China - Technical Cooperation Project

DoculmenXt of The World Bank FOR OMaCL USE ONLY C4. wi2 - CAA uupo ND.-3638-CHA REPORT AND RECOMEUNDATION OF THE PRESIDENT OF THE InTERNATIONAL DEVELOPMT ASSOICIATION ON A PROPOSED CREDIT OF SDR 9.4 MILON TO T}E PEOPLE'S REPUBLIC OF CEINA FOR A TECHNICAL COOPERATION PROJECT August 24, 1983 This dc.meat km a reistickd djjis.gjda =du nmy be wed by reedleubatsony I. the pedformome of thei offcia dubies ltb content -M" not ote&wise be disclosd wldth. World Bank authndutem.  CURRENCY EQUIVALENTS (August 1, 1983) Currency Unit - Yuan 1 Yuan CY) = $0.50 Y 1.99 - $1.00 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS IDA - Internatioual Development Association KOF - Ministry of Finance TCC - Technical Cooperation Credit UNDP - United Nations Developmcnt Program  FOR OFFICIL USE ONLY CHINA TECHNICAL COOPERATION PROJECT Credit and Project Summary Borrower: People's Republic of China Amount: SDR 9.4 million (US$10.0 million equivalent) Terms: Standard Project Description: Technical assistance and training subprojects, to be selec- ted by mutual agreement, primarily for preparation of investment projects expected to be financed by the Bank and/or the Association; project advisory services and strengtheninig of institutions related to Bank operations. The project will also strengthen the Government's ability to administer and sapervise technical assistance and prepare investment projects. There is some risk of slow implementation because of the borrower's inexperience with management of foreign technical assistance. Estimated Cost: Local Foreign Total -- ($ million) Consultants 0.7 6.3 7.0 Training/Equipment /a 0.8 2.7 3.5 National Personnel 1.5 - 1.5 Total 3.0 9.0 12.0 Financing Plan: Local For'Rign Total -- ($ million) IDA 1.0 9.0 10.0 Goverment 2.0 - 2.0 Total 3.0 9.0 12.0 Estimated Disbursements: IDA FY 1984 1985 1986 1987 1988 ($ million )- Annual 0.5 2.5 3.0 3.0 1.0 Cumulative 0.5 3.0 6.0 9.0 10.0 /a Cost includes taxes and duties on equipment estimated at 15%. No estimate of total taxes and duties is given because of the uncertainty of total amount of equipment to be financed. This document has a restricted distribution and may be used by recipients inly in the performance of their official duties. Its contents may not othenvise be disclosed without World Bank authorization.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A TECHNICAL COOPERATION PROJECT 1. I submit the following report and recommendation on a proposed credit to the People's Republic of China to help finance a te-chnical coopera- tion project. The credit, for SDR 9.4 million ($10 million equivalent), would be on standard IDA terms. PART I - THE ECONOMY 2. An introductory economic report, entitled "China: Socialist Economic Development" (No. 3391-CHA), was distributed to the Executive Directors on June 1, 1981. A country economic memorandum, entitled "China: Recent Economic Trends and Policy Developments" (No. 4072-CHA), was distributed to the Executive Directors on March 31, 1983. Basic data on the economy are given in Annex 1. Background 3. Following a period of major institutional changes in the 1950s, including land reform and the eventual establislatent of communes in rural areas and the extension of public ownership to cover almost all of the modern sector, development efforts in China have been directed toward the major objectives of industrialization and poverty reduction. Despite sharp oscil- lations in policy and political upheavals like the 'reat Leap Forward (1958-61) and the Cultural Revolution (1966-76), China has made substantial progress toward achieving its objectives. Industrial growth since 1949 has averaged more than 12Z p.a. (compared with under 5Z for agriculture); the current share of industry in GDP (around 44Z) is similar to the average for middle-income developing countries; and the country now produces a far greater variety of industrial goods than most other developing countries. Per capita GNP (with adjustments for international comparability) grew at 2.5-3.0Z p.a. in 1957-81, significantly above the average for other low-income developing countries. In terms of basic education, nutrition and health the Chinese population is much better off than its counterparts in other low-income developing countries. 4. However, China remains a very poor country, with a GNP per capita of only $300 in 1982 and about 200 million people or 20Z of the population witb unacceptably low incomes. The economy is also inefficient: past growth has come mainly from massive mobilization of resources. For a country that faces significant domestic resource constraints inefficiency is a particularly serious problem.  -2- 5. To address these problems and ensure rapid growth and improvements in living standards, the Government initiated a program of reform and adjustment in 1979. Economic reform, aimed at improving the efficiency of the economic system, involves: (a) restoring and improving the quality of central planning and policy coordination; (b) devolving more decision-making authority to lower level units; (c) establishing more direct links between incomes and the performance of economic units and individuals; and (d) relying more on market mechanisms and economic instruments and less on administrative directives, to influence economic activity. Structural adjustment, aimed at speeding improvements in living standards, has involved readjusting the relative shares of consumption and investment in national income, some sectoral and subsectoral readjustments, and greater emphasis on foreign trade. In 1981, problems with inflation and large budgetary and current account deficits resulted in short-term stabilization temporarily receiving the highest priority, but by 1982 the Government was again pushing ahead rapidly with adjustment and reform. Economic Reform 6. Reforms have now affected all sectors