qualitv control improvement; and (iv) operationalresearch in disease surveillance and disease prevention especially for non-communicable diseases(NCDs), along with testing new approaches in rural health insurance.

Project Objectives

3. The main objectives of the project were to: (a) strengthen and expand the Ministry ofHealth's continued efforts to improve rural health care; (b) improve the efficiency, coverage andquality of the national immunization program for children; (c) initiate improved drug qualitycontrol; and (d) develop new communicable and chronic disease prevention strategies and healthcare financing systems in rural areas.

4. To accomplish these objectives, the project included four main components: (a) RuralHealth -- expansion and qualitative improvement of preventive and curative health services in thepoorer rural counties of five provinces, and strengthening of the disease monitoring and control

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activities and immunization delivery and management of the epidemic prevention stations in theseand three additional provinces; (b) Vaccine Production - improvement in the coverage and costeffectiveness of the national immunization program against the main childhood diseases throughconstruction and rehabilitation of three national centers for the production of essential vaccinesmeeting international quality standards; (c) Drug Quality Control - improvement of the qualitycontrol of drugs used; and (d) Operational Research - undertaking research to (i) strengthen thecapacity of the National Center for Preventive Medicine for disease surveillance, and (ii) test newapproaches to rural health insurance.

Implementation and Results

5 The project made significant contnrbutions in the area of rural health and disease control,but expenrenced severe problems and delavs in the development of vaccines and the constructionof the production facilities. Within the Rural Health Care Delivery Component, a number ofhealth facilities, including hospitals, village clinics, maternal and child health (MCH) stations,epidemic prevention stations (EPSs) and other training and administrative blocks, were built andequipped, mainly in the rural areas of five provinces: Gansu, Hubei, Jilin, Sichuan, and NingxiaHui. The civil works were generally completed within the specified time and according to thebudget estimates contained in the staff appraisal report (SAR). Preventive service delivery of theprovincial and municipal EPSs was also strengthened in these five provinces as well as in theprovinces of Heilongjiang, Jiangxi, and Shandong through training and by disease control andmonitoring.

6. The Drug Quality Control Component also achieved its envisioned objectives of moreskilled personnel due to improved training and better equipment for use in drug efficacy andquality testing. These improvements also contributed to the 1995 revision of the Chinesepharmacopoeia, as the results of improved testing were incorporated into the document.However, the project did not address the weaknesses of the national control authority, especiallyinsofar as its authority for drug qualitv and its regulatorv enforcement capability are concerned.

7 The Operational Research Component assisted the Chinese Academy of PreventiveMedicine (CAPM) in two objectives: extension of its disease surveillance system, and increasedcapacity to develop disease prevention strategies. The Academy launched the first of manyinvestigations into the health impacts of smoking in China and contributed to assessing howvarious health education campaigns can be effectively designed to reduce smoking, especiallyamong youth. This component also included a successful rural health insurance experiment whichprovided the Chinese govemment with experience and knowledge on the design of healthfinancing mechanisms.

8. Finally, the project enabled the Government of China and other developing countries,because of the publicity of the project's implementation difficulties, to learn about the intricaciesof development of high technology vaccine production. Three vaccine plants have beenconstructed: an oral polio vaccine (OPV) plant in Kunming, and two multi-vaccine productionplants, in Shanghai and Lanzhou, designed to produce diphtheria, pertussis and tetanus (DPT),measles, and tetanus toxoid (TT) vaccines. The plants will begin to produce vaccines as soon asthe validation of plant production processes and testing at normal production capacity levels are

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completed. One year after the start of operation, the plants' output will be expected to meet theguidelines for vaccine production established by WHO. Although the component has experiencedmany frustrations in contracting with intemational vaccine manufacturers, significant costincreases over that estimated in the SAR, and difficulties in production process development forsome vaccines, the three plants have been constructed and equipped, and are now awaiting fullproduction testing.

Issues

9. While the rural health and other non-vaccine production components had very favorableresults, critical examination of implementation problems indicated a number of shortcomings.These shortcomings, primarily caused by health policy changes affecting the support to preventiveand curative health care delivery, were outlined in the Borrower s project completion report, andincluded:

(a) inadequacy of recurrent cost for: (i) the EPSs at the provincial and county level; and(ii) the provincial (health equipment) maintenance centers and county MCH stations,contributing to lowered personnel productivity in the immunization program, lowerquality services than the public's willingness to pay via direct user charges, and lowerthan expected utilization;

(b) lack of training materials for local staff based on the new primary health care (PHC)policies and changing pattern of health problems toward chronic diseases; and

(c) insufficiency of implementation flexibility from one province and county to another,ignoring local differences in facility and service need or demand, and leading torelatively poor resource allocation from one assisted locality to another.

10. Although difficult to quantifv, these factors mav have contributed to lower health statusand service use improvements than orizinally expected from the project's investments. The lackof project implementation flexibility, however, provided a learning experience for Chinese officialswhich contributed to strengthened provincial and lower level health planning and implementationin the World Bank supported Integrated Regional Health Development Project (Health III; Cr.2009-CHA), which became effective in January 1990.

l1. While the other project components were implemented with little difficulty, except asnoted above, the vaccine production component was fraught with imnplementation problems fromthe beginning. Because of its highly complex technical requirements and long implementationdelays, by 1992/3 the World Bank and MOH separated this component from the rest of theproject for purposes of supervision and management. This separation inevitably reduced theproject design linkages conceptualized at the start of project development. In addition, projectclosing, originally planned for June 1992, had to be extended three times for a total period of fouryears, to December 31, 1997.

12. Because of the Bank's and the Borrower's inadequate technical knowledge in producingvaccines in sophisticated facilities, the component was not properly designed, contracted, or

v

managed at the outset. The Borrower and the Bank therefore obtained international expertise tofacilitate the managing of the implementation process. Additional financing was obtained fromthe Rotary Foundation of Rotary International in the amount of US$15.0 million. Theinternational group contracted from the Netherlands. after a nearly four year delay, experiencedproject financing problems due to a lack of adequate finds in the original design of the project,exchange rate fluctuations and domestic inflation. That difficulty sparked technical andmanagerial disputes between the Government of China and the contracting group. In spite ofthese difficulties, the plants have reached the next stage where production processes must befinally validated, full production testing is required, product quality must meet WHO guidelines,and production process must adhere to European good manufacturing practices (GMP) standards.

Key Lessons Learned

13. The major key lessons learned from the project are:

Rural Health and. Other Non-Vaccine Production Components

(a) Particular attention should be paid to finding solutions to the common problem ofinadequate recurrent costs in the design and implementation of "low-cost" rural healthcare projects.

(b) As an integral aspect of the project preparation, the project monitoring and evaluationcomponent should be designed and guidelines formulated as to how it will beimplemented.

Vaccine Production Component

(a) Vaccine production is a hiahly sophisticated technical undertaking, for which the Bankhas insufficient expertise in design or supervision. Further, production processdevelopment and up-scaling to large production volumes are difficult tasks that wouldpose daunting challenges to even the largest and most highly specialized firms in theindustry.

(b) Building three production plants of this size and complexity simultaneously shouldhave been avoided. Rather, start with one and employ lessons learned fordissemination and application elsewhere.

(c) Selected turnkey contractors should have successfully developed similar projects in thepast. Also, envisioned production processes should be successfully tested in anotherlocation and the contractor should have firsthand knowledge of how to transfer thattechnology to the Borrower.

(d) The Borrower should ensure that adequate technical and managerial staff are availableto monitor project implementation, and if necessary should be willing to hireinternationally qualified personnel to do the work. Involvement of WHO expertsshould be sought throughout the design and implementation phases of the project.

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(e) Since a vaccine production project is not a community health project, but rather anindustrial project, its feasibility should be assessed according to normal financial andeconomic methods of project appraisal prior to making a financial commitment.

(f) Before starting a major vaccine project, a national strategic plan for viable vaccineproduction needs to be developed, and the national drug control authority should bestrengthened to ensure drug quality and safetv.

CHINA

RURAL HEALTH AND PREVENTIVE MEDICINE PROJECT

LOAN 2723-CHA / CREDIT 1713-CHA

PART 1: PROJECT IMPLEMENTATION ASSESSMENT

A. BACKGROUND

Macro Economic Performance and Policy Framework

I. Since the introduction of economic reforms in 1978 designed to move the country from acommand to a market driven economv, China has undergone one of the most rapid increases ineconomic growth ever experienced. During this twenty-year period, per capita income hasincreased more than fourfold at an average annual rate of 7. 1%, as individual responsibility,especially in the agricultural sector, has been fostered. As this unprecedented growth has beenoccurring, new challenges have emerged, with the rapid move from a predominately agrariansociety to an urban, industrial one. To sustain the progress into the future, further reforms havebeen recently announced to strengthen the financial sector, extend the reforms to state-ownedenterprises, and ease the social dislocation of prior and anticipated reforms by ensuring socialprotection through pension, housing and health financing reform.

2. At the same time China has been undergoing its rapid economic transformation, the healthstatus gains achieved since independence have slowed. It appears, for example, that under-fivemortality trends might have leveled off since the early 1980s at about 45 per thousand live births.The health status gains have generallv been attributed to the implementation of priority publichealth interventions, along with improved food security and nutrition, and by rising income.

3 At the same time, the epidemiological transition is fully underway. Communicable healthproblems such as immunizable childhood diseases. e.g., measles, and controlling endemicinfections have largely been mitigated. Today, non-communicable problems, e.g., cancer andheart disease, in part due to an increase in smoking and other life style changes, have emerged ashealth challenges for the new millennium.

4. Finally, rapid increases in economic growth since the introduction of market reforms inagriculture have contributed to an increasing inequity in the delivery and financing of health careservices, as many of the nation's poorest cannot afford critical health services under the presentfee-for-service system. These issues were emerging as Health 1I was being designed. Rural areaswere placed in jeopardy as the financial support to preventive and curative health care deliverywas undermined by the dismantling of the rural cooperative medical systems (CMSs) withoutreplacing that support with alternatives. Further, rural areas no longer received adequate financialsupport for preventive programs which had in the past enabled the country to improve its healthstatus.

2

Health Sector Policy and Financing Framework

5. Policy.Framework. China's progress in improving the health status of its people hasbeen grounded on not only improving the delivery of curative and preventive health care services,but also on stressing the importance of nutrition, water supply, sanitation, education, and reducedfertility. This broad approach taken by China, along with the delivery of basic preventive andcurative health care services, forms the basis of China's policy to support primary health care. Byvirtue of its success in reducing communicable health problems, including immunizable childhooddiseases, the country's policy basis for this project in the early 1980s was threefold, to:

(a) promote prevention by strengthening anti-epidemic activities, improve themanagement of immunization campaigns, and identify preventive measures againstchronic diseases;

(b) strengthen and consolidate rural health services by upgrading country-level healthinstitutions and major township health centers, and promote "barefoot doctors" torural doctors after they have received sufficient training; and

(c) intensify medical research and training of health professionals, improve the technicaland administrative management of health delivery, and improve the quality,production, distribution and proper use of pharmaceuticals.

