China - Second University Development Project

Document of The World Bank FOR OFFICIL USE ONLY Repot Ne.P-3933-CHA REPORT ALND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 148 ILLLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND UNIVERSITY DEVELOPMENT PROJECT February 5, 1985 This docunent has a restricted distbutin and may be ued by recipients only in the perfonrance of their official duti Its conLuts may not otiwise be disclosed witwot World Bank antbriinion I  CURRENCY EQUIVALENTS Currency Unit = Yuan (Y) $1.00 Y 2.80 (as of January 1985) Y 1.00 = $0.36 FISCAL YEAR January I - December 31 ACADEMIC YEAR September 1 - August 31 ABBREVIATIONS AND ACRONYMS AAPRC - Audit Administration of the People's Republic of China CNTIC - China National Technical Import Corporation MOE - Ministry of Education MOF - Ministry of Finance SOE - Statement of Expenditure- SPC - State Planning Commission .  F OR CAL USE ONLY CHINA SECOND UNIVERSITY DEVELOPMENT PROJECT Credit and Prolect Summary Borrower: People's Republic of China Amount: SDR 148 million ($145 million equivalent) Terms: Standard Prolect Description: As the first phase of a ten-year program (1985-94) to build up high-level technical and managerial manpower for national development, the proposed second university development project aims to promote policy and institutional changes related to the engineering and economics/finance education subsector. Objectives include: relatively faster growth of enrollment in economics/finance and postgraduate education; broadening of present over-specialized curricula; accelerated in-service training and promotion of younger faculty; strengthening of experimental work and academic support services such as computer and audio-visual certers and libraries; improvement in longer-term manpower planning, facilities planning and university resource utilization; and introduction of project monitoring and evaluation. In support of the program, the project would help finance: (a) equipment and materials including bcoks and Journals related to engineering and economics/finance for about 35 subproject universities; and (b) technical assistance and equipment for five national programs comprising specialist services, fel- lowships, staff exchange, studies, and training centers. By 1990 the annual supply of engineering and economics/finance graduates is expected to increase to 180,000 and 50,000, respectively, which would meet the needs of central and provincial government agencies for technical and managerial manoower. The graduates would have received an improved quality of education under more efficient management. It is also expected that the capability of the Ministry of Education to systematically process and implement projects would improve as a result of the changes to be adopted under the proposed project. An important risk arises from the inherent difficulty in coordinating imple- mentation by many subproject institutions managed by some 20 ministries. In order to reduce this risk, a central coor- dinating committee, comprising representatives of the State Planning Commission, the Ministry of Finance and the 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.  - ii - Ministry of Education has been created. Also, a workimng group located in the Ministry of Education and responsible for day-to-day project implementation has been formed consisting of representatives of selected universities. Program Cost (July 1985 - June 1989): Local ForeiRn Total ---- $ million -- National programs 59 24 83 Engineering subprojects 329 242 571 Economicsffinance subprojects 92 53 145 Base Cost 480 319 799 Contingencies Physical 48 32 80 Price 170 113 283 Total Cost /a 698 464 1.162 Financing Plan: Local Foreign Total $ million -- Government 698 319 1,017 IDA - 145 145 Total 698 464 1.162 /a Excludes indirect taxes and duties. Imported equipment, books and journals would be exempt from duties. Estimated Disbursement: IDA Fiscal Year 1986 1987 1988 1989 1990 1991 ------ $ million ----- --------- Annual. 1.5 27.5 43.5 36.5 29.0 7.0 Cumulative 1.5 29.0 72.5 109.0 138.0 145.0 Rate of Return: N.A. Staff Appraisal Report: No. 5271b-CHA dated February 5, 1985  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 SECOND UNIVERSITY DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed IDA credit to the People's Republic of China to help finance a Second University Development Project. The credit for SDR 148 million ($145 million equivalent) would be on standard IDA terms. PART I - THE ECONOMY 2. 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. An economic mission that visited China early in 1984 is currently preparing a report on long-term development issues and options, which is expected to be submitted to the Executive Directors by May 1985. Basic data on the economy are given in Annex 1. Background 3. To address problems of economic inefficiency and structural imbalances, the Goverrment initiated a program of reform and adjustment in 1979. Reform implementation proceeded most rapidly in agriculture and culminated with the introduction of the "production responsibility systeM" (in various forms), which gave households and small groups autonomy in production and investment decisions and allowed them to keep most income earned after contracted payments to the state and collective. By the early 1980s, the vast majority of production teams in China had implemented such a system. Reform of the urban economy started out much more slowly, but nevertheless signi- ficant systemic changes occurred, including bonuses for individual workers; profit retention by state-owned industrial enterprises (at first on an experimental basis); fiscal decentralization measures, which allowed provinces to share in the benefits of increased revenues and gave them more freedom in budgeting; and some decentralization of foreign trade authority. Adjustment policies resulted in an increase in the share of consumption in GDP; a rise in the share of light industry in total industrial output, substantial improve- ments in living standards, rapid growth of foreign trade (particularly manufactured exports), and relatively modest (in relation to past trends) GDP growth. 4. A number of problems emerged in the process of reform and adjust- ment, including large budget deficits in 1979 and 1980, a deterioration of the external position and a significant current account deficit in 1980, inflationary pressures and some overt price increases, and excessive invest- ment demand resulting from decentralization of investment decision making and financing. In response to these difficulties the Government imposed a stabil- ization program in early 1981, which relied mainly on administrative con- trols. It resulted in a slowdown in growth, a reduction in price inflation  - 2 - (to around 2% p.a.), a sharp cutback in budget-financed investment, a lower budget deficit (1% of GDP in 1981); and a current account surplus of $1.5 billion in 1981 and $5.6 billion in 1982. Economic Performance. 