of the economy and institu- tions from the central government down to rural households. A major govern- ment reorganization has strengthened the core planning and management agencies (especially the State Planning Commission and the State Economic Commission) and reduced the number of commissions, ministries and agencies under the State Council from 98 to 52. Reorganization within ministries also has occurred, while that of provincial and local governments is now underway. Economic management has been decentralized: provincial and local authorities have been given more autonomy in investment decision making and use of credit to finance investment has increased; provincial and local governments have been granted greater budgetary flexibility and more incentives to expand revenues and/or economize on expenditures; and-ministries, new local trading companies and some enterprises now have authority to engage directly in foreign_trade. 7. Reforms have been most far reaching in rural areas, where introduc- tion of various types of production responsibility systemw has given small groups and households more autonomy in production and investment decisions and linked incomes directly with output. By the end of 1982 92Z of production teams in China had implemented such a system; 78% had implemnted a household responsibility system, whereby collective ownership of farm land and major equipment is maintained but plots of land are contracted out to individual households, which can retain whatever they produce beyond their obligations to the state and to the collective (which account for about one third of production). The number and types of rural markets have also increased. 8. Economic reform has not proceeded as far or as fast In urban areas, but significant systemic changes have occurred. Reforms in the management of state ente prises have aimed at improving incentives through profit retention schemes and more flexible payment and employment practices. There have also been experimental changes in the organization of state enterprises, a greater  - 3 - variety of marketing channels, some price flexibility and adjustment of relative prices, and greater autonomy for state enterprises in production decisions. The scope for cooperative and individual economic activities has also been enlarged. 9. Many economic reforms, especially those in rural areas, have already had a positive impact on efficiency, while others will take longer to have a significant effect. There are also some emerging issues with economic reform that the Government will need to address. In rural areas, there is a potential conflict between enhanced economic incentives and equity in income distribution, continued provision of basic services, and mobilization of * labor. In the state enterprise sector, many units are still inclined to overinvest and overproduce, since substantial decentralization of decision making and control over resources has not been accompanied by necessary reforms in the pricing system. More use is being made of the market, but information and transport systems are still weak, markets are fragmented and competition is limited. It has also been difficult to develop effective indirect fiscal and monetary policy instruments. Adjustment, Stabilization and Growth 10. During the past four years, the Government has followed a strategy of setting relatively modest targets while implementing economic and admin- istrative measures that contribute to adjustment and stabilization as well as to economic growth. The various measures have included: major increases in agricultural procurement prices; strict controls on many other prices; rationing and other administrative measures to improve efficiency of resource use; cutbacks in state capital construction investment; fiscal measures to limit the budget deficit; increases in interest rates; moderation of currency and credit expansion; and the introduction of an internal settlement rate for foreign exchange transactions and other measures to encourage exports and economize on imports. 11. These economic and administrative measures, combined with systemic changes, have played an important role in the impressive performance of the Chinese economy in recent years. Gross agricultural and industrial output at constant prices grew by 7.3% per year between 1978 and 1982 - agriculture by 7.5% and industry by 7.2% (heavy industry by 3.4% and light industry by 11.8%). Net material product (NMP) at constant prices grew by an estimated 6.3% p.a. during the same period. Net investment has stagnated in real temns, while material consumption grew by over 9% p.a. between 1978 and 1982. The share of investment in NM? was reduced from 36% in 1978 to 29% in 1982. Domestic consumption of energy rose by less than 2% p.a. during 1978-82. 12. Structural adjustment and rapid overall economic growth, combined with a low population growth rate (1.3% p.a. between 1978 and 1982), have led to rapid increases in per capita incomes. In urban areas, real per capita  - 4 - incomes increased by 4.8% p.a. between 1978 and 1982; in rural areas the real increase in per capita incomes was about 12X p.a. While more prosperous areas and households may have benefitted the most and income differentials at a local level may have increased, many poor areas and households have also enjoyed substantial income improvements. 13. The high rate of investment in 1978 and the low returns to much of this investment made a cutback in the investment rate a priority for the adjustment program. But achieving such a cutback has proved difficult. Decentralization of investment decision making has permitted a rapid growth in investment financed from retained earnings or local resources. As a result, most of the cutbacks in investment have been in large centrally financed projects (in 1981 even the priority sectors of energy and transportation were affected), though some of these were revived in 1982. 