China - Fiscal Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 25892 IMPLEMENTATION COMPLETION REPORT (CPL-38730; SCL-38736; TF-25291; IDA-27090) ON A LOAN/CREDIT/GRANT IN THE AMOUNT OF US$50 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FISCAL TECHNICAL ASSISTANCE PROJECT June 6, 2003 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 5, 2003) Currency Unit = Chinese Yuan (Y) Y 1 = US$ 0.12 US$ 1 = Y8.2769 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CTAIS China Tax Administration Information System GFMIS Government Financial Management Information System IBRD The International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Association IMF International Monetary Fund MOF Ministry of Finance MOF Ministry of Finance NBF Non-Bank Financed NCB National Competitive Bidding PBOC People's Bank of China SAFE State Administration of Foreign Exchange SAT State Administration of Taxation TA Technical Assistance TL Task Leader UNDP United Nations Development Programme USD United States Dollar WB World Bank WTO World Trade Organization Vice President: Jamal-ud-din Kassum Country Manager/Director: Yukon Huang Sector Manager/Director: Homi Kharas Task Team Leader/Task Manager: Hana Brixi  CHINA FISCAL TECHNICAL ASSISTANCE PROJECT CONTENTS Page No. 1. Project Data 2. Principal Performance Ratings 3. Assessment of Development Objective and Design, and of Quality at Entry 4. Achievement of Objective and Outputs 5. Major Factors Affecting Implementation and Outcome 6. Sustainability 7. Bank and Borrower Performance 8. Lessons Learned 9. Partner Comments 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents Annex  Project ID: P036041 Project Name: FISCAL TECHNICAL ASSISTANCE PROJECT Team Leader: Hana Polackova Brixi TL Unit: EASPR ICR Type: Core ICR Report Date: June 6, 2003 1. Project Data Name: FISCAL TECHNICAL ASSISTANCE PROJECT L/C/TF Number: CPL-38730; SCL-38736; TF-25291; IDA-27090 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Central government administration (94%); Sub-national government administration (6%) Theme: Tax policy and administration (P); Public expenditure, financial management and procurement (P); Decentralization (P) KEY DATES Original Revised/Actual PCD: 1994-05-15 Effective: 1995-09-25 1995-09-25 Appraisal: 1994-12-25 MTR: Approval: 1995-04-25 Closing: 1999-12-31 2002-12-31 Borrower/Implementing Agency: People's Republic of China/MOF; People's Republic of China/SAT & PBOC Other Partners: IMF STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Shahid Javed Burki Country Director: Yukon Huang Nicholas Hope Sector Manager: Homi Kharas Zarfar Ecevit Team Leader at ICR: Hana Brixi Bert Hofman ICR Primary Author(s): Hana Brixi 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome:S Sustainability:HL Institutional Development Impact:H Bank Performance:S Borrower Performance:S QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Fiscal Technical Assistance (Fiscal TA) Project aimed at supporting reforms in public finance management in China. Particularly, the project aimed at enhancing effectiveness and efficiency of tax administration, tax policy, and public expenditure management, including preparation and implementation of the Government budget. Specifically, the Fiscal TA Project focused on: (a) developing and implementing a modern national tax administration system; (b) improving Government capacity for tax policy analysis; (c) improving the central-provincial grants scheme; and (d) improving budget management capacities and processes. 3.2 Revised Objective: The Fiscal TA Project maintained its original objective. 3.3 Original Components: The Fiscal TA Project focused on the key initiatives of the Government's fiscal management reforms. The project was organized into four components as follows: (a) Tax Administration (US$76.3 million equivalent): This component was to support the development of a national tax administration capable of implementing current and future tax reforms. The project was to assist in developing new administrative procedures, organizational arrangements and information systems for pilot cities. The State Administration of Taxation (SAT) was to develop and implement the information system primarily in-house, with consultant support for system design. The project would provide: 1) consultancies for tax administration procedures and information systems development, 2) training in systems development and in administrative and managerial functions, and 3) equipment and software for the information system in 18 cities, at the national office, and in a training center. (b) Tax Policy Analysis (US$4.8 million equivalent): This component was to improve the tax policy analysis capacity of the Government and assist in a gradual transfer of the tax policy function from SAT to Ministry of Finance (MOF), and create tax policy analysis capacity at the provincial level of Government. The project was to provide: 1) the design of appropriate databases and models to support tax policy analysis, 2) computer equipment to support the new databases, analytical tools and improved communication between the national and provincial tax policy offices, 3) training for central and provincial government officials in tax policy analysis, and 4) studies to provide analytical background for future tax reforms. (c) Intergovernmental Fiscal Relations (US$2.9 million equivalent): The component was to assist in designing an improved central-provincial grants scheme, and in developing administrative procedures and information