6. To address the second policy focus of strengthening rural health services, China hadlaunched a national program in the early 1980s called the One-Third County Upgrading Program.This program was to strengthen the four county-level health institutions: (i) general hospitals; (ii)EPSs; (iii) MCH centers; and (iv) training centers. Further, selected centers were identified toserve an intermediate referral function between ordinarv centers and county hospitals. To thisend, Health 11 provided continuing assistance to extend this national program to the poorest ruralcounties initiallv launched bv the Bank through Health I. In so doing, Health II contributedtoward the implementation of the first two policies enunciated above.

7. Financing Framework. By the early 1980s, China had significantly altered how healthwas previousiy financed. From the 1950s to the late 1970s. the sub-national governmental levelswere a major financier of rural based preventive health services, with the rural CMS providing alarge share of curative health care financing support, especially at the hospital level. Out-of-pocket payments provided the balance of the financial support required. After the collapse of therural medical insurance system in the late 1970s, it was expected that out-of-pocket paymentswould fill the gap and provide not only additional financial support to curative health facilities, butalso to preventive programs such as those provided by the EPSs and MCH centers. Thus, as theHealth II Project was undergoing implementation, the sector's financial base of support wasexperiencing a major transformation, especially in rural areas. During the period ofimplementation of the rural health and other non-vaccine production components (1986 to 1993),Government support to the recurrent cost of the sector declined in constant (1993) yuan percapita from RMB 9.9 to RMB 9.1, or 8%. For two of the major preventive programs, epidemicprevention and maternal and child health, per capita support fell even more, from RMB 1.82 toRMB 1.36 (in 1993 yuan terms), a decline of more than 25%. Finally, repeated concern was

3

voiced in project supervision reports and the Borrower's Completion Report for the Rural Healthand Other Non-Vaccine Production Components of the Project (1996), about the lack ofrecurrent cost support for preventive (and even curative) services.

B. PROJECT OBJECTIVES

8. The Bank began working with China on health issues with the launching of the rural healthand medical education mission in 1982. That mission led to the sector study in 1984, China: TheHealth Sector, and formed the basis of a sector lending program starting with the Rural Healthand Medical Education Project (Health 1), approved by the World Bank Board on May 3, 1984.The Rural Health and Preventive Medicine Project (Health II) extended the work begun by thefirst health project. A project bnref for the Health II Project was presented to the Bank in July1984. It was appraised in July 1985 and approved by the Board in June 1986.

9. The sector report also provided the basis for crafting the design of Health II whoseobjective was "... to strengthen and expand MOH's continued efforts to improve rural healthcare, improve the efficiency, coverage and quality of the national immunization program forchildren, initiate improved drug quality control, and develop new communicable and chronicdisease preventive strategies and health financing systems in rural areas" (pg. 7, SAR). Toaddress this set of objectives, which primarily focused on the health of the rural poor, Health IIwas designed with four components:

(a) Rural health care delivery improvement by: (i) extending access by constructing newfacilities; (ii) addressing service quality by personnel training, and extending theavailability of modern diagnostic equipment in five of some of the poorest provinces inChina; (iii) improving disease monitoring and control and immunization delivery; and(iv) managing preventive health programs as part of epidemic prevention activities inthree additional provinces, Heilongjiang, Jiangxi, and Shandong.

(b) Vaccine production improvement via the rehabilitation and construction of facilitiescapable of producing essential childhood vaccines according to international qualitystandards in a cost-effective manner;

(c) Drug quality control improvement by personnel training, new facilities, and using up-to-date testing methods; and

(d) Operational research in disease surveillance and disease prevention by the ChineseAcademy for Preventive Medicine (especially for NCDs) and by testing newapproaches in rural health insurance.

10. Under Health 1, 46 rural counties were assisted, and through Health II, an additional 50counties in five of the poorest provinces were supported. The vaccine production component wasviewed at the time of project identification and design as a logical extension of supporting healthstatus gains by improving the quality of childhood immunizations and extending coverage. Theother two project components were viewed as vital to the long-term financial and service quality

4

sustainability of the health sector. Finally, the operational research sub-component was designedto test strategies for changing the pattern of disease by piloting various preventive approaches tothe emerging rapid growth of chronic health problems.

11. The scope of the vaccine production component at the time of project design was to:

(a) establish a new production center for oral poliomyelitis vaccine (OPV) in Kunming,Yunnan Province with an annual production capacity of 100 million doses of liquidtrivalent vaccine;

(b) establish two new production centers for essential vaccines, including diphtheria-pertussis-tetanus (DPT), TT, and freeze-dried measles vaccine in Shanghai andLanzhou, Gansu Province, each with an annual production capacity of 100 milliondoses of DPT, 40 million doses of TT, and 20 million doses of measles vaccine; and

(c) rehabilitate quality control laboratories in each of the three sites.

12. This component was to facilitate China's efforts to fully immunize its children in a cost-effective manner and to provide the country with internationally recognized quality vaccineproduction facilities.

C. ACHIEVEMENT OF PROJECT OBJECTIVES

13. The investments undertaken in the rural health development component were consistentwith the dominant policy objectives at the national and provincial level. The investment programswere successfully carried out. In addition, the project succeeded in expanding preventive healthcare service delivery along with improved MCH services and delivering basic health services inrural areas in the project provinces. However, lack of funding for recurrent costs at the local levelprevented the project from fully achieving the originaliv expected objectives. In contrast, thetraining sub-component exceeded the project's original expected targets.

14. The drug quality control component met its project objectives by initiating many trainingand research efforts at institutional levels to improve the quality and safety of domestic andimported pharmaceuticals. However, the project design should have addressed the weaknesses ofthe national drug control authority, which has the mandate of developing appropriate policies andenforcing rules and regulations concerning drug quality and safety. In particular, improving theagency's deficit in enforcing GMP standards in the country could have been of substantial value tothis project as well as for other pharmaceutical projects in China. The operational researchcomponent also met its objectives by providing financial support to CAPM, which enabled it toexpand its capacity to conduct epidemiological research and improve its collaboration with othergovernment agencies to formulate health related policies and improve its public informationfunction.

15. In physical terms, the vaccine production component will have met the project objectiveswhen full vaccine production commences. At present, the three plants are close to physical

5

completion with final validation of the plant systems and their equipment expected by end 1999.Before normal production can start, however, completion of process development for measles andDPT, trial production, process validation, GMP training of new staff, work process, standardoperating procedures completion, work process training, and then managing each of the facilitiesas an integrated operation, remain to be accomplished. Barring unforeseen difficulties, all fivevaccines should be in licensed production by the end of 1999 or early 2000.

16. The three new facilities represent state-or-the-art technology in the field of vaccineproduction. These extremely complex plants have been well designed and house some of theworld's most advanced systems and equipment in the field. It is expected that the productiontargets for all five types of vaccine can be met. Due to the size of the facilities and thesophistication of the systems and machinery, production expansion should be achievablesubstantially above the design capacities. It is also expected that the quality of the vaccines willmeet international standards for potency and safety as established by WHO guidelines and that theoperation of the facilities will be in accordance with European GMP.

17. This component was the first vaccine production project financed by the World Bank. Itis also by far the largest, most complex and most expensive project in the field of biologicalproduction in China. In terms of overall production volume (420 million doses of vaccine) andsize of the facilities, it most likely is the largest project of this type in the world. Its complexity interms of technology and management would undoubtedly be a daunting challenge to even themost experienced Western pharmaceutical companies. It is therefore in hindsight of little surprisethat the project design, procurement arrangements as well as implementation and fundingrequirements often exceeded both the domestic and professional, managerial, and financialresources throughout the project implementation period.

18. In terms of financial objectives, i.e., yielding significant improvement in the costeffectiveness of the national childhood immunization program, the project upon completion maynot exhibit the same positive results commensurate with its physical achievements. While it wasalways recognized that the new vaccine products would be more costly than those currentlyproduced. as they are of higher quality and safetv, preliminary cost studies prepared by theMedical Technology Assessment Research Center of Shanghai Medical University indicate thatthe cost of vaccines would be substantially above the cost of the current production. It isessential that the cost study be revised as soon as actual data becomes available during the trialproduction phase, and that conceptual problems concerning the analysis be resolved as soon aspossible. Moreover, MOH has agreed to carry out a study to assess the cost savings effectsresulting from the improved-quality vaccines as well as from better product packaging, freeze-drying, and longer shelf life. It is, however, not expected that these effects will fully offset thesubstantially increased cost for the new products.

19. Of great concern to the Government is the possibility that the full cost of the new vaccineproducts may exceed the UNICEF price level. The Government has expressed interest inrequesting assistance from U'NICEF experts to assist in cost accounting and analysis. Moreover,UNICEF may also help advocate the policy debate for additional funding needed to assure thateffective immunization levels are maintained in China.

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D. IPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT

20. Annex tables to this report provide quantitative information regarding the implementationrecord of the entire project, including supervision support, disbursement, and compliance withproject covenants. Overall, all project components, with the exception of the vaccine productioncomponent, were successfully impiemented within the original timeframne, and in accordance withproject design and objectives. When the vaccine production component suffered from significantimpikmentation problems. and attainment of development objectives was a concern, the projectreceived "Unsatisfactory" ratings to highlight these issues. Regarding the rural health and non-vaccine production components, the Foreign Loan Office (FLO) within MOH drafted a projectcompletion report and submitted it to the World Bank in 1992 (see Annex A). It reported thatcivil construction had been completed as planned, personnel recruitment and training surpassedthe project targets, and equipment procurement had been 80% completed by June 30, 1992, theoriginal project completion date.

Implementation of the Rural Health and Other Non-Vaccine Production Components

21. The issues encountered during the implementation of these components were outlined inthe Borrower's project completion report and are summarized below:

(a) lack of funding for recurrent cost for: (i) EPSs at the provincial and county level; (ii)provincial (health equipment) maintenance centers and county MCH centers,contributing to low personnel productivity in the immunization program, lower qualityservices than the public's willingness to pay, via direct user charges, and lower thanexpected utilization; and

(b) shortage of training materials for local level staff based on the new PHC health policiesand changing pattern of health problems toward chronic diseases, and

(c) Insufficient implementation flexibility from one province and county to another,ignoring local differences in facility and service need or demand, and leading torelatively poor resource allocation from one assisted locality to another.

22. These factors contributed to lower health status and service use improvements than wasoriginally expected from the project's investments. The lack of project implementation flexibility,however, increased the desire of Chinese officials operating at the provincial level and below toachieve greater decision making flexibility and thereby devolve greater autonomy to sub-nationallevels of government. This experience was an important lesson learned by local officials andhelped facilitate the implementation of the Health III Project, which was based on local decisionmaking.