14. Government policy measures have helped restore domestic economic stability by lowering the rate of inflation from 6% in 1980 to 2.4% in 1981 and 2% in 1982, and by reducing the budget deficit (adjusted to eliminate financing items) from 7% of NMP in 1979 and 5X in 1980 to less than 2% in 1981 and 1982. The restoration of fiscal stability was achieved mainly by sharp cuts ia expenditures on investment. Subsidies (mainly on daily living necessities) rose dramatically from about 7% of total expenditures in 1978 to 26% in 1982, whea they were 9% of NMP. 15. China's external position has also changed greatly in recent years; the current account deficit of $2.4 billion in 1980 was converted into a $2.0 billion surplus in 1981 and an estimated $6.4 billion surplus in 1982, an improvement far greater than anticipated. The real growth of merchandise exports has been very impressive, averaging over 15% p.a. during 1978-82, mainly because of a rapid growth in manufactured exports. The growth rate has been declining steadily, however. Meanwhile the volume of imports declined in both 1981 and 1982, due in part to the lagged effect of contract cancellations and suspensions, but also to delays in equipment deliveries and to problems in obtaining high technology goods. A substantial increase in Imports is expected in 1983 and 1984 as China expands its investment program and imports more mach!nery and equipment. 16. A major consequence of the Government's conservative balance of payments strategy has been reduced foreign borrowing. In 1980 and 1981 the Government cut back sharply on interbank borrowing and in 1981 and 1982 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981 China's debt service ratio was 7.8%, due in part to accelerated loan repayments. At the end of 1981 total reserves (excluding gold) were $5 billion; by the end of 1982 they had increased to over $11 billion (equivalent to about seven months of 1982 imports).  -5- Medium-Term Prospects 17. During the remainder of the 1980s, the Government's efforts to improve living standards should be helped considerably by continuation of a relatively low population growth rate; by opportunities to make greater and more efficient use of foreign technology and capital; and by the possibilities for improving efficiency through economic reform. Rapid and equitable econ- omic development is constrained by a number of factors, however. There are serious shortages of skilled manpower (current enrollment in universities and technical and vocational schools is one quarter of the average rate for other developing countries). With limited possibilities for expanding the cultivated area and with cropping intensities and yields already quite high, the growth rate for agriculture is unlikely to average more than 3-4Z p.a. during the 1980s. Energy availability will continue to constrain industrial growth, and there are capacity constraints in the transport and commercial sectors. Large investments will-be required in energy and transport at a time when competing demands from other sectors, especially housing, are very great, domestic revenues have not been growing rapidly, and decentralization has weakened government control over investment. 18. In recognition of these difficulties, the Government's Sixth Five- Year Plan (published in December 1982 but covering the period January 1981 - December 1985) emphasizes continuation of the program of "adjustment, reform, consolidation and improvement of the national economy." The plan period is essentially viewed as an interim period during which the foundation will be laid for more rapid economic development under subsequent plans. Modest targets are set for production and income growth (4% p.a. for gross agricul- tural and industrial output and for NlMP), consumption is expected to grow faster than investment, prices will be kept basically stable, the budget deficit will be kept low, and a significant expansion in foreign trade is forecast, with imports growing more rapidly than exports. Priority will be given to measures improving efficiency rather than maximization of output, but the Government expects most production targets to be surpassed, as they have been in the first two years of tie Sixth Plan. 19. Reform implementation will be speeded up during the next three years. Rural reforms will be broadened and strengthened, with the production responsibility system extended to new spheres of activity, new types of orga- nization (including joint ventures between rural and urban units) encouraged, and the administrative functions of communes separated from their economic functions. In state-owned industry, taxation will replace profit remittance as the primary means of raising government revenue, industrial administration will be streamlined, and more inefficient enterprises will be closed down. The commercial system will be reformed and cooperative and individual commerce, particularly in rural areas, will be promoted. In investment planning, the Government is striving for more effective implementation of existing administrative regulations, but improving the structure and efficiency of investment will be a long and difficult process, dependent very much on progress on other aspects of reform. Measures to introduce formal  - 6 - economic analysis (including use of shadow prices) into investment decisions and to make producing units more economically and financially responslble for their decisions through appropriate pricing and incentive schemes are especially important. Price reform itself is recognized as being crucial, but in view of the complexities and magnitude of the changes required, the Government has decided that it cannot implement comprehensive price reform until after 1985. However, appropriate upward or downward adjustments in the most distorted prices are being made, and the prices of many minor commodities are being allowed to fluctuate according to market conditions. 