1981-84 5. Economic growth picked up in 1982 with the resumption of rapid growth of heavy industry and the rebound in investment. Overall performance has continued to be strong -since then, and real GDP growth averaged over 8% p.a. from 1981 to 1984. Shortages of energy, many producer goods, and con- struction materials were exacerbated by the rapid growth of demand, yet price increases were limited by further strengthening of administrative price controls (particularly in 1983). Government budget revenLue grew very slowly in -1982 (1.3%) but much more rapidly in 1983 (7.9%) and 1984 (as much as 10%), due to a new-tax on enterprise retained funds and extrabudgetary incomes of Government organizations. This permitted an increase in budget expenditures on investment of 17% in 1983 and a further rise in 1984, while maintaining a relatively small budget deficit (less than 2% of GDP in 1983). Growth of subsidies was largely stemmed by stopping increases in most of the agricul- tural procurement prices. 6. Gross industrial output value grew at over 10% p.a. between 1981 and 1984, with heavy industry growing somewhat faster ttan light industry (12% vs. 9%), a reversal of the 1978-81 pattern. The energy constraint on industrial growth was eased by rising coal output (8% p.a. in 1981-84) and maintaining annual crude oil output at over 100 million tons, along with improvements in the efficiency of energy utilization (primary commercial energy consumption grew only 60% as fast as GDP in 1981-83). Agriculture has continued its very strong performance, with gross agricultural output value rising at 9% p.a. in 1981-84 and grain output at 7% p.a. (reaching over 400 million tons in 1984). Cash crops and animal husbandry have also grown very rapidly, stimulated by rising demand and attractive prices. 7. There have been impressive increases in personal incomes throughout the period 1978-83. Average per-capita income in rural areas rose by about 12% p.a. in real terms and urban incomes by about 5% p.a. Rural income growth was mainly due to production increases, efficiency improvements, and growth of employment in nonagricultural activities, as well as substantial agricultural procurement price increases (through 1981). Urban income growth, on the other hand, can be attributed primarily to wage and benefit increases, which have exceeded growth of labor productivity. 8. Control of the aggregate level of investment and its composition has continued to be a serious problem. Enterprise and local government investment continued to increase sharply in 1982, far exceeding plan guidelines. In 1983, more stringent measures brought this part of investment under control (though it still exceeded plan targets). But investment outside the rural sector remains rather inefficient, and improvements in efficiency have been hindered by administrative controls. Construction costs have risen continuously (10% p.a. in 1978-83).  - 3 - 9. China has maintained a strong external position. The dollar value of both exports and imports stagnated in 1981-83, but this masked considerable increases in the volume of foreign trade. Since 1983, imports have grown more rapidly than exports, and in the first 11 months of 1984, exports rose by 18% and imports by 25%. Manufactured export growth was slower in 1981-84 than in 1978-81, but it started from a much higher base and occurred in the face of worsening world market conditions. Foreign debt and debt service ratios remained at very low levels ($6.4 billion and 5.5% respectively in 1983); China's foreign currency reserves (excluding gold) rose to $17 billion (over 7 months' imports) by mid 1984 and have stabilized at that level since then. The value of the Chinese rernminbi declined by about 36% against the SDR between the end of 1981 and late 1984 (60% against the US dollar). Recent Reforms 10. Rural reforms have continued to progress more rapidly than reforms elsewhere in the economy. A salient trend has been the spread of nonagri- cultural activities like processing, transport, and commerce. "Specialized households" (which concentrate on one type of pursuit - often cash crops, animal husbandry, or nonagricultural activities) and pooling of capital by small groups of households in various types of ventures are becoming increas- ingly common forms of economic organization in China's rural areas. Wholesale markets for some agricultural products have emerged. To encourage investment in land improvement and development, farming contracts between collectives and peasant households (which typically had been fixed for no more than 3-5 years) can now be extended to as long as 15-20 years. In early 1985, it was announced that planned procurement quotas for agricultural commodities will be abolished; more methods of financing investment in rural nonagricultural activities will be permitted (including tax exemptions, local government bonds, higher interest rates to attract more saving, etc.); and the growth of the agricultural processing industry in coastal areas will be promoted. 11. The momentum of urban reforms has revived, with significant progress on a number of fronts. Since early 1984, a main focus has been further broadening and clearer delineation of the decisionmaking authority of urban enterprises. Profit retention now extends almost universally to state-owned industrial enterprises and in nonindustrial sectors like transport, commerce, construction, and other services. Urban collectives and individual enter- prises as well as a variety of joint ventures between them and state enter- prises have grown rapidly (the number employed in urban individual enterprises rose from 150,000 in 1978 to 2.31 million in 1983). 12. In financial reforms, the most important new development was the implementation of a profit tax system to replace profit remittances to the Government budget by state enterprises. Though most enterprises have switched to this system, the benefits have been limited because of the application of a different effective tax rate for each enterprise, to offset the impact of distorted relative prices and other factors. Similar problems have resulted in the abandonment of an attempt to impose a fee or charge on the fixed capital provided to state enterprises by the Government, and they have hindered the shift from grant to loan financing of new fixed investment, de_-ite strong Government support. Financial discipline at the enterprise  - 4 - level remains weak, in spite of efforts to strengthen accounting and auditing systems and more strictly enforce existing .