23. From available documentation, it appears that the drug control and operational researchcomponents were implemented without major problems. The construction and equipmentrequired to implement these components were procured without major difficulty and relatedprogram development was implemented in a timely manner.

7

Implementation of the Vaccine Production Component

24. While other project components were implemented without major difficulty, except asnoted above, the vaccine production component has been fraught with implementation difficultiesfrom the beginning. Because of its significant technical requirements and lengthy delays in projectimplementation, by 1992/3 both the World Bank and MOH effectively split off this componentfrom the rest of the project for purposes of supervision and management. This reduced theproject design linkages conceptualized at the start of project development.

25. Procurement and Contracting. Both the Bank and MOH agreed at appraisal to havethe component implemented as a turnkey operation by a reputable international vaccine producer.However, the preparation of a short list of qualified international vaccine producers led to adispute regarding the criteria used to prequalify firms. Further, the task of preparing verytechnically complex bidding documents created unforeseen delays within the Chinese importagency responsible for expediting the bidding process. Negotiations with the lowest evaluatedbidder on the first round became protracted and eventually collapsed in late 1988 over price, anumber of technical issues, and conflicts regarding the role of each party in a turnkey contractualarrangement.

26. A revised approach to contracting this component was formulated by selecting anengineering firm which would be associated with an experienced vaccine producer. The Bankapproved this approach in January 1989. After a year, a contract was signed in 1990 with aDutch consortium, comprised of an engineering firm (EF) as the leading partner which designedand implemented the construction of the vaccine production facilities, a vaccine productioninstitute with the technical knowledge required to develop the vaccine production processes, anda supplier for bioreactor equipment. The vaccines were supposed to be developed in a "jointdevelopment program" with Chinese vaccine experts.

27. Financing. As the contracting difficulties were ending in 1990, it was learned there wereinsufficient funds from the World Bank project to fully finance this component as envisionedduring appraisal. This problem was mitigated in part by a grant from the Rotary Foundation ofRotary Intemational which provided US$15.0 million for the OPV plant facility in Kunming. Butas the contract between the Dutch consortium was beginning full implementation in 1992, afurther financing gap of about US$50 million emerged after non-used World Bank project fundshad been reallocated to this component from other project components. This gap was due toseveral factors: (i) devaluation of China's currency (RMB); (ii) local inflation; (iii) higher thanexpected facility equipment prices; and (iv) low estimates of the component cost prior to projectapproval.

28. Between the date of Loan/Credit effectiveness in 1987 and contract signing in 1990, theRMB devalued by 40%, and by full project implementation in 1992, the RMB had devalued by anadditional 10% from 1990, or a total devaluation of nearly 55% from 1987 to 1992. Thedevaluation, in conjunction with international price increases of the vaccine production equipmentrequired by the plants, delayed equipment procurement. Local inflation followed the currencydevaluation by about a year and also increased the local cost of constructing plant buildings.Between 1987 and 1990, domestic prices as measured by the GDP deflator, increased by 29% and

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by 1992 the increase from 1987 was nearly 49%. These price increases for international andlocally procured items could account for a large share of the cost increase of the component.

29. An additional factor possibly at work in this large procurement was due to the typicalbidding strategy employed by international firms seeking to obtain a major government contract.As the turnkey bids by a short list of suppliers were used to estimate the cost of this projectcomponent, which were based on the usual practice of "low ball" bidding, this likely led to lowerthan true cost estimates of the project component. Such bidding tactics are often employed byfirms when asked to bid on high technology content projects where the production processes havenot yet been developed or where the implementation of the process is not well understood in thenew site. The delays in implementation caused by the financing problem created by a combinationof the above mentioned factors further delayed project implementation, and caused increasinglystrained relationships between the Dutch consortium. MOH, and the three Chinese vaccineinstitutes.

30. The financing problem was eventually addressed by obtaining a supplementalappropriation from the Chinese government of about US$44 million in equal parts of localcurrency and foreign exchange and about US$5 million from the Dutch bilateral assistanceprogram. Also, the strained relationships were resolved in September 1994 in part by theformulation of a Mid-Term Project Modification Plan and a detailed Action Plan. Thesedocuments included the financial commitments of both the Chinese and Dutch governments, andmodifications to the engineering contract which altered original onerous guarantees and loweredknow-how fees, without reducing vaccine quality below European GWM standards. Finally, theVaccine Project Offices (VPOs) at the MOH and institute levels were also strengthened and therole of the EF redefined to shift greater implementation authority to the institutes. The Bankapproved these documents in September 1994.

31. Production Process Development. By early 1995, additional problems regardingpayment disputes, engineering drawing delays, supervision inadequacies, and lack of progress inproduction process development again had strained relationships between the implementingparties. The Bank recommended a neutral assessment by an independent expert of the status ofproduction process development to resolve this aspect of the strained relationship. The results ofthis assessment were used by the Chinese Government to release the EF from its responsibility todevelop a new DPT production process and to use an improved Chinese process for DPT, and anavailable roller-bottle rather than an unproven microcarrier technology for measles vaccine.These production decisions were to be implemented according to the standards promulgated byWHO and European GMP guidelines, thus continuing to ensure the possibility that output fromthese facilities could be internationally marketed after Chinese immunization requirements hadbeen met. The Government and the EF settled all of their claims regarding this decision in anamicable manner.

32. In spite of the aforementioned implementation difficulties, it is heartening to learn that thefacilities have virtually completed construction and equipment installation. This phase was fullycompleted at all three sites by the end of 1998. An additional year planned to fully test how thevaccine production processes will work at fill capacity. Bank and Government officials arecautiously optimistic that full production will commence in late 1999 or early 2000.

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E. PROJECT SUSTAINABILITY

33. Sustainability must be addressed from at least two dimensions: financial sustainability ofthe investments supported by the project; and institutional sustainability of the function or servicecreated by the investment. Further, for this project, an assessment of sustainability must bedisaggregated according to the various project components.

34. Vaccine Production. First, during full operation, the vaccine production institutes willface serious recurrent financial issues. As they have received considerable state investmentfunding, and since the immunization program for which they were originally built continues to bea policy pnrofity, the institutes through the medium-term will be able to garner financial resourcesfrom the state as may be required. At present, they are not viewed as a state enterprise soon to beprivatized. However, the cost of continuing to maintain GNP production standards will bedaunting, especially as the production processes for DPT, measles, and OPV have not yet beenfully tested in any plant.

35. The three plants were initially incorporated into the project to help China realize itsobjective of fully immunizing its children against the basic package of childhood communicablediseases. During the project's design phase, an economic assessment'/ was conducted of thechoice between locally producing or importing vaccines required to reach its immunization target.That report found that domestic production of vaccines for the Expanded Program onImmunization (EPI) would likely be about half as costly per dose as imported vaccine. Theseestimates were based on assumptions about the level of output envisioned by the new plants, thecapital cost of developing the new production capacity, and the recurrent cost of producing thevaccines, once the new production facilities were in place. Thus, based on estimates of theinvestment cost of the vaccine plants in 1985, the decision was made to include the three plants inHealth 11

36. However, the large cost overruns of the three plants increased the original investment costfrom US$40.6 million to over US$90 million in 1985 dollars. This estimate does not include a fillaccounting of the costs yet to be incurred, as the production processes have not yet been verified,production tested, or reviewed by WHO. This situation raises serious concerns about the futurecost of vaccines. A revised assessment of this past decision must also take into considerationseveral other aspects, including:

(a) the present price of vaccines from UNICEF or other suppliers;

1 F. Orivel, "Economic Analysis of Vaccine Production: Choice Between Domestic Production and Import of Vaccines inChina", World Bank Consultant Report or the Preparation of the Rural Health and Preventive Medicine Praject,(Washington D.C.: World Bank, August 1985).

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(b) the envisioned production costs of the vaccines in the three new plants when theybecome operational;

(c) whether the Chinese Government will close the existing plants that produce vaccinesfor the EPI;

(d) the likely change of domestic and international demand for EPI vaccines over the nexttwo decades;

(e) the examination of whether the global production capacity existing in 1985 would havebeen able to fully respond to the import requirements of China at that time without anincrease in global prices; and

(f) an assessment of the prospect that China will be able to attain and maintain GMPproduction standards, and thereby obtain and sustain WHO certification of its qualitystandards, so that the plants might compete on the international market for vaccineproduction.

37. Finally, it may be instructive to take a broader perspective on the economic feasibility ofthis project component. Without quantitative information to conduct a formal assessment, assuggested above, it may still be instructive to view this investment in terms of the transfer oftechnology from international producers of pharmaceutical products, particularly in terms of thepotential of producing new biotechnological products in the future. When this project componentwas under initial consideration for inclusion in 1985, a number of international pharmaceuticalfirms were approached for their interest in inclusion on the turnkey short list. One firm expressedinterest in the project, not because they wanted to develop vaccine plants, but because they saw itas the vehicle for becoming involved in producing high-tech biological products in China fordomestic and international markets. Several others were intrigued by the same possibility. Part ofthe difficult discussions between the finallv chosen contractor consortium and Chinese officialswas over the issue of technology choice and ultimate transfer to China of the productionprocesses. The contractor consortium saw considerable economic possibilities in the growingbiotechnology product area from successfully refining microcarrier technology for the large scaleproduction of measles vaccine. This project would have provided the vehicle for supporting thisresearch work without bearing the fill cost of it. The Chinese government and the Dutchconsortium have agreed to share the results of the microcarrier development undertaken by thisproject, even though they may not be using it in the two plants where measles is intended to beproduced.

38. The Kunming facility is the most financially at risk vaccine production institute, as it willenter full production of liquid polio vaccine (OPV) at a time when the country will haveeffectively eradicated the disease. Thus, it will serve the domestic requirements for vaccine duringthe eradication maintenance phase for about five years until 2005. Therefore, plans should beinitiated soon as to how to modify the production process with attendant additional costs toproduce other vaccines or other pharmaceutical products for the domestic market and possibleexport.

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39. Vaccine Production Institutional Sustainability. One of the sustainability issues facingChinese officials is whether these vaccine institutes, once completed, will be able to retain thetrained staff necessary to maintain GMP production standards in a rapidly changing economy.This is especially true where pnvatization is one of the dominant economic poiicy objectives forthe future evolution of the country. MOH is aware of the potential problems it might face in thisregard, and has already had to replace some officials who received training via the project and lefttheir institute for more lucrative positions elsewhere. MOH is working to establish institutionalapproaches consistent with the policy of alternative ownership, which may reduce the likelihoodthat trained staff would leave in the future.