20. During the remainder of the 1980s, China's development and moderni- zation programs are expected to result in rapid growth of imports of capital and intermediate goods. By the late 1980s, some imports of energy are also likely to be necessary before new domestic energy production capacity is established. China's temporary current account surpluses are expected to change quickly to moderate deficits. But the overall rate of import expan- sion, the size of the current account deficit, and the magnitude of foreign borrowing requirements are very sensitive to assumptions about economic trends and the effectiveness of government programs. For example, even a slight acceleration of economic growth without significant improvements in effi- ciency, especially energy efficiency, could result in large current account deficits and debt management difficulties by the end of the 1980s. In fact, a relatively high rate of economic growth of 6-7% p.a. during the rest of the 1980s (which is the growth rate used in the projections in Annex 1) will probably be feasible only if major improvements in energy efficiency continue. 21. China-s access to concessionary capital to finance its development and modernization program is limited: apart from Bank Group funds, a signi- ficant amount of concessionary capital is likely to come only from Japan and a few other bilateral donors and will probably average only $500-600 million a year during the 1980s. If China is to maintain a reasonable growth rate and manageable debt service payments, it will need to obtain the necessary foreign capital at an average interest rate below the market rate. China also has a strong claim to concessionary lending because it is still one of the poorer countries in the world. 22. For China, as for many other developing countries, the 1980s will be a difficult decade. But looking further ahead, China-s economic prospects appear favorable. By 1990, most new entrants into the labor force will have received some secondary education, and the skilled manpower deficit will have been reduced. Further progress will have been made in tapping China's large energy potential and in using it more efficiently. Continuation of recent manufactured export trends should generate additional foreign exchange, enabling the Government to use foreign capital more freely and be less concerned about its terms. If the country's immense wealth of human talent, effort and discipline can be combined with policies that increase the efficiency of resource use, China will be able to achieve continuing substantial increases in the living standards of its people. Whether this potential can be realized, however, will depend crucially on the success of the Government's program of reform and adjustment in the 1980s.  - 7 - PART II - BANK GROUP OPERATIONS IN CHINA 23. In view of the particular circumstances of China and the economic transition now underway, the Bank's relationship with China should have several broad objectives. Firstly, the Bank should offer China its consider- able development experience and institutional knowledge. Moreover, working with the Bank represents one means for China to re-establish its position in the world community after its lengthy isolation. Secondly, the Bank should assist China in removing the major constraints on development - the shortages of energy, transport infrastructure, skilled manpower and modern technology. Even more important, the Bank should help the authorities to use these and other inputs more efficiently, by improving project analysis and investment control, as well as overall economic management and planning. Finally, the Bank should help the Government identify ways of reducing China's remaining poverty. Since the Government htas been successful in meeting the basic needs of most of its people, these efforts should concentrate on the poorest rural areas. 24. Since China's change of representation in the Bank Group in May 1980, eight projects involving lending of about $870 million have been approved. Two have been in education (University Development and Agricultural Education and Research), two in energy (Daqing Oilfield Gaotaizi Reservoir Development and Zhongyuan-Wenliu Petroleum), two in agriculture (North China Plain and Heilongjiang Land Reclamation), one in transport (Three Ports), and one in industry (Industrial Credit). Annex II contains a summary statement on these loans and credits, as well as notes on the execution of ongoing projects, as of March 31, 1983. Economic and Sector Work 25. The Bank's economic and sector work was initially designed to pro- vide a basis of knowledge on the development and functioning of the Chinese economy. This work resulted in completion of a nine-volume introductory economic report in June 1981. A follow-up country economic memorandum (Report No. 4072-CIA) analyzing developments over the past two years was distributed to the Executive Directors on March 31, 1983. In addition, the Bank has undertaken studies in several areas important for our understanding of the Chinese system, includirm rural finance and urban planning and management in Shanghai. 26. Other economic work is designed to assist China in its present effort to promote efficient use of investment resources, and more generally to introduce new methods of economic management and planning. As preparation for the Industrial Credit Project, an appraisal manual has been developed with Bank assistance by the new financial intermediary, the China Investment Bank. The Bank is now helping to develop a similar manual for the Agricultural Bank of China. A program of economic research on China's  -8- development problems, aimed at the application of advanced analytical techniques, has begun in collaboration with Chinese economic research insti- tutions in the areas of enterprise incentives and analysis of structural change. 