-Mancial regulations. 13. In the crucial area of price reform, a major price adjustment for textiles and textile raw materials occurred in early 1983; it helped balance supply and demand, to a large extent equalized profit rates for synthetic and cotton textiles (which are close substitutes in production and consumption), and drastically reduced subsidies for cotton procurement, with only a small net effect on the Government budget. Prices of many "minor" consumer goods (which individually do not have a significant impact on living standards) and the majority of agricultural commodity prices have been decontrolled and are now set by negotiations between producers and commercial units. "Floating prices" (up to 20% above or below official prices) are now allowed for many industrial producer goods (either for all output or for output above the mandatory plan target). Price adjustments for key energy products and raw materials (which in many cases are severely underpriced) and for subsidized basic consumer goods like grain and edible oil have proven more difficult to implement, hindered by the potential impact of price changes on urban living standards and on the finances of energy-using enterprises. Nevertheless, some price rises have occurred (e.g. for coal and petroleum), and moreover the share of free market transactions (at largely uncontrolled prices) has increased in recent years. 14. Reforms in the employment and wage system have made limited progress. The bulk of urban labor is still allocated administratively, and transfers of workers or professionals among enterprises are heavily impeded. Numerous attempts are being made to link individual performance more closely with rewards, including piece-rates, "floating wages," and various types of contractual "responsibility systems." These have achieved some success, but problems of egalitarian distribution of bonuses remain, and many enterprises give out bonuses in kind or disguise them as allowances in order to evade regulations. 15. China's foreign exchange rate system has been unified with the abolition of the "internal settlement rate" (Y 2.8 to $1) at the beginning of 1985. Direct foreign investment (which was first allowed in the late 1970s but developed slowly due to the lack of a legal framework) is being actively encouraged and joint venture agreements have increased sharply. In addition to four "special economic zones" open to fcoreign investment and subject to more flexible policies, 14 coastal cities were recently opened up in the same way. 16. Significant steps have been taken to develop new tools of indirect macroeconomic management. The central banking functions of the People's Bank of China were separated from its commercial banking functions (which were given to the newly-established Industrial and Commercial Bank of China) at the beginning of 1984. The central bank relies on redeposit requirements and a discount window to influence the operations of specialized banks, and even- tually may use discount rates and interest rates in general as a flexible tool of macroeconomic management. Adjustments in indirect taxes may be used to affect profitability and supply, in the absence of or as a supplement to price reform. Scope for horizontal flows of investment funds is also being widened,  - 5 - with enterprises investing in each other and in joint ventures and in some cases purchases of stocks by individuals occurring. Though restrictions on secondary trading remain, Government bonds purchased by individuals now can be sold to banks or used as collateral for loans. Long-term Issues and Prospects 17. The Central Committee of the Chinese Communist Party issued a major document on urban reforms in October 1984, which reaffirmed and consolidated recent reforms and gives some general guidelines for the direction of future reform. It emphasizes the need for breakthroughs in the following areas: (a) enlivening and better motivating urban enterprises; (b) clearly separating Government and enterprise functions (and limiting direct intervention by Government organizations in enterprises' day-to-day operations); (c) reforming the price system; (d) improving incentives in the wage and bonus system; (e) establishing a planning system that is in harmony with greater reliance on the market mechanism and developing indirect macroeconomic management; (f) up- grading managerial personnel to meet the new demands on them in a reformed economy; (g) removing obstacles to a unified national market and promoting cooperation and technology transfer among regions; and (h) expanding utiliza- tion of foreign capital and advanced technology. Among the main themes of the document are the role of competition in promoting a more dynamic, flexible economic system; the recognition that a certain degree of income inequality is necessary to provide better incentives for economic development; the need for clear responsibilities and appropriate incentives at all levels in the economy; and the recognition that thoroughgoing price reform must involve liberalizing the mode of price determination, not just adjustments in administratively set prices. Managers of large state-owned enterprises, however, will still be appointed by Government organizations; a few key products will still be subject to mandatory planning and distribution by the Governmient; state ownership and control over certain institutions like banks and railways will net be relinquished; and establishment, relocation, changing product lines, mergers, and shutdown of enterprises will still be subject to Government approval. 18. The Central Committee declaration represents a political commitment to economic reform, which will help foster an environment in which fundamental reforms can be gradually implemented in a coordinated way. But specific policy measures will take a considerable length of time to design and then to implement. Many of the reforms required will be very difficult, particularly since reforms in different areas are closely interrelated, and thus appro- priate sequencing and coordination become essential. For example, price reform in the absence of improvements in enterprise financial discipline will have limited benefits, yet the more profit-oriented behavior that would result from tighter financial discipline would exacerbate the adverse impact of distorted prices. Similarly, reform of the labor allocation system will be incomplete without eliminating many of the "social responsibilities" of enter- prises (which now provide housing, medical care, and pensions for their workers and in many cases education and jobs for workers' children) and replacing them with Government supported social service programs.  -6 - 19. China's objective of quadrupling the gross output value of industry and agriculture between 1980 and 2000 (which means GDP growth of well over 6% p.a.) will require significant improvements in efficiency as well as continued high saving and investment rates. There will be major structural changes in the economy over the next two decades, including a reduction in the share of agriculture, a rise in the share of industry and possibly in that of services (which at present is unusually low), and substantial urbanization (in smaller towns if not in large cities). There will also be a shift within agriculture, away from grain and basic crops and into cash crops and animal husbandry. 20. Certain physical/technical constraints will ninder the attempt to achieve China's targets for the year 2000 and its longer-term goal of catching up with the developed countries. Despite rapid growth and substantial improvements in efficiency in recent years, agriculture may again become a constraint on overall growth, since land in China is severely limited. In energy, shortages of fuel (primarily coal) and electricity may continue to constrain growth as they do now. Transport and commercial infrastructure will become increasing drags on the economy without large new investments (as well as improvements in efficiency). In mobilizing resources in all these areas, China could profitably make use of foreign borrowing. Finally, the rising share of the elderly in China's population (related to the slowdown in popu- lation growth) means that more resources will have to be devoted to main- taining their consumption levels, especially in the decades after 2000. 21. Poor motivation and inefficient utilization of labor in the state sector of the economy are a major problem which can be solved only by coor- dinated reforms in labor allocation, the wage system, enterprise management, and social services, among other things. Reforms in the system of education and training to develop China's "human capital" potential also are crucial. Backward technology and inefficient utilization of existing technology must be dealt with by a combination of reforms, appropriately directed investment, and transfer of advanced foreign technology. Irrational location of factories. suboptimal scale of many plants, and poor utilization of physical capital in general are related problems. 22. If reforms successfully transform the economic system, with a beneficial impact on growth and efficiency, a new set of issues will come to the fore. Management of a reformed economy with indirect fiscal, monetary, and other instruments is one of the most important ones. In this context, maintaining an adequate saving rate (if the Government no longer accounts for the bulk of aggregate saving) and avoiding inflation (as well as deep cyclical downturns) will be major goals. Assuring an adequate minimum standard of living for the population and an appropriate level of social services will become a major challenge as enterprise and rural communal responsibilities in these areas are reduced. The problem of poor, backward rural areas in various parts of the country will continue to require attention. Redistribution of financial resources through the fiscal system, easing restrictions on migra- tion out of the poorest areas, and lower nonagricultural wages to make invest- ment in them more attractive are among the ootions for alleviating poverty in these areas.  - 7 - 23. The Government is now in the process of finalizing its Seventh Five Year Plan (covering the period 1986-90). The combination of potentially fundamental reforms and the urgent need for large investments in many parts of the economy to build the foundation for further growth makes this task a difficult one. In order to mobilize the investment resources needed for rapid, sustained economic growth and development, China will need to rely in part on foreign borrowing. This is recognized by the Government, which plans to gradually draw down its substantial foreign exchange reserves and hopes to attract foreign capital through a variety of channels. China also has a claim to concessionary lending because it is still one of the poorer countries of the world. But its access to concessionary capital to finance its development and modernization program is limited; apart from Bank Group funds, a significant amount of concessionary capital is likely to come only from Japan and a few other bilateral donors and will probably average no more than $500- 600 million p.a. during the rest of the 1980s. PART II: BANK GROUP OPERATIONS 24. For China to sustain rapid growth over the coming decades, with increases in efficiency and innovation while maintaining equity in distribu- t-ion, will require continuing and fundamental reforms. These challenges are compounded by China's large investment requirements and the difficulties associated with its efforts to open up to the rest of the world. In light of this, there are several broad objectives for the Bank to pursue in its relationship with China. First, the Bank can offer China its development experience and institutional knowledge as well as the opportunity for interaction with the Bank's other member countries. Second, the Bank can assist China in removing major constraints on development and in improving investment planning and policy coordination in the priority sectors - particu- larly energy, transport, other infrastructure, human development and industry. Third, the Bank can assist the Government in its efforts to remove the remaining pockets of poverty. 25. The Bank Group's strategy to meet these objectives is formulated in line with China's broad development priorities and related issues outlined in Part I of this report. However, Bank Group lending can provide only a small portion of overall resource needs. As a key element of the strategy, therefore, the Bank's lending operations will aim to create a substantial demonstration effect applicable to China's overall development efforts. For example, projects involving new techniques for land development or for provi- sion of social services have been designed so that they can be repeated by local authorities within their existing resources. Some of the agriculture projects and the rural health projects are examples of this approach. The introduction of international competitive bidding through Bank projects (first to finance goods, and later civil works) is now being adopted by the Government for most local purchases and many domestic construction projects. 