40. Sustainability of the Rural Health Component. Expanding preventive health careservice delivery, along with improving MCH services and delivering basic health services in ruralareas of the country, comprised the second largest component of financial support from the Bankthrough the project2". This component has demonstrated the benefits of improved services andbetter management, however, the costs of these improvements, including recurrent expenditures,have been significantly higher than in the non-project areas. The sustainability and replicability ofthese programs would clearly depend upon increased budgetary allocations by the government atall levels. While the project did suffer from implementation delays and insufficient counterpartfunding and recurrent cost support, additional costs for these areas are expected to be well withinthe reach of government budgets, especially considering the currently low level of budgetaryallocations for health services in China compared to most other countries. This has been wellrecognized in recent years, and demonstrated by 1997 State Council directives to increasebudgetary allocations for public and preventive health services. Sustainability of this programshould also be viewed from the utilization of services. It was clear in the project areas that thepoorer families had significantly lower utilization of health facilities. This will continue to be aconcern until the health financing system is reformed to improve access for the poorer families

41. In terms of institutional sustainability of the rural health care system, the training sub-component exceeded its expected targets. But no assessment was conducted of the quality of thetraining or its impact on the quality of service delivery or on indicators of managementperformance.

42. Drug Quality Control Component. Institutes in Beijing, Shanghai and Tianjin, andmedical universities in Beijing, West China, and Zhejiang were provided assistance under theproject. The Government's Project Completion Report reported that a number of persons hadbeen trained for field inspectors, administrators, and technical positions within the field of drugquality control. In addition, about 13 persons had obtained overseas training for high levelresearch, technical and supervisory tasks. In addition, a number of research and methodologicalpapers were written and published in Chinese technical journals by high level staff of each institutereceiving support, which contributed to the dissemination of the new drug quality control methodsthroughout the country. Finally, this project component has contributed to improving the periodic

2 This component was initially envisioned as the largest component from a cost perspective, over USS75 million, withChinese goveaninet fmancing amotmting to over USS53 million and the World Bank contributing over USS22 million.

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revisions of the Chinese Pharmacopoeia, the nationally used reference document forpharmaceutical products.

43. According to the director of one institute, there was an occasional problem of recurrentcost support from the Government, but the institute adjusted to that reality by charging for drugquality tests conducted by the institute. By virtue of the testing equipment acquired under theproject (US$0.6 million), the institute was in a position to charge fees as they had up-to-dateequipment and trained staff with the know-how to conduct these tests in a professional andquality-minded manner.

44. Support to the Chinese Academy of Preventive Medicine. Finally, the projectsupported institutional development and operational research of the Chinese Academy ofPreventive Medicine in an amount of about US$8 million, with the World Bank's contributionunder Health 1I being about US$1.9 million. This support continued the assistance providedunder Health I and extended the capacity of the institute to conduct epidemiological research,disseminate its findings, and work with MOH and other Government officials to formulate healthrelated policy and nationally disseminate the results.

45. Through the institutional capacity building supported by the project, CAPM evolved froma traditional public health research institute, financed solely by the Government through MOH,into an organization whose mission, as defined by the State Council, has expanded from basicpublic health research. Its activities now include: (i) training public health professionals; (ii)providing public health surveillance technical assistance to sub-national entities of government;(iii) conducting infectious and NCD disease surveillance, (iv) providing technical assistance forthe promulgation of health laws and regulations; and (v) formulating practical approaches for thedissemination of public health information. Its govemmental financial support has grown and ithas become more active in attracting finds from domestic and international sources.

F. PERFORMANCE

46. The project was in fact implemented as two projects after the technical and price lessonswere absorbed from the initial unsuccessful effort to engage an international firm to implement theturnkey approach embodied in the project design. The Bank and MOH were naive at the outsetabout how technically complicated it would be to develop large-scale vaccine production facilitieswith untested methods of production and GMP-quality standard requirements underlying the task.

47. These problems contrasted with the rural health care delivery component, which wasdesigned according to national policy guidelines, and benefited from the lessons learned andapproach taken under Health I. At that time, it was thought that locating health facilities closer towhere people lived would lead to a greater utilization of both preventive and curative services andsubsequently improve indicators of health status. The project did not stress the importance ofproject monitoring and evaluation, but in the Borrower's Project Completion Report there weresummarized monitoring and evaluation indicators from the assisted counties suggesting a mixed

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picture of project outcome in terms of improved health status and perfornmance. However, therewas little thought given to other factors which could have contributed to the changes noted.

BANK PERFORMANCE

Rural Health and Other Non-Vaccine Production Components

48. The Bank's overall performance during preparation and supervision of the rural health andother non-vaccine production components was satisfactory, although it is acknowledged that theBank might have been more proactive about recurrent cost issues. While various references weremade in supervision mission Aide Memoires regarding the lack of recurrent cost financing for thepreventive rural health sub-components of epidemic disease prevention and MCH, there appearsto have been little dialogue about possible solutions or how the project components couldmitigate its adverse impact. A comprehensive review at mid-term of implementation could havebeen a desirable vehicle to address these issues. Such mid-term reviews have been included in allsubsequent Bank financed health projects in China, beginning with Health 111. In addition,economic oversight or participation on supervision missions should have been strengthened, andthe Bank should have addressed the need to strengthen the national drug regulatory authority aspart of the project.

Vaccine Production Component

49. The Bank's performance during preparation and implementation of the vaccine productioncomponent was flawed. The Bank recognized during the project preparation stage that it had noexperience in the preparation and supervision of vaccine production projects in China orelsewhere. It had hoped that its limited experience in industrial projects in China would be ofassistance. However, the Bank was not prepared to recognize the extremely complex, costly andhighly specialized nature of a vaccine production project.

50. During the post-appraisal mission for Health I in February 1984, discussions were heldbetween the Bank and MOH about a possible second health project. In the beginning theGovernment wished assistance for the strengthening of all seven regional institutes of biologicalproduction, but the Bank felt that resources were too limited for such a comprehensive approach.In May 1985, the present concept emerged, including building three new facilities for DPT,measles, and OPV. A WHO sponsored consultant team prepared the investment program,tentatively estimating it at US$26 million. Subsequent preparation missions increased the estimateto US$46 million, which was still far too low, given that final component costs amounted toUS$141 million. To overcome the lack of experience with this type of project, the Bankanticipated assistance in form of a turnkey operation by a major international producer withappropriate qualifications. This became necessary because only very few top-level consultantswork in this field and companies for proprietary reasons do not provide information unless there isa significant contractual relationship. It was hoped that such a contractor could preparepreliminary cost estimates before finalizing the SAR. However, the SAR was issued before suchan arrangement was consummated, thus depriving the project of a realistic cost estimate. TheBank therefore did not set aside sufficient financing in the Loan and Credit to support the vaccineproduction component. However, this was not realized until much later. When the financial gap

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became apparent, the Bank secured a Grant in the amount of US$15 million from RotaryIntemational and about US$5 million from the Dutch bilateral assistance program.

51. The dialogue between the Bank and the Borrower during the preparation andimplementation phases of the vaccine production component was constructive, informative andprofessional. The Bank's supervision effort of 22 missions, two of which were carried out afterLoan/Credit closing, was comparatively high. But in light of the experienced problems, this mayhave been insufficient, particularly in identifying problems in a timely manner. However, it isquestionable whether additional Bank supervisory resources would have overcome significanttechnical and contractual obstacles. The Bank's repeated proposal for the Govemment to retainunder project financing a long-term consultant with international expertise in vaccine plantconstruction and vaccine production to assist the VPO and the three vaccine institutes, wasdeclined. The Bank played an important part in reconciling as honest broker differences betweenthe project owner and the EF, and initiated the mid-term project restructuring as well as a numberof studies, including the vaccine cost study as part of the Mid-Term Modification Plan, andseveral assessment reviews by experts. A Bank mission also traveled to Geneva to meet officialswho could provide funding assistance and expert advice. On several occasions, the Governmentspecifically requested Bank missions to be fielded to provide assistance.

52. The Bank and the Borrower benefited substantially from the generous assistance byUNICEF which made a vaccine production expert available for a period of about ten years forsome of the preparation missions and for almost all of the supervision missions. In addition, theproject also benefited from the advice given by a senior representative of Rotary Internationalduring several supervision missions. During the preparation and supervision period of 14 years,only three Bank task managers were assigned to the component, providing a large degree of staffcontinuity. They had various degrees of medical, epidemiological, and financial expertise.

BORROWER PERFORMANCE

53. Overall, the Borrower's performance during project development and implementation wassatisfactory. The Borrower learned from implementation of Health I how to address World Bankprocurement regulations so that this often vexing problem did not arise, with the exception of thevaccine production facilities. However, as this procurement was an unusually large and complexmatter, the two sides worked very hard together to deal with the one-of-a-kind problemspresented by this task.

Rural Health and Other Non-Vaccine Production Components

54. Project investments in health care facilities of poor rural areas were concentrated at thecounty rather than at the township or village level. Thus, access to facility based care wasimproving at the county level as facility per-capita ratios fell at the county level but rose at thetownship and village. Similarly, greater facility construction occurred in hospitals (andcorresponding equipment procurement) rather than in health centers or related facilities at thevillage.

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55. The training sub-component was successful in training more personnel than anticipated atproject launch. It focused on technical skill acquisition, rather than on improving the quality ofservice delivery. However, neither focus was explicitly incorporated into a monitoringframework, thus, little has been learned from the legacy of the training investment. What isreported however, is that, over the life of the project, there was a systematic reduction in thenumbers of trained paramedics available in the assisted counties, reflecting low pay and lack ofstatus.

56. The monitoring of disease pattern change within the project areas was inconclusive, in partdue to a lack of good information regarding health status prior to the project and partly due todifficulties in determining project attribution. This was due to the monitoring strategy employedwhere information was collected at points of service use under the jurisdiction of the localauthorities, rather than from households in the various project localities. Greater attention on thedesign and gathering of information is required in future projects.

57. In spite of the lack of project monitoring of health status change in project areas, theoperational research component provided funds to CAPM for the purpose of: (a) strengtheningcapacity to conduct disease surveillance, and (b) testing disease prevention strategies for emergingpublic health problems, especially for chronic diseases. No information was reported in the 1992Borrower's Project Completion Report about these activities or their outcome. However, aseparate Project Component Completion Report was issued by CAPM3 /, which demonstratedconsiderable institutional capacity strengthening and role expansion from the support of the twoWorld Bank projects amounting to about US$8 million, nearly US$6 million from Health I andabout US$2 million from Health II over the period 1984 to 1992. The funds from the Health IIProject supported personnel training, technical assistance, program activity support, andequipment to address the five tasks which it had been assigned by the MOH via the State Council:(a) conduct research on important public health issues; (b) train provincial level professionals inpublic health methods, (c) provide technical assistance to provinces and below levels ofgovernment regarding outbreaks of disease; (d) provide the scientific basis for health laws; and (e)develop and promote the dissemination of public health information to the Chinese people.Through these investments, CAPM now has a strong research record with highly qualifiedpersonnel and has demonstrated its importance to the Chinese Government in addressing its fivetasks. Consequently, they are now better able to respond to the needs of the policy makers totranslate epidemiological and other public health research findings into more relevant public healthpolicy options.