27. Sector studies will help inter alia to identify and prepare future investments. Some have been included in Bank Group-financed projects, e.g., agricultural development in Shandong Province under the North China Plain Project, containerization under the Three Ports Project, and agricultural manpower and research under the agricultural Education and Research Project. A health sector review is reporting on rural health care delivery systems and health manpower development. e Near-Term Lending 28. Work has begun on a range of projects, with emphasis on improved management and efficiency as well as on technical assistance and training. Several are in the key sectors of energy and transportation. In energy, the Bank's efforts will help to increase the supply of fuel and power. Future petroleum projects will, like the first two, emphasize the introduction of modern technology, staff training and studies. Other operations will support hydropower generation in southwest China and the development and management of large underground coal mines in Shanxi province. In transportation, the Bank will finance a railway project to help transport coal from mines in Shanxi to the east coast, and may finance further projects in railways and in ports where additional capacity is needed. 29. In view of China's shortages of manpower with higher or technical education, the Bank will continue its support of education, through the pro- posed polytechnic and TV university project, a second agricultural education project, and another university development project. Support of agriculture will continue through a project to develop rubber cultivation in Guangdong Province, as well as others to provide rural credit in two provinces with emphasis on improved project appraisal and institutionbuilding, provide further assistance in agricultural research, and assist the Government in forestry. In industry, further loans will be made to the China Investment Bank mainly for modernization of light industries and export projects, and there will be projects for technical renovation and modernization in industries such as fertilizers and machine tools. In health, a project will help improve rural health care services and medical education. Bank assistance is also planned for a water supply project.  - 9 - PART III - TECHNICAL ASSISTANCE Scope of Technical Assistance Need. 30. China's isolation and limited access to the innovation and technological advance occurring elsewhere in the world during much of the past 30 years constitutes a major stumbling block to the achievement of more rapid progress today. Many of the changes now underway (see Part I) are linked to the objective of establishing conditions under which China cpn become a technologically progressive and dynamic economy. Most reforms can be expected to bear fruit in a relatively long run context (for example, the expansion and reform of the system of higher education); in the interim however, the Government is seizing opportunities to inject modern technology in key sectors of the economy through its massive investment program. The focus for much of this effort is an expanding network of joint agreements and technical cooperation with the international private sector (as for example, in offshore petroleum); another part involves Investment-linked advisory services and technical assistance through government-to-government cooperation and in association with multi-lateral agencies, including the Bank Group. The proposed project would contribute to this effort, in particular, by providing a source of funds for studies and other services related to the expanding program of Bank Group lending. IDA's Role and Strategy 31. Early Bank Group experience, in project work carried out over the past three years, confirms the important role of technical assistance in the design and preparation of projects, even though the bulk of the work is carried out by government officials and agencies. 32. In addition to the direct role of Bank Group staff in project preparation and appraisal, considerable support for these early projects has been obtained from the UNDP. The Bank has been the Executing Agency for two UNDP-financed projects which have had the specific objective of preparation of investment projects to be financed by the Bank Group. UNDP has allocated $1.8 million for this purpose, $1.4 million under an Umbrella Project and $400,000 for preparation of a proposed first coal project. The Umbrplla Project has financed inputs required in connection with preparation _ each of the first eight projects approved by the Bank Group, and is financing inputs for several other proposed projects. Typical Umbrella Project subprojects include major inputs into feasibility studies, assistance with preparation of bidding documents, study tours and other training. A list of subprojects financed under the Umbrella Project is attached as Annex IV. Bilateral grants have also been drawn upon to help finance project preparation activities. Australia made an initial grant of approximately $380,000 equivalent in 1982 for preparation of a proposed first hydropower project, and Germany has approved assistance worth approximately $400,000 equivalent for further preparation of a proposed first coal project. The  - 10 - Government has also begun to make increasing use of piggybacking, i.e., the inclusion of funds in one Bank Group-financed project for the preparation of subsequent projects involving the same ministry in the same sector. 