26. Bank assistance can help improve the efficiency of investment, through introduction and dissemination of improved analytical techniques for investment and project planning and through institution building. Preparation  - 8 - of the project appraisal manuals for the China Investment Bank and the Agricultural Bank of China, consultant assistance and the EDI sponsored programs, as well as specific sector work in transport, industry, health, education and other sectors have improved the quality and content of project proposals. Assistance to Chinese enterprises and agencies through staff training, consultant assistance, creation or reorganization of institutions, and improvement of costing and financial management has been included in a number of projects ranging from the ports and railway projects to the several education and petroleum projects. Specific sector work in enterprise manage- ment, urban development, health and industry has also provided assistance for improvement of investment efficiency. 27. Human resource constraints are a particularly serious problem for China's development. There are severe scarcities of higher level trained manpower. Substantial economic and sector work and technical assistance and training components in most of the Bank projects are providing support. In terms of poverty alleviation, the rural health project, proposed urban and water supply projects and sector work on labor mobility and regional development options address poverty, health and equity issues. 28. Transfer of technology in the broad sense is of fundamental impor- tance iL China's efforts to improve efficiency of the economy. Outmoded, inefficient and costly industrial technologies are serious impediments to development and are wasting valuable energy resources. Here, the Bank can play the role of an intermediary. In transportation, energy, industry, agriculture and even education, the Bank can finance transfer of technology through equipment imports, provision of foreign consulting assistance, arrangement of training and promotion of licensing and other agreements such as are now being discussed in the railways and other projects. Long-term investment for new technology will require increased foreign borrowing in the future and the Bank can assist China through cofinancing. Progress is being made in introducing co-financing under the first and second power projects, coal, urban, water, and some agriculture proiects, and the Bank will continue these efforts. 29. For most of these elements of country strategy, however, progress will be gradual and will require sustained Bank involvement over a series of projects in various sectors. Economic and Sector Work 30. Economic and sector work in China was initially designed in part as a learning experience to provide the Bank with a basis of knowledge on the development and functioning of the Chinese economy. It also introduced the Government to alternative ways of economic analysis and views about its achievements. 31. In the last four years, the above approach has been well received and has allowed economic and sector work to be particularly relevant to the problems of adjustment and reform which have been in the forefront for the Government. Followup to the first economic report emphasized technical assistance and sector work for investment analysis and selection techniques  and enhanced sector planning. The content of the lending program has been directly influenced as a result. The rural credit project, the China Investment Bank projects, and future regional industry projects are among examples of the links between economic and sector work and the lending program. 32. More fundamental research into the problems of enterprise management is now nearing completion in collaboration with Chinese economic research institutions. It has yielded insights into the thinking and reaction of enterprise managers to system reform and led to better understanding of how policy changes can improve pLanning, performance and management of enterprises. In addition, there is a variety of project-related sector work underway through studies included in the projects. These are expected to produce the basis for detailed discussion of development options and policies in the various sectors. 33. Current economic work focuses on future options and issues to the year 2000 and a comprehensive report will be ready later this fiscal year. In light of the experience of other countries in making the transition from low to middle income levels, the report will pay special attention to inter- sectoral linkages and cross-sectoral and economy-wide issues. 34. Future economic and sector work will be based on the conclusions of the economic report and will look in more detail at some of the issues raised. It will continue to improve our knowledge of the economy - its struc- ture, the issues and constraints in key sectors, and the functioning of the economic management system. Collaboration on issues of institutional and policy change with Chinese research institutions will continue. Review of the investment program in key sectors when the Seventh Five Year Plan (1986-90) is finalized will help develop the next generation of projects for the lending program. Lending Operations 35. Since China's change of representation in the Bank Group in May 1980, 19 projects involving lending of $1883 million to China have been approved. Annex II contains a summary statement on these loans and credits as of September 30, 1984. For this fiscal year we hope to present a total of ten projects to the Board. These include the already approved Second Agricultural Research Project, the proposed Second Power Project and projects in educatior., seeds development, coal mining, rural water supply, railways, roads, ferti- lizer production, and irrigation. 36. For FY86 and beyond, the China lending program should continue to grow from current levels. Areas of emphasis would include development of energy resources, transport infrastructure, skilled manpower and improved technology. We will also investigate the feasibility of a regional approach in a number of sectors and will take better account of intersectoral linkages. 37. In the energy sector, lending has included four projects, which have emphasized increased energy output and technology transfer through financing of equipment, technical studies, training and consultant assistance. The  - 10 - Lubuge Hydropower Project has resulted in the Government's extensive use of competitive bidding for power projects. A proposed Second Power Project places particular emphasis on better system planning. Fuel alternatives for electric power, generating plant location and interconnection of power grids will be the subject of future work. For development of China's petroleum and coal resources, Bank Group assistance will emphasize acquisition of appropriate technologies, least cost planning of investment and related transport investment programs. 