58. Finally, the rural health insurance experiment was designed and implemented in a timelyand professional manner, with a good degree of technological transfer between the externalconsultant group contracted to perform the experiment and Chinese counterparts. This transfer ofhealth economic research skills was also strengthened at this time by the development of anetwork of health economics researchers which received financial and technical assistance from

3. Chinese Academy of Preventive Medicine, Final Report on the Implernentation of Health I and 11 Proiects, (Beijing: ChineswAcademy of Preventive Medicine, April 1992).

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the Economic Development Institute of the World Bank. The findings from this research werepublished in the Rural Health Insurance Handbook and have been available to the health policyresearchers and the country's emerging cadre of health economists, and it has positivelyinfluenced the thinking of many involved with formulating health financing policy in China.

Vaccine Production Component

59. A leading group, headed by the Minister of Health, was established to oversee theimplementation of the project. While the three vaccine institutes had a large degree of autonomyin project implementation, overall project coordination was carried out in a satisfactory manner bythe VPO established specifically for this purpose. Personnel assigned to the VPO as well as to theinstitute level project offices were invariably highly motivated. None of them, however, had beenpreviously involved in a project of similar dimensions and complexity. This was initially not seenas a deficiency as the vaccine scientists and production experts were supposed to work under theJoint Development Program to develop the technological processes in collaboration with theDutch vaccine institute, and the engineering firm was supposed to be in charge of the design andconstruction of the buildings and the installation of systems and equipment. However, soon afterconstruction started it was realized that project staff on the side of the project owner needed to bestrengthened, but particularly at the center it was difficult to get additional positions, especiallyfrom the engineering field, for project supervision. Compared to the number of specialists andskills which would be normally assigned if a project of this size would be implemented in theprivate sector, the VPO and the project offices at the three institutes had to handle their tasks withbut a fraction of such resources. That they were, nevertheless, able to ultimately fulfill theirresponsibilities, should be stated with admiration.

G. ASSESSMENT OF OUTCOME

60. The two distinct parts of the project had different outcomes. Overall, the outcome of therural and other non-vaccine production components was satisfactory but the vaccine productioncomponent remained deficient. The rural health development component succeeded in achievingits basic objectives of upgrading the quality of preventive, MCH and basic health services in ruralareas and expanding access. However, recurrent cost deficiencies at the local level prevented therealization of its fuill potential. Through training and research efforts, the drug quality componentimproved the quality and safety of domestic and imported pharmaceuticals. In addition, researchand methodological papers were wfitten and published, which contributed to nationwidedissemination of the new drug quality control methods, and improvements were made to periodicrevisions of the Chinese Pharmacopoeia, the nationally used reference document forpharmaceutical products. The operational research component strengthened CAPM's capacity toconduct epidemiological research and improved its cooperation with other government agenciesto formulate health related policies and augment its public information function. A key outcomeof this component was to successfully evaluate new rural health insurance schemes, whichprovided the govemment with experience and knowledge on the design of health financingmechanisms, and helped contribute toward filling the vacuum left by the demise of the rural CMS.

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61. The vaccine production component had mixed results characterized by substantialimplementation delays and cost overruns. Nevertheless, it would broadly achieve its goal whenfull vaccine production commences by the end 1999 or early 2000. Upon completion, China willhave three of the largest, and among the most modem, vaccine production facilities in the world,which will enable full replacement of its current deficient production capacity in OPV, DPT andmeasles, and provide its children with safe and efficacious vaccines. It is expected that thesevaccines will meet WHO standards and that the plant operations will meet European GMPstandards. This would be important for exports since these plants are likely to have excesscapacity.

62. Another important outcome of the project is the substantial transfer of biotechnology.Despite extreme difficulties and contract disputes with internationaL contractors, design engineers,vaccine experts, and equipment suppliers, the hundreds of Chinese officials people involved in thepreparation and the execution of the project have gained invaluable experience in the state-of-the-art vaccine plant design, construction and operation. In addition, through the Joint DevelopmentProgram, Chinese experts have also gained extensive expenrence to work with overseascounterpart scientist colleagues. These highly trained and motivated scientists and managersworking for the three vaccine institutes are crucial for the operation of the new facilities. Theremaining important challenge for China would be how far the production costs will becompetitive with other local production and international competitors.

H. FUTURE OPERATION

63. Project implementation succeeded in improving rural heaith infrastructure, equippinghealth facilities and training health workers, which improved the quality and delivery of ruralhealth services. The quality of their fiture operation, including utilization and expansion, wouldgreatlv depend on how fast local leaders change their priorities toward increased support forpreventive and basic health care by rediscovering their virtues. The main issues are, first, whetherthe government will recognize the need to nurture these gains by allocating adequate budgets forcontinued public health and basic care and, second, how soon the arrangements would beestablished for risk-sharing and for assisting the poorest families to increase their access to theseservices. As noted in the Bank's recent health sector study report, CHINA: Issues and Optionsin Health Financing, 1996, the government's attention to these critical health areas has beeninadequate, resource allocations have deteriorated, and health gains in some basic areas havestagnated and may even have reversed. On the other hand, recent government pronouncementson this subject have provided reassurances that the national mood has been reinvigorated in favorof investments in these areas.

64. Building on the experiences of the Health 1I Project, improvement of preventive and basichealth care programs has been included in a number of subsequent Bank financed health projectsin China. The Integrated Regional Health Development Project (Health III; Cr. 2009-CHA), theComprehensive Maternal and Child Health Care Project (Health VI; Cr. 2655-CHA), the DiseasePrevention Project (Health VII; Cr. 2794-CHA), and the Basic Health Services Project (HealthVIII; Cr. 3075-CHA) have directly benefited from the design and implementation lessons of the

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Health 1I Project and have progressively made firther improvements. Combined withimprovement of health services, the Health 1I Project also provided MOH and the five projectprovinces with valuable exposure to modem management practices which has greatly benefitedsubsequent programs. CAPM has evolved into a large and well-respected institution, comparablein many respects to the best international institutions involved in health and medical research, andhas become an important partner in many subsequent Bank supported projects.

65. Efforts to establish experimental health financing mechanisms and alternative deliverymodalities, such as Health Maintenance Organizations and the building of necessary regulatorystructures to ensure performance in line with service quality and equity guidelines, represent areaswhere Bank assistance may be helpful for improving the health status and service use of both ruraland urban populations in China.

66. Given the recent policy guidance by the State Council to privatize much of the stateenterprise structure, it would be well to assess how the Bank, possibly through collaboration withthe International Finance Corporation, could assist China in developing a privatized vaccineproduction entity, with potential for producing other essential pharmaceutical items on acommercial basis. The country may be ripe for exploring alternative ownership arrangements formany activities within the domain of the health sector. Support for privatizing the vaccine plantsmay be a logical first step, along many, to begin implementing the policy guidance of the StateCouncil within the health sector. However, MOH officials are not fully convinced about thisapproach. There are nevertheless already arrangements underway with internationalpharmaceutical companies which could accelerate technological transfer and assist in openingmarkets for Chinese vaccines overseas. In addition, an overall viability study for vaccineproduction in China would be helpful in determining the future use of the new vaccine facilities inlight of their cost structure and the anticipated changes in global vaccine markets.

1. KEY LESSONS LEARNED

67. Through the experience gained from implementing this project, the key lessons learned canbe grouped into two categories: Rural Health and Other Non-Vaccine Production, and VaccineProduction.

Rural Health and Other Non-Vaccine Production:

(a) Pay attention to recurrent cost in the design and implementation of "low-cost" ruralhealth care projects, especially where there are externalities and public good benefitsaccruing therefrom.

(b) Design project monitoring and evaluation frameworks and how they will beimplemented as an integral aspect of the project fornulation phase. The use of thelogical framework as an important design tool would provide immeasurable help infocusing attention on relevant indicators for regular and periodic managerialassessment of performance.

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(c) Develop a research agenda to be financed via the project, which has some possibilityof operational implementation testing and verification during the project's life. Thefindings from the rural health insurance experiment conducted during this project havebeen widely distributed and are still being utilized - a decade later - in the policyformulation process to address the problem of health financing.

(d) The funds from this project which supported institutional development in the areas ofdrug quality control and preventive medicine have resulted in significant gains to thehealth development capacity of the countrv. Where there are similar opportunities theBank should assist to the extent possible.

Vaccine Production:

(a) Vaccine production is a highly sophisticated technical undertaking, for which the Bankhas insufficient expertise in design or supervision. It requires technical expertisenormally only found in the industry, which, for proprietary reasons is not eager toshare with others. Further, process development and up-scaling to large productionvolumes is a difficult undertaking and can pose daunting challenges to the largest andbest firms in the industry.

(b) To take on the challenge of building three large-scale production facilities in oneproject, without doing the project in phases with the first phase being a pilotundertaking with one facility, has added additional complexity and stress beyond thecapacity of even the largest pharmaceutical companies. It would therefore have beendesirable to start with one plant which is the least complex (in this case the OPV plant)and include a second plant in a follow-up project provided there is reasonable progresson the first.

(c) Ensure turnkey contractors have successfully developed vaccine projects (or othertechnicaily complex products) of a similar size as the one contemplated in the projectand the contractor has firsthand knowledge of how to transfer that technology to theBorrower. In addition, design and construction of vaccine plants should only startwhen the development process has been successfully established, tested andsufficiently scaled up to the anticipated production output.

(d) If the Bank has decided to become involved in similar projects, it should insist, aftercareful review of potential local project staff, that the Borrower retain the necessaryexpertise from any locality, domestic or internationally, to manage the implementationof the envisioned undertaking and require the involvement of WHO expertsthroughout the design and implementation phases.

(e) Since a vaccine production project is not a community health project, but to a largedegree an industrial project, its feasibility should be assessed according to normalfinancial and economic methods of project appraisal prior to making a financingcommitment. Such assessments will encourage realistic discussions about productpricing, potential markets and possible market changes as well as private sector

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participation and other relevant economic development policy implications. Variousaltemative scenarios could be developed to test the sensitivity of various assumptionsregarding the project's economic feasibility.

(f) Improvements in vaccine production can only be successful if the respective controlauthorities are sufficiently strengthened in terms of authority, policy development,structure, management, and enforcement capabilities. In addition, physical investmentshould only commence after a national strategic plan ensuring viable production hasbeen developed and periodically reassessed. including prioritization of improvementsand investments.