33. The Government intends to continue to utilize grant financing from UNDP and bilateral sources for project preparation when it is available. However, UNDP's allocation to China is limited and there are many compet- ing demands on it. Bilateral financing will continue to be utilized in certain cases. For example, Australia has agreed to provide grant financing totalling $3.7 uill!on for additional assistance for preparation of the proposed hydropower pLoject referred to above, for urban transport, housing and sanitation studia- in Shanghai, and for the preparatiou of a future 9 coal project. Other possibilities for bilateral financing will be pursued actively, e.g., through rhe Government-s technical assistance agreements with Canada and Germany. Piggybacking will also be increased. 34. The Government thus intends to continue to make use of the mechan- isms described above to finance project preparation activities. However, they are expected to be far from sufficient to meet the full needs of the ex-anding Bank Group lending program to China. The proposed IDA technical cooperation credit would fill the need for an assured and flexible means of financing project preparation when grant financing is unevailable. The credit would also finance other categories of technical assistance in appropriate cases (see para. 37). Administration of Technical Assistance 35. The three main organizations dealing with the administration of technical assistance in China are the State Planning Commission, the Ministry of Finance and the Ministry of Foreign Economic Relations and Trade. The State Planning Commission is responsible for ensuring that proposals for technical assistance are in accordance with the national development plan. The Ministry of Finance must ensure the availability of counterpart financing for each project and acts as the coordinating author- ity for Bank activities in China, including techrical assistance. The Ministry of Foreign Economic Relations and Tradle is the government coordinr- ating authority for United Nations and most bilateral technical cooperation. In addition to the overall coordination and supervision functions exercised by these bodies, the relevant line ministry or agency is responsible for initiating requests for specific technical assistance, providing counterpart support and technical supervision, and utilizing the results.  - 11 - PART IV - THE PROJECT Project Formulation and Preparation 36. The Bank Group has been discussing the possibility of an IDA credit for technical assistance with the Government for the past year and a half because of the need to supplement existing sources of technical assist- ance for preparation of the expanding program in China. Appraisal cf the project took place in March 1983. Negotiations for the proposed credit were held in Washington, D.C. in July, 1983. The Government was represented by a delegation led by Mr. Luc Qing, Deputy Director of the External Finance Department, Ministry of Finance. Attached as Annex III is a supplementary project data sheet. Project Objectives and Description 37. The principal objective of the project is to provide an assured and flexible source of financing (line of credit) for technical assistance for the preparation of projects proposed or expected to be proposed for fi-xancing by the Bank Group, in cases where other preparation financing is not readily available on equally suitable terms and where IDA financing would permit more expeditious action. The project also provides for financ- ing of technical assistance for the preparation of other investment pro- jects, in exceptional cases. Further objectives are to strengthen the government-s capacity to select, prepare and implement projects and to administer technical assistance. It is expected that limited technical assistance required for the implementation of projects already being financed by the Bank Group, and instit-:Lion building assistance to agencies involved with Bank Group operations, would also be financed. In addition, the credit would finance limited amounts of equipment required for implementation of the technical assistance provided. 38. The proposed project would finance approximately 20-25 subprojects involving high priority technical assistance needs. Individual subprojects, their method of implementation and allocatioas from the credit would be agreed between the Government and the Association on a case-by-case basis. The subprojects would be of high priority in the Government-s economic development plan and consistent with the Bank C oup-s lending strategy in the country during the next few years, and would have no other equally suitable source of external financing (Development Credit Agreement, Section 3.01 and Schedule 1). Virtually all sectors where the Bank Group is involved in lending are expected to benefit. The pipeline of potential suSprojects under consideration for financing under the proposed project is given in Annex V. At negotiations, preliminary agreement was reached on some 16 initial subprojects, cvering the first six to twelve months of project implementation.  - 12 - 39. Subprojects or activities likely to be .inanced from the credit include major inputs into large feasibility studies, assistance with or review of other feasibility and prefeasibility studies, smaller amounts for other preparation work such as expert panels, individual specialists, and study tour<, limited related equipment and other activities whose objective is to strengthen institutions responsible for project planning and implemen- tation. Technical assistance required during the implementation of projects already being financed by the Bank Group, such as advisory services (where these are not include4 in the project loan or credit) would also be eligible in exceptional cases, primarily where the aeed for such technical assistance was not foreseen at the outset. 