China - Tianjin Light Industry Project

 ICRR 10031 Report Number : ICRR10031 ICR Review Operations Evaluation Department 1. Project Data : OEDID: OEDID : L3022 Project ID : P003464 Project Name : Tianjin Light Industry Project Country : China Sector : Industrial Restructuring L/C Number : L3022 Partners involved : Prepared by : Farrokh Najmabadi, OEDCR Reviewed by : Patrick Grasso, OEDPK Group Manager : Ruben Lamdany, OEDCR Date Posted : 06/05/1998 2. Project Objectives, Financing, Costs and Components : Following the decentralization of investment decision making from the Central Government to Provinces, the Government of China (GOC) requested the Bank in 1987 to assist some selected provinces . Tianjin, a coastal city with a large light industrial base, was selected as the first province and textile dyeing and finishing, pulp and paper and packaging were chosen as the subsectors to be assisted . The project was based on in-depth studies of these subsectors which were carried out by the Bank staff and the Tianjin Municipal Government (TMG). The objectives of the project consisted of: a) systemic reforms by granting more autonomy to State Owned Enterprises (SOEs) while subjecting them to more accountability; b ) restructuring enterprises included product rationalization among plants and supporting high-priority investments; c) improving internal enterprise management and systems; d ) strengthening the institutional infrastructure including research and design institutes and vocational training schools; and, e) supporting the preparation of a study for the long term overall industrial development strategy for Tianjin . To achieve these objectives the project included two components : an industrial credit of US$141.2 million to be onlent by the China Investment Bank (CIB) to the enterprises in the selected subsectors for restructuring and modernization; and, secondly, US$ 12.8 million as technical assistance for all institutional development programs . At appraisal, the project cost was estimated at US$ 227.6 million. 3. Achievement of Relevant Objectives : All enterprise reforms agreed with TMG such as deregulation of price and production controls, enterprise taxation, direct export rights, freedom in the choice of banks and hiring practices were carried out . They were further enhanced later as more reforms were introduced . The subsector restructuring achievements were, however, more mixed. Most of the 15 subprojects financed under the Bank loan are not operating satisfactorily and have financial difficulties. 4. Significant Achievements : All subsector reforms were carried out and even further enhanced . 5. Significant Shortcomings : The two large Paper Mills were not in operation and had not been run continuously since the first attempts at test runs some 6 months earlier. The textile dyeing and finishing plants also faced difficulties because of the softness in the export market and competition from the TVEs . Most enterprises in these two subsectors need financial restructuring, easier access to working capital and better marketing and management set up . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Substantial Substantial Sustainability : Uncertain Uncertain Bank Performance : Satisfactory Satisfactory OED considers the Bank performance  only marginally satisfactory because of its modest attention to cost overruns and the non inclusion of technical experts in supervision teams. Borrower Perf .: Satisfactory Unsatisfactory Despite the introduction of all enterprise reforms, the borrower failed to carry out a creditable appraisal and supervision of the subproject with disappointing results . It also failed to follow up diligently the need for reform in enterprise management. Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : The most important lesson of this project is that the simultaneous implementation of sectoral reforms (including deregulation and trade liberalization ) and industrial renovation and restructuring of SOEs is a difficult proposition requiring very thorough market studies, careful preparation of feasibility studies and sound cost estimates and the introduction of risk mitigating measures before investment decisions are made . A second is that the change in economic environment does not automatically translate into a change in enterprise behavior especially in the countries with a long history of central planning . A change of mindset requires the introduction of modern management techniques and the physical presence of consultants and outside experts in the enterprise until the new systems are understood, practiced and internalized . 8. Audit Recommended? Yes No Why? Even though the technical and financial conditions of some enterprises are unsatisfactory and problematic at present, it is quite likely that if the technical shortcomings are quickly resolved, financial restructuring recommendations are carried out and market conditions improve, the anticipated benefits would materialize and the uncertainty surrounding the sustainability of this project would be lifted . It is, therefore, proposed that an audit be carried out in about two years . 9. Comments on Quality of ICR : The ICR deals candidly and comprehensively with all the issues related to this very complex and demanding project .