system for its implementation. The project was to provide: 1) consultancies to design the center-provincial grants scheme and develop an adequate information system, 2) training for the implementation of an improved grants scheme, and 3) equipment for the needed information system. (d) Budget System (US$4.3 million equivalent): This component was to assist MOF in building institutional capacity for budget preparation and implementation, and for conducting further budget management reforms. Capacity building was to cover, among others, expenditure analysis, budgeting - 2 -  and budget evaluation, government accounting, and treasury management. The project was to deliver: 1) training and studies to assess the current budget systems in China and draw lessons from international practice, 2) consultancies on improving budgetary procedures and practices, and 3) consultancies, training and computer equipment for establishing a modern treasury system. Component IBRD Counterpart Total Cost Rating Tax Administration $36,422,000 $39,829,000 $76,251,000 S Tax Policy Analysis $3,626,000 $1,143,000 $4,769,000 S Intergovernmental Fiscal $2,215,000 $713,000 $2,928,000 S Budget Systems $3,177,000 $1,101,000 $4,278,000 S 3.4 Revised Components: The objectives remained unchanged, but two of the four components were restructured to reflect the Government's evolving priorities and reforms in public finance management. Specifically, since 1999, the Government has placed emphasis on reforming its budget management systems. To support budget management reforms, two separate departments were created at MOF in 2000: the Budget Department in charge of intergovernmental transfers, budget classification and budgeting, and the Treasury Department in charge of budget execution (the establishment of a treasury system), cash management and debt management. Correspondingly, the fourth component under the Fiscal TA Project, the Budget Systems Component, was split into two, along the lines of the responsibility of the two new departments: A new Budget Reform Component, merged with the Intergovernmental Fiscal Relations Component, was managed by the new Budget Department. A new Treasury System (budget implementation) Component was managed by the new Treasury Department. The objectives and activities originally outlined under the Budget Systems Component remained valid and were pursued continuously under the Budget Reform and Treasury System Components. To reflect the evolution of Government's relative priorities, activities designed under the third component, Intergovernmental Fiscal Relations, pursued under the Budget Reform Component, were redefined with a narrower scope. Allocation of funds was revised as follows: Component IBRD Counterpart Total Cost Rating Tax Administration $40,000,000 $27,085,852 $67,085,852 S Tax Policy Analysis $3,630,000 $1,143,000 $4,769,000 S Budget & Intergovernmental Fiscal $2,930,000 $970,000 $3,900,000 S Treasury System $2,470,000 $830,000 $3,300,000 S 3.5 Quality at Entry: Quality at entry was satisfactory. The Fiscal TA Project met a critical need to build public finance institutional capacity in China. The project was consistent with the Government priorities as well as with the World Bank Country Assistance Strategy for China. The project was well designed, with the contribution of experts from the respective fields. Client ownership was strong. Counterparts had the incentives and motivation to implement project activities and adhere to project objectives. There were three different counterpart agencies, the MOF, SAT and the People's Bank of China (PBOC), with very clear responsibilities defined under the project. The project was ready for implementation at approval. There were no conditionality or safeguard policies applicable and no explicit policy content. - 3 -  4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The Fiscal TA Project made an important contribution to the design and implementation of Government reforms in public expenditure management, tax policy and tax administration. The project supported the development of a modern national tax administration system and capacity building in tax policy analysis and in the preparation and implementation of Government budgets. With the direct contribution of the Fiscal TA Project, the Government established the foundations for a modern national tax administration system, for a Government treasury system, and for continuing reforms in tax administration, tax policy, inter-government finance and budget management. 4.2 Outputs by components: Tax Administration The component accomplished its objectives. During the life of the project, modernization of the tax administration system became one of the priorities of the State Council (Cabinet). The Government pursued the objective of improving tax compliance and control over revenue collection. Directly supported by the project, SAT developed unified procedures for tax administration and collection. Based on the new procedures, SAT designed, developed and piloted a national uniform China Tax Administration Information System (CTAIS). In the process, SAT led the development of system design and software, and installed equipment enabling gradual implementation of CTAIS throughout China. CTAIS was tested and piloted in 19 cities. At the end of the project, CTAIS covered 110 cities and 7 whole provinces, and managed the collection of one third of all budgetary revenues in China. Thanks to CTAIS, tax compliance is estimated to have increased significantly. Complementing