40. While the principal objective of this first techaical cooperation credit is to finance technical assistance for specific projects, an effort would be made to strengthen the Government-s ability both to administer technical assistance and to prepare projects. Certain steps have already been taken. In June 1982 the Bank gave a three-day seminar in Beijing on consultiag services for the central coordinating authorities as well as line ministries and China-s recently established consulting firms. The appraisal mission for the project devoted substantial time to the mechanics of techni- cal cooperation, using the Association-s experience with technical assist- ance projects in Bangladesh as a case study. During negotiations the Association conducted a seminar on technical assistance utilizing its recently developed audio-visual program on procedures for the contracting of consultants. It also provided the proposed project coordinator within the Ministry of Finance (see para. &2) with a week of training in technical assistance administration at Association headquarters at the conclusion of negotiations. Finally, arrangements have been set in motion for the three most closely involved Ministry of Finance officials to visit Bangladesh and Pakistan to review those countries- considerable experience with technical assistance projects financed by the Bank Group. 41. To strengthen China-s ability to prepare projects, an effort would be made to ensure that consultants- terms of reference include appropriate provision for training of counterpart staff. If the line ministry agrees, additional man-months would be included in consultants- contracts specifi- cally for training. Also, in certain cases it may be desirable to have local and foreign consultants work in combination on specif'c assignments to facilitate the transfer of technology. Because of the importance of the terms of reference to the success of consulting assignments, IDA would review and approve all terms of reference (Development Credit Agreement, Section 3.05(a)). Organization and Implementation 42. The External Finance Department of the Ministry of Finance (MOF) would have responsibility for overall coordination and subproject processing for the Government (Development Credit Agreement, Section 3.04 (b) (i)). MOF would consult with the State Planning Commission concerning the status  - 13 - of the investment project which the technical cooperation credit (TCC) subproject would support. It would consult with the Ministry of Foreign Economic Relations and Trade concerning the availability of UNDP and bilateral grant financing for the proposed subproject. The MOF is making the necessary internal arrangements to coordinate and to administer the TCC; it would designate a suitably qualified officer of the External Finance Department to serve as project coordinator until the Closing Date, to be assisted by other competent staff in adequate numbers as required (Development Credit Agreement, Section 3.04 (b) (ii)). The Ministry has identified a suitably qualified official as the proposed coordinator and his formal designation is expected shortly; he was a member of the Chinese E negotiating team. As mentioned above (para. 40) the Association is assisting MOF with the training of the proposed coordinator and his staff. Designation of the coordinator would be a condition of effectiveness (Development Credit Agreement, Section 5.01(b)). The MOF also intends to provide the coordinator with an assistant familiar with Bank Group operations in China. 43. Line ministries would present requests for TCC financing to MOF. These requests are expected to originate mostly during discussions between Bank Group project staff and line ministry staff during the course of missions. MOF would review the proposals on a case by case basis and those the Government supports would be forwarded to the Association for approval. The line ministry would handle all technical aspects of the subprojects, and would contract consultants, arrange study tours and other training, an' procure equipment. MDF would provide administrative assistance on a case-by-case basis. It plans to draw up shortly guidelines for the processing, implementation and supervision of subprojects, and intends to provide the guidelines to the Association for review prior to finalization; points to be covered were discussed during negotiations. 14DF would maintain records on the status of each subproject including the elapsed time between various steps in subproject processing and the contracting of consultants. The Government would establish procedures satisfactory to the Association for supervising the work of consultants and reviewing their reports and recommendations (Development Credit Agreements Section 3.04(c)). IDA would have the right to terminate withdrawals--for a particular subproject in case of a delay exceeding six months in effectiveness of the related consultants' contract (Development Credit Agreement. Section 4.01(b)). Project Cost and Financing 44. The proposed project would cover a two-year commitment period (FY84-85), while the Closing Date for disbursements would be December 31, 1987. The total project cost is estimated to be $12 million, including taxes and duties with a foreign exchange cost of $9 million. The proposed IDA credit would be SDR 9.4 million ($10 million equivalent) and would finance the full foreign exchange costs, as well as a portion of local costs in appropriate cases (para. 47). The Goverrment would finance the remaining $2 million of local costs. No allowance has been made for r,hysical and price contingencies as the project is essentially a line of  - 14 - credit to help finarae a program defined in financial terms and for which the specific requirements are not yet known precisely. Based on consultants- rates under the UNDP Umbrella Project and estimates for consultants to be financed from initial Bank Group supported projects, it is estimated that the consultant rates under the proposed project would average about $10,000 per man-month (including travel and subsistence). 