38. In the transport sector, railway, port and road capacity must be substantially increased. So far, one project each in ports and railways has focussed on increasing capa-ity, upgrading technology for lower cost opera- tions, and establishing better costing systems. Expanding domestic capacity to manufacture improved transport equipment will continue to be a theme in the sector andi this should provide scope for substantial foreign private sector involvemient. Improved management and information systems and analytical techniques for better cost control will be encouraged under the projects, which, once proven, will be suitable for wider use throughout transport enter- prises. inter-modal coordination and planning and assessment of alternative investment choices will have increasing prominence in both lending and sector work. 39. in agriculture, five proJects have emphasized support services through improved research and education, production increases through new land development, reclamation, use of improved technologies and management. and strengthening of the agriculture credit system. Future projects in seeds development, forestry and agriculture credit will continue to strengthen sup- port services and rural institutions. Land and area development projects will endeavor to provide models of integrated regional development. Specialized activity projects such as fisheries, livestock and agro-processing may also be developed to support on-going structural transformation in agriculture. 40o In the industrial sector, two projects have focused on establishing and strengthening the China Investment Bank. Improved investment selection criteria, incentives for more efficient management, technology transfer, and energy conservation are priorities for future projects. Lending will have a two-pronged approach - further strengthening of the China Investment Bank (and perhaps other financial intermediaries) and financing large regional production-oriented projects such as for fe.-tilizer, machine tools, and cement, to expand output and demovstrate the merits of improved subsector analysis and planning. 41. Further expansion of higher education and improvement of teaching, curricula and graduate quality will be needed to the end of the century. The human resource constraints have already been addressed by four education projects and a component of the Rural Health/Medical Education Project. The value of international competitive bidding for equipment purchases and of international advisory panels for educational policy and curriculum reform has been demonstrated in the first projects. Improved university management is being encouraged through establishment of quantitative targets for growth, student-teacher ratios, classroom utilization, laboratory experiments per- formed, and other reforms (including development of evaluation and monitoring  procedures and greater decentralization). Future projects in health, urban development and water supply will assist the Government in addressing diffi- cult poverty-linked questions of affordability, cost recovery, and minimum standards with focus on particularly impoverished regions. 42. Implementation. Project implementation is generally proceeding well. While there were some initial delays in procurement because of the Government's unfamiliarity with the concept of bidding, it has since estab- l.si-i a specialized central prncurement agency and has largely overcome this problem. Most project agencies, as well as the Ministry of Finance and the State Planning Commission, have established and staffed offices to handle Bank Group projects- To support further expansion of the lending program, accelerate project preparation, improve project implementation, and facilitate further economic and sector work, the Bank Group is planning to open a resident office in China early in FY86. PART III - ENGINEERING Ai ECONOMICS/FINANCE EDUCATION Overview 43. Higher education, the primary source of high-level manpower, is provided by comprehensive universities, and by colleges and institutes which specialize in certain fields (e.g., agriculture, medicine, engineering)- Education policy is formulated by the Central Committee of the Chinese Commmnist Party in cooperation with the State Council. The Ministry of Education (MOE) is responsible for overall administration of the education system in the country, including higher education. Day-to-day management of higher education institutions is the responsibility of a 7ariety of ministries of the central government and provincial/municipal governments. The institutional structure of higher education has changed little since the 1950s. While primary and secondary education have expanded rapidly since 1949, higher education has progressed at a slower rate partly due to political events which virtually halted its development between 1966-76. A recent analysis of higher education by the Bank has pointed out a number of structural, qualitative and managerial problems requiring policy adjustments. Level and Structure of Enrollment 44. There are two dimensions to the manpower constraint: the low level of overall university enrollment and the imbalance of enrollment structure. The information submitted by central and provincial government agencies for the annual planning and allocation of university intake and output indicates that shortages of professional and technical manpower exist in all fields. Between 1981 and 1983, t'.: overall supply of university graduates could meet only about half of the r-iuirements. While the development of the economy calls for the expansion of the university sector as a whole, the structure of enrollment needs adJustment to meet the changing pattern of manoower require- ments. The imbalance between manpower supply and requirements has been particularly acute in engineering and economics/finance which are essential for technological and managerial improvements of ihe ecoiscov. As a result of serious manpower shortages in those two fields, central agercies in charge of  - 12 - priority industries and banking and financing services have to function at suboptimal level with underqualified personnel. The university system is further constrained by the limited size of its postgraduate programs. Action is needed urgently to increase enrollments in engineering and economics/ finance, and expand post-graduate education. ENROLLMENT IN ENGINEERING AND ECONOMICSIFINANCE 1983 AND 1990 Enrollment % of total ('000) enrollment 1983 9ggo 1983 1990 Undergraduate Engineering 419 713 35 31 Economics/Finance 71 178 6 8 Postgraduate Engineering 16 50 4 7 Economics/Finance 5 14 7 8 Quality 45. To increase the potential effectiveness and productivity of graduates in the fields of engineering and economics/finance, several areas need to be strengthened: curricula, control of standards, teachers, experimental work, and academic support services. 