the Fiscal TA Project during 1998-2002, SAT also implemented its Golden Tax Project to establish automatic monitoring of value-added-tax invoices. By the end of 2002, all invoices above RMB10,000 were covered. CTAIS and the Golden Tax Project were two vital pillars supporting overall improvements in the efficiency of tax administration in China and, as such, have been publicly credited for the strong government revenue performance during 2001-2002. To build on the success of both CTAIS and the Golden Tax Project, SAT launched a new project to integrate the two systems and to create interfaces also with customs administration, the banking system (via PBOC), and the State Administration of Foreign Exchange (SAFE) in order to monitor all major transactions that are subject to tax. In the process, the system of unified procedures for tax collection and administration along with CTAIS will be reviewed and adjusted with the objective of promoting efficiency and user-friendliness of tax collection in China. For instance, although the current procedures and CTAIS support tax declaration via internet, the tax declaration process is unnecessarily cumbersome. In the context of the current e-government initiative in China, the new project was already approved by the Government. Although most of the funds allocated to this component were spent on equipment contracts, a significant amount of consultancy and training was delivered. After 2000, in cooperation with the World Bank, TA and training programs were also arranged and financed by the IMF/UNDP technical assistance program. Training was also partly delivered under the equipment contracts. To complement these activities, SAT implemented $1.6 million-worth of training from its own resources. Consultancies focused on tax administration procedures and information systems development. - 4 -  Training targeted systems development and main administrative and managerial functions. The process of system design and software development as well as the country-wide implementation of CTAIS involved nearly 100,000 local and central government officials. Hardware and software was delivered to support the information system in the pilot sites and at the national office. Tax Policy Analysis The component accomplished its objectives. Tax Policy Department of the MOF utilized the Fiscal TA Project to build the capacity for tax policy analysis at the MOF and at local tax policy offices throughout China. Over the life of the Fiscal TA Project, MOF assumed a growing role in tax policy analysis and formulation. The Fiscal TA Project assisted the MOF in preparing detailed tax reform plans to: 1) equalize the treatment of domestic and foreign funded enterprises under enterprise income tax and implement an overall reform of enterprise income tax, 2) broaden the base for the personal income tax (to launch taxation of personal income on a global basis), 3) improve local tax system (including the removal of arbitrary rural fees and introduction of an inheritance tax and property tax), and 4) expand the scope of value added tax and move value added tax from production basis to consumption basis. The Fiscal TA Project also supported preparation for tax expenditure reform that would enhance transparency and effectiveness of taxation and tax incentives in China. In the context of China's accession to the World Trade Organization (WTO), the Fiscal TA Project assisted MOF in assessing the impact of WTO accession on Government revenues and in adjusting the import-export tax system as required by WTO. With the direct and indirect contribution of the Fiscal TA Project, some tax policy reforms have already been implemented. These include the rural tax reform, enterprise income tax reform (gradually de-linking revenue allocation from enterprise ownership) and reform of the import-export tax system. The rural tax reform abolished rural fees imposed by local governments with the objective of reducing the tax burden of farmers from about 8 percent to 2.5 percent. During 2000-2002, the tax-for-fee reform was implemented in 20 provinces, with the remaining provinces joining the reform in 2003. (Because the rural tax reform reduced the overall revenue of local governments and needed to be complemented by compensatory intergovernmental fiscal transfers to poor rural localities, the rural tax reform was also supported by the Budget and Intergovernmental Fiscal Reform Component of the Fiscal TA Project.) Other major tax policy reforms, including the tax treatment of domestic and foreign-funded enterprises, the introduction of a global income tax, the introduction of an inheritance tax and the expansion of the VAT from a production to a consumption basis are expected to follow. In supporting MOF tax policy reform initiatives and analytical capacity, the Fiscal TA Project delivered: 1) databases and modeling capacity to support tax policy analysis, 2) training in tax policy analysis and modeling, 3) studies pertaining to specific areas of tax reforms as well as China's overall tax policy system, and 4) equipment to support more efficient communication between MOF and local tax policy offices as well as their enhanced modeling and analytical capacity. In priority tax reform areas, such as the income tax reform and value added tax reform, Fiscal TA Project provided multi-pronged assistance, with complementary outputs including studies, seminars, and analytical models (for example, income tax forecasting model and value added tax forecasting model) supported by specialized