45. The proposed credit amount is based on an estimate of the technical assistance requirements for project preparation during FY84-85. This would include any remaining technical assistance required to prepare the projects expected to be brought forward for Board consideration in FY84, technical assistance requirements of projects in the pipeline for FY85-86, and the initial requirements of projects programmed after FY86, i.e., technical assistance expected to be needed before the close of FY85 'or such projects. The MOF would make credit funds available to line ministries as grants, except that whenever an investment project resulted, the funds would be repaid to the MOF on terms and conditions satisfactory to the Asociation (Development Credit Agreement, Section 3.08). An understanding was reached that repayment would take place in the first year after the grace period of any loan made for the investment project, which is acceptable. Procurement and Disbursements 46. Consultant services to be financed from the proposed credit would be contracted in accordance with the Bank-s Guidelines for the Use of Consultants. Equipment to be financed from the credit would be limited and the cost of most individual items is expected to be small. Procurement of items and groups of items estimated to cost $100,000 or more in each contract (if any) would be through international competitive bidding in accordance with the Guidelines for Procurement under World Bank loans and IDA credits. Domestic manufactur.-rs would receive a preference of 15% or the applicable customs duty, whichever is less, in bid evaluation. Items and groups of items estimated to cost less than $100,000 in each contract and not exceeding an aggi-egate amount of $500,000 may be procured an the basis of quotations from at least three qualified suppliers. Prior Association review would be required of contracts for equipment items estimated to cost $100,000 or more (Development Credit Agreement Schedule 2). 47. It is estimated that about 70% of the credit would finance consul- taut services and about 30% would finance study tours, other training and equipment. The Association would finance Ci) 100% of foreign expenditures for consultant services: (ii) 100% of foreign expenditures for overseas study to'rs and other training; (iii) for equipment, 100% of foreign expend- itures, 100% of local ex-factory costs and 75% of local expenditures for imported items procured locally. The Government will normally meet the costs of local consultants. However, to facilitate the transfer of technology, an understanding was reached that the Association would, if requested, finance 100% of local expenditures in cases where the local consultants work in combination with foreign consultants.  - 15 - 48. The Government-s contribution to individual subprojects would normally consist of counterpart staff, local consultants, office space, supplies, secretarial services, vehicle operation. It is expected to total about 17% of the cost of each subproject. Monitoring and Evaluation 49. The Ministry of Finance would be responsible for monitoring the project and would collect, review and evaluate information regarding individual subprojects. Semi-annual progress reports would be forwarded to the Association (Development Credit Agreement, Section 3.06(b)). The line * ministries would be responsible for monitoring the progress of individual subprojects. Project-related accounts would be audited by independent auditors acceptable to the Association and the audit report provided to the Association within six months of the end of each fiscal year (Development Credit Agreement, Section 3.07(b)). The State Audit Agency now in process of establishment may be in a position to undertake the relatively simple audit that will be required for this project. Benefits and Risks 50. The major benefit of the proposed project would be the development of a pipeline of projects intended and suitable for financing by the Bank and/or the Association. The project would also strengthen other institu- tions which support the development and implementation of investment projects. A longer run benefit would be the strengthening of the Govern- ment-s capability to prepare projects. It is expected that the domestic consulting industry would also be strengthened through working with foreign consultants, thus reducing dependence on expatriate consultants and advisers for preparation of repeater projects. 51. There are no major risks in the implementation of the proposed project. There is some risk that implementation could proceed more slowly than projected. This is due in part to the borrower's relative inexperience with management and supervision of foreign technical assistance. To minimize this risk, training has been and would be provided for Ministry of Finance staff and the Association would monitor the project closely. 52. Because of the nature of the project, and the fact that it is the first one of its type in China, it would require close supervision and advice and a heavier than usual allocation of IDA staff time.  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 53. The draft Development Credit Agreement between the People's Republic of China and the Association, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, are being distributed to the Executive Directors separately. 54. Additional conditions of effectiveness of the proposed credit would be that: (a) China's State Council shall have approved the Development Credit Agreement; and (b) A project coordinator shall have been designated (Development Credit Agreement, Section 5.01). 55. Special conditions of the project are listed in Section III of Annex III. 56. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments August;4-, 1983 Washington, D. C.  - 17 - ANNEX I Page 1 of 6 aETNA. PZwar S REP. Or - SOCIAL TAOSAORS mAA SRET CIIIIU PE W lES REP. OF' REFREzCE SOUPS cElIetwD AvERAcS) ^. MrSS (MOST RECET ESTIMATE) /b RCENT LGW IlCZ MIIDLE IN-COtE 196