2 1

PART II: STATISTICAL TABLES

TABLE 1: SUMMARY OF ASSESSMENTS

A. Achievement of Ohjectives Suhstantial Partial Negligible Not Applicable

Macroeconomic PolicicsSector Policies /

Financial ObjectivesInstitutional Development /

Physical Objectives /Povertv ReductionGender IssuesOther Social ObjectivesEnvironmental ObjectivesPublic Sector Management V

Privatc Sector Dec%clopmcnt I

Other (specidN)

B. Project Sustainahility Likely Unlikely Uncertain

C. Bank Perfornance Highly Satisfactory Satisfacton Deficient

Identification V

Preparation AssistanceAppraisal 1/ /Supermsion I/ V

Note: 1/ For the rural healthi and other non-vaccine production components. the Bank's perfornance wassatisfactorv during appraisal and supervision. For the vaccine production component. however, theBank's performance was flawed. This was demonstrated by failure to predict the highly complextechnical requirements and large cost overruns of vaccine production. and to reduec their impacts ina more timelv manner.

D. Borrower Perfornance Highly Satisfactory Satisfactorv Defacient

PreparationImplementation V

Covenant Compliance /

E Assesment of Outcome Highly Satisfactor Unsatisfactory HighlySatisfacton UnsatisfactorY

Vaccine ComponentOther Components V

22

TABLE 2: RELATED BANK LOANS/CREDITS

Loan/Credit Title Purpose Year of StahsApproval

Rural Health and Medical Educaion Project Extend coverage of PHC and 1984 Completed(Cr. 1472-CHA) improve quality of medical

education.

Integrated Regional Health Dcvelopment Strengthen regional capacitv for 1989 CompletedProject planuiing and management.

(Cr. 2009-CHA) experiment with innovative wavs toimprove health education. diseaseprevention and suvecillance. MCHcmergcncv scrvices. hospitalsevices, rehabilitative services.medical education and training, andequipment management. StrengthenMOH capacity to oversee andmanage innovation.

Rural Health Workers Development Project Strengthen health worker planning. 1993 Ongoing(Cr. 2539-CHA) retrain health workers and improve

training, improve management andworking conditions of workers, andimprove MOH capacitv to managechange in personnel manttrs.

Infectious and Endemic Disease Control Support Tuberculosis and 1991 OngoingProject Schistosomiasis control. and

(Cr. 2317-CHA) improve institutional capacitv forinfectious discasc control of all types.

Comprehensive Maternal and Child Healtih Reduce maternal and child monalitv 1995 OngoingProject and morbidity through improving

(Cr. 2655-CHA) basic health services delivey,. healthwvorker training. managementimprovemenL and improving MOHcapacity to nmnage these changes.

Iodine Deficiency Disorders Control Project Increase use of iodized salt to reduce 1995 Ongoing(Ln. 3914/Cr. 2756-CHA) iodine deficiencv disorders.

strengthen the legal framework andimprove management.

Diseasc Prevention Project Reduce vaccine preventable disease, 19% Ongoing(Cr. 2794-CHA) and design and implement health

promotion programs to control therising prevalence of NCDs. sexuallytransmitted diseases (STDs), humanimmunodeficiency virus (HIV), andinjury. Strengthen MOH capacity tomanage these initiatives.

23

LoAnCredit Title Purpose Year of StauApprval

Basic Health Scrvices Project Assist with achieving sustainable 1998 Ongoing(Cr. 3075-CHA) health improvement in poor mrual

areas through improved allocationand management of healthrcsources, upgrading healthfacilities, improved qualitv andceffectiveness of health services. andgrcater financial access to essentialhealth care for the poor.

Health Nine Project Improve maternal health and child Underdevelopment. and improve preparationprevention and control ofHlV/AIDS/STDs and other bloodborn infections.

24

TABLE 3: PROJECT TIMETABLE

Steps in Project Cycle Date Planned Date Actual

Identification October 1984 October 1984Appraisal May 1985 Julv 13. 1985Negotiauions Fcbnzaly 1986 April 21. 1986Board Presentation March 1986 June 19. 1986Signing N/A Januarv 15. 1987Effectiveness N/A Mav 26. 1987Project Completion June 30. 1991 Junc 30. 1996Loan/Credit Closing June 30. 1992 June 30. 1996

N/A: Not applicabic.

TABLE 4: LOAN/CREDIT DISBURSEMENT: CUMULATIVE ESTIMATE AND ACTUAL(US$ MILLION)

FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97

Appraisal Estimate 8.9 24.1 45 6 64.0 76.0 80.0 -.- .. - -.- -_Actual 9.0 21.4 23.3 39.1 50.4 56.0 62.0 78.2 83.5 90.3 93.85Actualas%of 101.1 88.8 51.1 61.1 66.3 70.0 -.- -.- -- --

EstmateDate of Final October 10. 1996Disbursement

Note: Tnc difference bctwcen appraisal cstiiiatc and actual Loan/Crcdit disburscmcnt is duc to fluctuation of thc SDRexchange ratc.

TABLE 5: STUDIES INCLUDED IN PROJECT

No. Study Conducted By

1. Rural Cooperative Health Insurance Schcmes Ministry of Health2. Vaccine Production Institutes Cost Stud% Shanghai Medical University3. GMP Training Needs GMP Expert. United

Kingdom. retained by theMinistry of Health

25

TABLE 6A: PROJECT COSTS

(US$ MILLION)

Project Component Appraisal Eslimate Actual/Latest Estimate

Local ForeiLrn Total Local Foreien Total I/Slrengthening Rural Healdi Scrniccs 53.3 22.3 75.6 52.6 31.6 84.2Vaccine Component 11.2 29.4 40.6 44.7 %.5 141.2Drug Qualitv Control 7.6 4.2 11.8 9.2 4.6 13.8Operational Research 6.3 2.4 8.7 6.7 2.2 8.9

Physical Contingencies 8.5 10.0 18.5Price Contingencies 11.8 10.4 22.2

Total Project Cost 987 787 177.4 113.2 134.9 248.1

Note: I/ Includes USS15.0 million Rotary International Grant. and USS4.5 million Dutch DevelopmentAssistancc.

TABLE 6B: PROJECT COSTS

(RMB MILLION) 1/

Project Component Apnraisal Estimate Actual/Latest Estimate

Local Forcian Total Local Forei!n TotalStrengthening Rural Hcalth Scrniccs 440.8 184.4 625.2 436.6 262.3 698.9Vaccine Component 92.6 243.1 335.8 371.0 801.0 1,172.0Drug Quality Control 62.9 34.7 97.6 76.4 38.2 114.5Operational Research 52.1 19.8 71.9 55.6 18.3 73.9

Phvsical Contingencics 70.3 82.7 153.0Price Contingencics 97.6 86.0 183.6

Total Project Cost 816.2 650.8 1.467.1 939.6 1.1!9.8 2.059.3

Note: 1/ Exchange ratc at project compiction used: US$ 1.00 = RMB 8.27.

TABLE 6C: PROJECT FINANCING 1/

(US$ MILLION)

Source Appraisal Estimate Actual/Latest Estimate

Local Foreie-n Total Local Foreign TotalGovenment 97.4 0.0 97.4 111.7 23.1 134.8IBRD 0.0 15.0 15.0 0.0 15.0 15.0IDA 1.3 63.7 65.0 1.5 77.3 78.8Rotary International 1/ -.- -.- -.- 0.0 15.0 15.0Dutch Development Assistance 2/ -.- -.- -.- 0.0 4.5 4.5

Total 98.7 78.7 177.4 113.2 134.9 248.1

Notes: 1/ In 1990, after the project was approved. Rotarv International provided a grant of US$15.0 million to bdpfinance the foreign exchange costs of establishing the Oral Polio Vaccine Plant in Yunnan Province-

2/ Dutch Development Assistan ORET. wvas utilized for sole source equipment.

26

TABLE 7: STATUS OF LEGAL COVENANTS

Agreement Section Covenant Present Desciption of CovenantType Status

Credit Article IIL 3.01 (c) 3 C Governnent to mnake proceds of credit availableto local entitles.

Credit Article IIL 3.05 10 C Borrower shall unplemcnt expernments in twocounties in Sichuan Province regardingalternative approaches to rural health insurwith terms of reference and time scheduleacceptable to the Association.

Credit Article 11, 3.06 5 C Borrower will maintain World Bank Loan Officein Ministry of Health.

Credit Artiicle IV, 4.01 I C Adequate records. accountsandauditingprocedures by the Borrower.

Credit Article IV, 4.02 10 NY Production of vaccmes to meet intemnationalguidelines established by the World HealthOranrzation on the qualitv of biologicalproducts, due one year after start-up of operationof the production centers.

Project Article 1, 2.01 (a) I0 C Each local entitv shall provide funds, facilitiesservices, and other resources required for theProject

Project Article II 2.01 (b) 4 C Each local entitv shall make adequate and timelybudgeting provisions for project implmaentation.

Project Article IL 2.05 10 C Each local entity shall maintain a World Bankoffice with appropnate functions and staffing.

Project Article 1m I c Adequate records, accounts and auditingprocedures by the local entities.

Covenant Class: Status:I= Accounts/audits 8 = Indigenous people C = covenant complied with2= Financial perlormance/revenue 9 = Monitoring, review. and reporting CD = complied with after delav

generation trom beneticiaries 10 = Project implementation not CP = complied with partiallv= Flow and utilization of project covered bv categones i-9 NY = not vet due

funds 11 = Sectoral or cross-sectoral4 = Counterpart funding budgetarv or other resources5 = Management aspects of the allocation

project or executing agency 12 = Sectorai or cross-sectoral policv/6 = Environmental covenants regulatorv/lnstitutional action7 = Involuntary resettlement 13 = Other

TABLE 8: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS

There was no significant lack of compliance with an applicable Bank Operational Manual Staternents(OD or OP/BP)

27

TABLE 9A: BANK RESOURCES: STAFF INPUTS(ACTUAL STAFF WEEKS)

Fiscal Year

Stage 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 . 1995 1996 1997 1996 Total

Preparation 7.3 20.3 27.6to Appraisal

Appmisal 75.7 7.7

Negouation 24.4 24.4to BoardPresentation

Supervision 10.6 2.0 6 h 14.2 6.4 10.9 10.1 15.7 14.1 15.9 17.6 2.8 127.1

Complicuon 13.1 13.1

Total 7.3 20).3 100.1 10.6 2.0 6.8 14.2 6.4 10.9 10.1 15.7 14.1 11.9 17.6 159 140.2

TABLE 9B: BANK RESOURCES: STAFF INPUTS(ACTUAL USS'000)

Fiscal Year

Stage 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total

Preparauon 15.6 89 4to Appraisal

Appraisal 176.2

Negouauon 270.8to BoardPresenauion

Supervision 28.4 5.6 18.8 40.3 20.6 37.9 34.9 55.3 49.4 39.3 51.5 4.3 386.3

Completion 527 52.7

Total 15.6 89.4 447.0 2&4 5.6 18.8 40.3 20.6 37.9 34.9 55.3 49.4 39.3 51.5 57.0 439.0

28

TABLE 10: BANK RESOURCES: MISSIONS

Performance RatingStage of Project Cvcie Month/ Number of Days Specialized Staff Imple- Devel-

Year Persons in Field Skills Represented mentation *pment/a Status lh Objectives

Pre-ldentification 02/84 2 n.a. EC. PiHPre-Identification 04/84 2 9 EC, PI IPre-Identification 07/84 3 n.a. PH. PLIdentification 10/84 2 16 EC, PMPreparation 01/85 8 32 EC, HE, PH. PMPreparation 02/85 1 9 ECPreparation 03/85 2 n.a. EC, PHPreparation 07/85 3 6 EC, HE. PliAppraisal 07/85 8 28 EC. HE. 00. PI-1.