46. Curricula. The present curricula are too rigid due to overspeciali- zation, and courses essential for China's modernization are unavailable due to the past general neglect of social sciences. Basic adjustments in the curri- cula are necessary to support changes in China's development strategy by reducing the numbers of specialties and specialized courses as well as introducing new courses to broaden the curricula. There are 11 major fields within the university system: engineering, agriculture, forestry, medicine, education, humanities, science, economics/finance, politics, physical education, and arts. Among these fields, there are about 800 specialties in which students are enrolled from their first year. Ministries and commissions organized by narrowly grouped economic sectors have established their own universities to supply most of the personnel needed for specific jobs in their own agencies. Due to their dominant concern with short-term manpower requirements, the curricula are oriented towards the formation of vocational skills rather than broad understanding of principles and analytical skills. The narrow specialization at undergraduate level is therefore limited in its capacity to train manpower with flexibility and mobility in the labor market.  - 13 - 47. While there are too many specialties, the coverage of courses is inadequate. In particular, economics/finance received low priority during the Cultural Revolution and is inadequate to serve the economic system which is undergoing reform and adjustment. The Government plans to improve efficiency in economic planning and management through incentives to stimulate priority industries, and move towards an open economy. These modernization programs require corresponding adjustments in training programs by introducing such courses as pricing policy, industrial management, international finance, and information processing. 48. Minimum Standards. There is no system to ensure the minimum quality of university education. Since the university system is expanding rapidly and the financial responsibility for the operation of provincial universities is being transferred from the central government to the provinces, it is important to create a review system of university quality. An initial action was taten in 1981 as part of a process to authorize universities to grant postgraduate degrees. The National Commission on Academic Degrees under the State Council reviews reports submitted by universities which wish to intro- duce new postgraduate programs in light of standards set for doctorate and master's degrees, in particular, specialties proposed, staff supervisory capacity, research programs, and facilities for experiments. However, no system of periodic assessment of university quality, either postgraduate or undergraduate, exists to ensure that those standards are satisfactorily implemented by universities. 49. Teachers. There are three principal issues concerning university faculty: (a) their knowledge and technical skills are in general outdated; (b) some teachers who were recruited during the Cultural Revolution are not suited to teaching; and (c) there are few experts in the new courses required for modernization. To help rectify these problems, it will be necessary to accelerate expansion of in-country aad overseas pre- and in-service training, and exchange of Chinese and foreign scholars, and to enforce retirement age and transfer policies. China lost a decade of progress from 1966 to 1976 when university education was seriously hurt. As a result few young people were fully trained to succeed senior faculty members. When the national entrance examination was reintroduced in 1977 and universities reopened, China was left with serious deficiencies in university education and research and in the teaching force. Leading professors and associate professors are both exper- ienced and well-qualified in terms of educational background. They are, however, aged and constitute only 11% of the total faculty since no promotions took place between 1966 and 1976. All these factors point to the need to build up a strong, younger university faculty. Another effect of the Cultural Revolution is that a small group of teachers recruited during that period are not suited to teaching. They were recruited based on their political rather than their academic qualifications. Finally, the neglect of university education has left China with a severe shortage of experts who are urgently needed to develop new courses for modernization. 50. Experimental Work. The implementation of the engineering curriculum is impaired by inadequate experimental work in terms of both the content of experiments and the availability of equipment. To solve these problems there must be change in emphasis in experiments and provision of modern and  - 14 - appropriate equipment. First, experiments are presently designed to illustrate relatively complex and specialized problems to serve the particular requirements of industries. Instead, it is necessary to give priority to experiments which demonstrate basic principles and mechanisms learned in the course work. Second, due to the inappropriateness or simply the alsence of experimental equipment. only 60% of advanced and specialized experiments of the engineering curriculum, and 69% of undergraduate and basic experiments are performed. Equipment for undergraduate courses is mostly old and obsolete, or too complex to demonstrate principles and single mechanisms. Advanced edu- cation and research suffer from the lack of modern experimental equipment as well as testing and measuring equipment. 