training programs as well as by databases and equipment. Studies and training materials were translated and widely disseminated. - 5 -  MOF recognized that the project was instrumental in enabling its Tax Policy Department to provide better support to the budget process by improving the quality of revenue forecasting, by enhancing the effectiveness and timeliness of communication between the MOF and local tax policy offices on new tax policies and their interpretation, and by promoting the dissemination of information and knowledge across tax policy offices in China. Budget & Intergovernmental Fiscal Reform The component contributed to the accomplishment of project objectives. The progress on budget management reform was satisfactory during the implementation of the Fiscal TA Project. In 1999, the Government launched a broad program of budget management reform, which significantly accelerated implementation of the Fiscal TA Project. The importance of reforming budget management to improve the performance of public spending and to prevent corruption has been stressed repeatedly in public by the Minister of Finance and other top-level Government officials. In the area of budget management, the Government focused on improving planning of project expenditures, on restructuring departmental budgets to guarantee adequate funding for core budget activities, on enhancing revenue and expenditure classification and on establishing modern treasury functions. To coordinate the various reforms and support them with a common platform, the Budget and Treasury Departments of MOF joined forces to outline a Golden Fiscal System, which would represent a comprehensive Government Financial Management Information System (GFMIS), connecting both central and local level governments, and covering the functions of budget preparation, budget implementation, accounting, and the management of cash, debt and fiscal risks. (The Golden Fiscal System Project, along with the Golden Tax Project, was also approved by the Government under its e-government initiative.) With the direct and indirect contribution of the Fiscal TA, Government designed and implemented reforms toward reorienting budget management from broad sectoral budget allocations towards departmental budgets, from a bottom up approach in budget preparation to viable aggregate ceilings on budget allocations, and from emphasis on input controls to performance monitoring. Since 2000, the departmental budgets have been gradually implemented to reach the first level of spending units (102 departmental budgets). During 2001-2002, budget preparation in all first level spending units was modified to separate recurrent and capital investment spending items, promote transparency and lay a basis for promoting output/outcome features in budget preparation. Since 2001, the budget process has been restructured to allow for a better balance between MOF, which is responsible for aggregate fiscal control, and departmental agencies, which present their sectoral needs. Reforms in revenue and expenditure classification have followed international practice, gradually solving political and technical problems in the process. In addition, the Government was also expanding the coverage of its budget to capture off-budget activities of budget institutions and extrabudgetary funds, improving the management of its cash flows and assets, and enhancing its accounting system. Further preparatory work was undertaken to reform the system of intergovernmental fiscal transfers, including central-provincial grants. Since 2000, complementing the Fiscal TA Project, the IMF supported these reforms with technical assistance under the IMF/UNDP technical assistance program. Under this component, the Fiscal TA Project delivered a large number of international workshops, training programs, consultancies and studies on public expenditure analysis, budget evaluation and preparation, government accounting, the organic budget law, the role of Parliament in the budget process, quantitative analysis and design for intergovernmental fiscal transfers, the analysis and management of fiscal risks, and budget statistics. Equipment was installed and used to establish and - 6 -  test a network of more than 100 budget units of the central government, which should eventually become a part of the GFMIS. Studies and training materials were translated and widely disseminated. Local government officials participated in most of the activities. Treasury System The component contributed to the accomplishment of project objectives. As part of the Government budget management reform, MOF in June 2000 created the Treasury Department to lead budget implementation reforms. These reforms primarily aimed at establishing modern treasury functions. After the State Council in February 2001 approved the treasury single account for implementation, the treasury reform has become one of MOF's top priorities. To ensure clear division of responsibilities in budget implementation as well as in the treasury reform per se, the State Council made the MOF responsible for developing the overall treasury system, including the treasury ledger general accounting system, and for managing the budget implementation process, including the management of government spending transactions, cash and debt. The Treasury Bureau of PBOC was in charge of the establishment and management of the treasury single account and execution of budget disbursements. MOF and PBOC collaborated to establish a mechanism to control payments vis-