PR. PMPlost-Appraisal 12/85 3 5 1 lE. LO. PI ISupervision 1 10/86 1 5 HIE I ISupervision 2 09/87 1 n a. I'M I ISupervision 3 09/88 I n.a. H:E I 1Supervision 4 12/88 1 15 HE I ISupervision 5 09/89 2 21 HE. PH 2 1Supervision 6 10/90 I n.a. HE 2 1Suipervision 7 12/90 3 9 AC, HE. VP 2 1Supervision 8 09/91 3 9 AC, HE. VP I ISupervision 9 01/92 2 9 IIE, VP I ISupervision 10 04/93 3 11 AC, I-E. VP I ISupervision I1 05/93 3 n.a. I1E, OA. VP 3 3Supervision 12 10/93 2 3 HE, VP 3 3Supervision 13 11/93 2 3 HE, VP 3 3Supervision 14 03/94 1 1 HE 3 3Supervision 15 05/94 3 6 AC, HE, VP S SSupervision 16 08/94 1 1 IIE S SSupervision 17 (3/95 2 i IHE. VP S SSupervision 18 12/95 3 7 lIE. VP U SSupervision 19 0(/96 3 9 AC. IE. VP S SSupervision 20 03/97 4 9 AC. HE. OA. VP S SSupervision 21/Completion 0/.198 2 19 EC, IIE S SCompletion 04/98 1 20 EC S S

Notes: /a AC: Accounting and Auditing: EC: Economist: HE: Health Economist: HP: HealthPromotion Specialist: LO: Loan Officer: 00: Operations Analyst: PH: Public HealthSpecialist: PL: Health Planning and Management Specialist: PM: Project ManagementSpecialist: PR: Pharmacist: VP: Vaccine Production Specialist.

A, I/HS: Highly Satisfactory: 2/S: Satisfactory: 3/U: Unsatisfactorv.n.a. Not available.

29 ANNEX A

BORROWER'S CONTRIBUTION TO THE ICR

Part 1: Rural Health and Other Non-Vaccine Production Components

The Borrower's contribution to the ICR for the rural health and non-vaccine productioncomponents, "Project Completion Report," was submitted to the Bank in 1992. Following aretwo sections from the Report: Background and Project Results. The full document is available inthe Project Files upon request.

1. Background

I. I Since the early 1950s, China has made remarkable progress in improving its population'sgeneral public health and social sanitation conditions. However, there has been unbalanceddevelopment in terms of setting up health care deliverv systems and the provision of healthservices. The reason could be largely contributed to the geographic regional differences wheresocial, cultural and economic situations have been shaped in its duet historical course.

1.2 As many of the health issues and health related issues are paralleled with the society'sgeneral economic stage, and although the reported national average health indicators/index revealthe successful control of the common communicable diseases and the fulfillment of the "FirstHealth Revolution," those averages in fact conceal the wide variations among the differentregions. Hence, the general consensus in China's health community is to promote the preventionand treatment of communicable and endemic diseases in remote and poor rural areas and at thesame time, promote the early detection and prevention of risk factors of chronic conditions inurban/rural areas.

1.3 With the impact and the influence by the nation's economic reform, particularly thedecentralization of financial responsibility, certain kinds of the so-called health reform are evidentin some places in the 1980s, such as introducing fee-for-service mechanisms and inducingrevenue-earning activities. But, on the other hand, the preventive work has shrunk because of theshortage of public funding and, due to the collapse of the commune system, the rural medicalcooperative system which is supposed to serve the farmers is largely abandoned. The fact is sincethe country is trying to attain its economic/production goals through economic restructuring, itssociety's public services have comparatively been weakened. Aid, especially external aid, tosupport the public programs becomes necessarily important.

1.4 The formulation of health policies in the mid-1980s is aimed at existing issues that thehealth sector itself faces:

(a) Consolidation of past gains;

(b) Continued control of communicable diseases; and

(c) Effective and efficacious responses to the new challenge of the changing

30 ANNEX A

epidemiological profile and the emerging older age structure.

1.5 As the second health project financed in part by Bank loans and coming after assessmentof China's achievement and prospects by the Bank, as reported in "The Health Sector in China,"this project is to support the current policies in executing the national immunization program,improving rural health services, training health professionals and workers in different fields and atdifferent levels, and strengthening preventive medicine. The project's rural health component ispart of the national One-Third County Program.

2. Project Results

2.1 Overall, the project has been implemented as expected. The leading agency for managingthe project operation, the Ministry's FLO, has been involved closely in every aspect of projectactivities, i.e., supervision of equipment procurement and program activities, financial accounting,as well as much of the painstaking coordination work. Observations and documents have beencumulated for files, and progress reports have been requested from the implementing entities forperiodic evaluations. For the purpose of the project completion report, the FLO has made theirspecial requirement for the project beneficiaries to conduct their own evaluations based on theagreed investigations and evaluation designs, and these data and investigation materials should bepresented to the FLO for summary and analysis.

2.2 For the evaluation of the rural health component, a comprehensive investigation wasconducted in the fifty project counties, and a before-after self-comparison evaluationindicators/index was constructed based on the following five categories:

(a) Basic social economic status;

(b) Health service conditions (in terms of civil construction, equipment, training);

(c) Rural health service facilities/institutions and manpower;

(d) Medical and health services/departments development; and

(e) Health service delivery and its impact.

2.3 Based on the structure/process/impact evaluation design, the basic social economic statusis a general framework or an overall structure which the evaluation will fit in; the health serviceconditions are the project inputs which are part of the structure indicators; the rural health servicefacilities/institutions and manpower are the extension of the service institutions coverage and ruralmanpower development/upgrading, which are process indicators on the health delivery part; themedical and health service/department development is the department/service items creations andarticles publications, which are also process indicators on the health delivery part; and the healthservice delivery and its impact is self-explanatory. The before-after comparison duration is from1986 to 1992, and the benefit population is as calculated, i.e., about 30 million which is 14% ofthe aggregate population in those five poor provinces.

2.4 The total evaluation indexes are 129, and only part of them were selected. For the health

31 ANNEX A

service delivery and its impact, originally, there were a total 54 indexes, but in consideration of itscomparative importance, we have only selected 14 index/indicators which have shown thedevastating health conditions in rural areas. For the remaining 40 index/indicators, they have allshown the positive changes of health conditions and health outcomes.

2.5 With regard to the medical service and management, except the length of stay (LOS) inSichuan has increased a little bit, all of the rest of the indexes show a positive change, which is anindication of health service quality improvement. Considering that the emergency case treatmentsuccess increase rate is not much higher, and the large investment at county level in Sichuanprovince, the negative LOS could be a point of serious case referral from the lower levels.

2.6 The health and public education indexes have all shown a good amount of work done, butthey may not target specific risk factors in the local areas as we have already seen the increase ofacute hepatitis A disease, so their effect needs to be further evaluated. But as general healthknowledge dissemination, the middle school health education course is a good approach for healthinformation sharing.

2.7 Overall, the project had the following merits:

(a) Improvement of the income levels of those poorer counties;

(b) Improvement of the service qualities and health facilities; and

(c) Reduction maternal and child mortality.

32 ANNEX A

Part tl: Vaccine Production Component

1. Background

1.1 Under the Rural Health and Preventive Medicine Project, or Health II Project, a vaccinecomponent was established for which IDA and IBRD funding was provided to construct threenew vaccine production facilities. The component was initiated in the middle of 1984 and wasactually prepared in 1985, when a turnkey approach was envisaged to select a vaccine producerthrough open bidding to take overall responsibility for all steps of designing, constructing,equipping, commissioning and operating the facilities during the testing and initial productionphase. Both the initial bidding and subsequent protracted negotiations with a Canadian vaccineproduction company ended in failure primarily due to underestimation of the cost for the facilities.

1.2 As a result of successful efforts to secure additional funds including a Rotary Grant, a newsemi turnkey approach was designed to invite an engineering firm subcontracted to a vaccineproducer as its partner. With foreign expert legal assistance, a contract was finally awarded to aDutch Consultant firm combined with its subcontractors as vaccine production process tranfererand a Dutch Company as process equipment supplied, generally known as the Engineering Firm.In fact, the contract is a foreign engineering professional service and vaccine production know-how transfer project.

1.3 The Contract was signed between the EF, EEC, the Purchaser and the Ministry of Health(MOH) on January 25, 1990 and became effective on May 8, 1990. Hence the vaccinecomponent or the vaccine project eventually began to move after 4 years of twists and turns.

2. Project Objective

2.1 The PO under the Rural Health and Preventive Medicine Project sought to establish threenew Vaccine Production Facilities. One facility for the Production of OPV will be located withinthe Kunming Institute. The two others, each for the production of DPT vaccine, TT andlyophilized EVE have attenuated measles vaccine, will be located within the Lanzhou Institute andthe Shanghai Institute. The quality of the vaccines should meet WHO requirements concernedand the performance and operation of the facilities will be up to the European GoodManufacturing Practice with a view to improve the quality of vaccines and cost effectiveness ofthe national immunization program against the main childhood diseases.

3. Project Design and Organization

3.1 The vaccine project is so far the largest one of technical renovation in the field ofbiological production in China. It was designed to upgrade the quality of vaccines under EPI inaccordance with WHO requirements and performance and operation meeting European GMP.

3.2 It was envisaged that the existing production process for the five vaccines in China wouldbe phased out after successful finalization of the vaccine project. According to the contractsigned between the PO and the EF, microcarrier fermentation process with VERO cells will be

33 ANNEX A

used for OPV production at 350L working volume in Kunming facility, current conventionaltechnology with 800L scale-up fermenters will be applied for DPT production and microcarrierfermentation process will also be used for MV production. With production process improved,the annual output of the vaccines produced in the three new facilities should meet therequirements as indicated in the following chart.

Host Institutes Products Annual Output (doses)

Lanzhou/Shanghai Measles Vaccine 40 million

Lanzhou/Shanghai DPT 200 million

Lanzhou/Shanghai TT 80 million

Kunming OPV 100 million

3.3 The contract started to be implemented in June 6, 1990 and was anticipated to becompleted in 66 months with the prerequisite that the EF's three guarantees (Product Guarantee,Facility Guarantee, and Facility Performance Assurance) would be granted by the Project Owner.Due to mid-term modification of the contract, only Product Guarantee was retained.

3.4 To provide overall management and coordination for the project implementation, avaccine project office (VPO) was established in Beijing under the Project Leading Group ofMOH, chaired by Minister Chen Minzhang and composed of key members of FLO, DPF andCNBPC. A similar managerial structure was set up in the three host institutes to meet the projectimplementation requirements. All these organization set-ups ensure the smooth communications,coordination and implementation of the project.

4. Project Implementation

4.1 The project implementation generally went well in spite of its great complexity anddifficulties. The project is now at the stage of facility and equipment validation. With acceptanceof OPV and MV processes, trial production will start soon after validation. The indicators aslisted in the contract to monitor overall project progress have been mostly met with efforts ofparties involved in the Project.

4.2 From the effective date, the contract was originally anticipated to be completed within 66months or by December 6, 1995. Now the project has more than two years behind thecontractual time. The reasons for such delays were compounded by a number of factors whichmay well be listed as: (a) funding crisis due to underestimation of project budget, inflation,fluctuation in foreign exchange rates and higher bidding prices of equipment than originallyestimated; and (b) lack of experience in managing and operating such a complicated project on theside of all parties involved.

4.3 The well-known engineering firm has great international experience in working with Asian

34 ANNEX A

countries, but it seemed insufficiently prepared to develop a complicated project involving threeindependent institutes and other related parties in China, and had encountered one after anotherdifficulty in addressing the problems experienced. Though known for its reputation in vaccineresearch and production, the subcontractor has no experience in transferring vaccine technologyin such a scale and with such updated technique; and cultural differences and insufficientcommunication have added to the above difficulties. Therefore, the project delay has become anundeniable fact and the process development remains a bottleneck for successful completion ofthe whole project. However, efforts have been made between the PO and the EF to overcome allthe difficulties experienced during the project implementation.

4.4 In its midway, the PO was confronted with a serious situation due to funding shortage,which consequentially led to the Bank's action to suspend the equipment procurement anddisbursement and request to reassess the project. After reporting to the Govemmment andconsultation with the Bank, an additional fund of USD 22 million was secured and a strategy inmodifying the contract were agreed on. The Project Modification Plan was signed by the ,O andthe EF and approved by the Bank in late 1994. As a result, the mid-way crisis was over.

4.5 The training goal surpassed expectations within the budget estimated in the contract; Theoriginal training plan in the contract were satisfactorily completed. The remaining surplussupported a GMP training assessment by extemal assistance and a new training program based onthe assessment report. There have been technical and management training activities abroad intotal amount of more than 550 persons/months in the framework of the contract and equipmenttraining was provided 200 times. Efficient and effective training was highly beneficial to theimplementation of the contract. The trainees have now formed the backbone for proper operationof the facilities in the future.

4.6 As PO's representative agency, the Project office with only six permanent staff memberstakes overall responsibility for communication, management coordination and monitoring. Themanpower inadequacy, particularly lack of senior legal, financial and engineering professionals hasmade the Office face extreme difficulties in addressing such a large and complicated project. It isimportant to structure a proper project organization. It is recognized that well organized andstaffed project management organizations at all operational levels are key to smooth projectimplementation. The staff at the managerial level should be relatively stable to keep confsistencyof policy and management during the project implementation.

4.7 Inadequate communication between parties especially in the civil construction, poorperformnance of EF's civil works' subcontractor, multi-party involvement and simultaneousoperation in three different sites all blocked the smooth implementation and had impacted on thefinal end of the project.

4.8 The PO utilized both foreign and domestic technical assistance during project preparationand implementation, which have been greatly beneficial for the project. The technical assistancehelped the PO especially to assess the process development and make decisions. Aftertermination of EF's DPT contractual obligations, external assistance has been sought for DPTprocess development in the new facilities.

35 ANNEX A

5. Evaluation of World Bank Performance

5.1 The vaccine component of the World Bank's Rural Health and Preventive MedicineProject is the largest project of biological product innovation in China, even in the world. TheBank officials have contributed to the project both in its course of preparation and evaluation aswell as in the aspects of giving guidance and supervision in its implementation.

5.2 The Bank officials provided financial support by securing a grant in the amount of USD 15million and administered the grant from the Rotary International. In addition, the Bank agree toshift the remaining surplus from other components of the Health Project 1I to the vaccinecomponent.

5.3 Since the implementation of the project, ten missions were dispatched by the World Bankincluding the representative from Rotary intemational for investigation and supervision. Themissions provided important technical assistance in relation with GMP, technical assistancemanagement and equipment procurement.

5.4 Underestimation of the cost needed to build three vaccine facilities in China causedenormous difficulties in the preparation and the implementation.

6. Evaluation of Borrower Performance

6.1 The Chinese Government has listed the vaccine component as one of national keyconstruction projects and paid serious attention to its implementation. The Leading Group,MOH, chaired by Minister Chen convened from time to time to provide supervision andcoordination. It should be noted that as approved by the Chinese Government additional fund oftJSD 22 million was appropriated to help solve the mid-term financial shortage.

6.2 Facing great challenges in terms of project complexity, multi-involvement, manpowershortage and lack of experiences and adequate skills, Project Office together with the projectinstitutes exerted every effort to absorb the heavy workload, to overcome difficulties and solvethe problems in the project implementation. As a headquarters of the project, the Project Officehas contributed greatly towards efficient and effective project communication, coordination,management and supervision. It has also played important roles in organizing project activitiessuch as facility construction, process development, equipment procurement, training, etc.Especially in the later period of the project, Project Office organized the exchange of technicaland managerial experiences among the institutes and assiste hem to reinforce their advantagesand to avoid the weak points during the commissioning and validation.

7. Status of Cost Study

7.1 Proposed by the World Bank in the mid-term implementation, a cost study of threeproduction lines has been conducted by the Evaluation Centre of Medical Technology, ShanghaiMedical University, assisted by international experts. The value of the study can orient the staffof the new vaccine facilities to cost and cost effectiveness analysis. If the cost of the new vaccineis much higher, alternative approaches might be considered to reduce the costs and planning mustbegin to mitigate the problem now. The study is also expected to be the basis for the Government

36 ANNEX A

to deterrmine the price of the products of the new facilities. The report on cost study of OPVproduction line has been completed. The dose cost of OPV is increased. Suggestions have beenmade by the evaluation team.

8. Status of Domestic Review Process Plan of WHO Certification

8.1 The availability of modem facilities for vaccine production, including the improved qualitycontrol mechanisms, especially improved GMP conditions seems encouraging for product exportin the fUture. The first step is to follow the national procedures to obtain GMP certificate for thefacilities and pre-production license for trial production.

9. Project Sustainability

9.1 Sufficient recurrent budget for the new facilities must be provided to keep the facilities inoperation in accordance with GWM standards. To gradually reduce the burden of operationalcosts, the project institutes should analyze the costs and try to replace the imported productionmaterials by domestic ones.

9.2 Rational prices for vaccines under EPI should be based on standardized cost, takdnggovernments economic affordability into account. In terms of manufacturers' benefits and theinadequacy of EPI's expense, a policy may be sought for to solve the problems.

9.3 With external technical assistance, continued training courses and upgrading of GMPknowledge will be conducted among vaccine production facilities.

37 ANNEX A

Part HI: Borrower's Comments on Bank's ICR

Introduction

After a careful review of the Implementation Completion Report (ICR): Rural Health andPreventive Medicine Project (Health II Project), we wish to extend our nigh appreciation for thecomprehensive coverage, objective analysis and constructive recommendations contained in theReport. Health II comprised of two different components in nature is indeeeS a unique project interms of its complexity and unintended protraction in contrast with other World Bank projectsestablished so far. We completely share with you the overall assessment of the achievements,outcomes issues and lessons learned as presented in the Report in which many of positiveelements contained in our initial evaluation documents have been incorporated. We only wouldlike to make some specific comments summanrzed as below.

1. Non-Vaccine Production Component

1.1 It should be noted that as a separate sub-component, funding support to the ten provincialand municipal EPSs in Gansu, Sichuan, Jilin, Hubei, Ningxia Hui, Heilongjiang, Shandong,Jiangxi, Harbin and Chongqing has also contributed to the strengthening of preventive services inrespect to physical and training capability. Consequently the whole non-vaccine component maybe grouped as rural health (56 counties in five Provinces), ten provincial and municipal EPSs,CAMs, drug control institutes and health insurance research.

1.2 The rural health insurance experiment is a pioneering one, which was conducted at a timewhen the cooperative medical system in most areas of China was being dismantled and effortswere made to explore possibility of restoring or replacing the system. The findings of theexperiment published in a Rural Health Insurance Handbook were widely distributed among thehealth authorities and health policy researchers and the methodologies of scientific estimation ofaffordability of the peasants, ratios of premium, etc., were then actually adopted by many ofresearchers in their studies on rural health care financing. Therefore, the findings from the ruralhealth insurance experiment are used not only a decade later but were also implicitly or explicitlyused at the time of their conclusion.

2. Vaccine Production Component

2.1 Rather than combining both limited intemational bidding and competitive internationalbidding, the revised approach by using consultant service according to the World Bank guidelinewas to engage an engineering firm, which would be associated with a vaccine producer.

2.2 The lessons learned from the vaccine component as summarized in the Report are bothcostly and profound, which are related to how vaccine production will be properly upgraded orrenovated in developing countries. The lessons will be useful not only for China and the WorldBank, possibly also for other developing countries.

38 ANNEX A

2.3 Through implementation of the vaccine project, the project institutes own not only theadvanced facilities but also a number of trained young people involved in different aspects ofproduction process and management, which is intangible and valuable resources of the institutes.Making use of those resources will be beneficial to operation of the new facilities, motivation ofthose trained young people and avoidance of turnover from the institutes.

2.4 The three new vaccine plants even when they come into final operation will be faced withenormous problems relating to cost, price, maintenance, etc. Consideration on the aspects ofcost, price, and assessment of economic feasibility of vaccine production mentioned in the reportis most helpful for the Ministry of Health and the project institutes to take actions in order to keepthe facilities operate and survive. While MOH will take relevant steps to support the newfacilities without compromising the ongoing EPI the World Bank will also hopefully giveassistance in this respect. However, it is debatable whether support for privatizing the vaccineplants is the best solution.

2.5 To help resolve one after another problems emerged in the process of the implementationthe contributions made by all the World Bank staff who were involved in the project cannot beoveremphasized, and our comments would not be complete without mentioning Mr. HerbertBoehm who among many has witnessed the darkest or most difficult time of the component andits break of dawn as well.

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