51. Academic Support Services. Academic support services such as compu- ter centers, libraries, and audio-visual centers are severely limited. To increase the effect of instruction and research, these support services need to be strengthened. Universities have a serious shortage of computers which underwent rapid development and innovation during the period of China's isolation. Similarly, universities have to restore their library collections which are out-of-date and insufficient, and modernize libraries with the use of computerized information systems. In addition, audio-visual aids and equipment are needed to improve foreign language teaching and to reach a greater number of students through the use of television programs. Efficiency in Planning and Management 52. Universities remain inefficient in terms of planning and management of their physical and human resources. Improvements are needed in manpower planning, student admissions, physical facilities planning, resource utiliza- tion, and management organization of higher education institutions. In addi- tion, the establishment of a system to monitor and evaluate the performance of development projects is needed to improve decision-making. Present manpower planning is deficient in its time span and methodology. Manpower requirements are estimated on a short-term (annual) basis as part of the allocation process of graduates. Enterprises estimate their own requirements for workers based on their output targets for the next year and submit them to the State Planning Commission (SPC). These estimates by individual enterprises are par- tial without information on the plans of other enterprises in the sector economic agents and cover too short a period to be useful for education planning. The existing planning methods for physical facilities are too generous and standardized. The Construction Bureau of the MOE has set design and cost standards for major disciplines (e.g., engineering, social sciences, medicine) and for different types and sizes of facilities such as classrooms, dormitories and libraries. The Production and Supply Bureau of MOE is responsible for laboratory standards and equipment supply. Unit capital and recurrent costs are reviewed every five years. The last review took place in 1978. The 1983 review was delayed and is being carried out now. Investment programs for civil works and equipment are, however, prepared by simply applying a set of unit costs to the incremental increase in enrollment by a target year. Inventories of physical facilities and their utilization by a more refined breakdown of items should be prepared and incorporated for improved facilities planning. The utilization of human and physical resources remains low. There are on average only four students per teacher in  - 15 - engineering and six students per teacher in social sciences. The utilization rates of libraries and laboratories are also low. Techniques to efficiently manage resources have to be improved. Ministries have set up their own training institutions to meet their personnel requirement. As a result, the administrative responsibility of universities is compartmentalized. Of the 805 higher education institutions 65% are administered by the central government and the rest by local governments. Among central agencies, MOE administers only about 15% and many other technical ministries manage the remaining 85% of institutions. The present management organization of universities needs to be reviewed. China has embarked on a number of develop- ment projects in recent years aimed at the reform and expansion of the university system. In 1981, MOE established a Foreign Investment and Loan Office for the execution of projects with external financial assistance. The overall capacity for project planning and execution has improved significantly with the support of Chinese and foreign specialists. However, a system to monitor implementation and evaluate results is needed to assist in the decision-making process. Government's Objectives, Strategy and Program 53. Objectives. As an integral element of modernization efforts, the Government's objectives address the major issues of the engineering and econ- omics/finance subsector as presented above, namely, reforms and adjustments in the enrollment size and structure, quality and efficiency. First, the Govern- ment aims to increase undergraduate enrollment at an average rate of about 10% p.a. between 1983 and 1990. Within the overall expansion, the Government plans to expand economics/finance at a faster rate of 14% p.a. in support of development needs. Engineering will grow at a rate of 8% p.a. These rates of growth in the two disciplines are expected to meet high-level technical and managerial manpower needs as foreseen by central and provincial governments. Postgraduate enrollments would also be expanded at a rate of 17% p.a. Second, the Government will improve the quality of engineering and economics/finance education in terms of curricula, teachers, experimental work and academic support services. The curricula will be broadened by reducing the number of specialties and specialized technical courses while introducing new courseg necessary for modernization. The quality of teachers will be revitalized by lowering their average age, transferring staff unsuitable for teaching to other occupations, and upgrading teachers' educational and professional quali- fications so that all lecturers and above will have a minimum of master's degree or equivalent. Improvements will be made to modernize laboratories, workshops, computer centers, libraries and audio-visual centers. Third, the Government aims to increase efficiency through improvement in planning and management related to manpower development, the university entrance examination system, physical facilities, resource utilization, project monitoring and evaluation. It is also addressing the diseconomy of size of individual institutions by emphasizing expansion of enrollment in existing institutions rather than creation of new ones. 54. Strategy. The Government faces two major constraints to achieving the subsector objectives: financing, in particular local budgets for dormi- tory construction and foreign exchange for advanced equipment, books and jour- nals, and technical assistance; and qualified staff to teach and research in  - 16 - modern fields of technology and social sciences. In view of these financial and staff constraints, the Government has put forward a strategy which calls for a selective and phased approach. It will attach priority to engineering and economics/finance as the graduates of these disciplines are most in demand for national development. Within these two disciplines, the Government has selected 120 specialties as priority areas. These specialties will be streng- thened in about 500 selective departments in universities in three phases between 1985 and 1994. The first phase will strengthen these priority specialties in about 150 departments in universities managed by the central government. The second phase will develop these specialties in another 150 departments in universities managed by provincial governments. The third phase will improve the same specialties in about 200 departments in univer- sities under both central and local governments. 55. Program. Based on a set of targets for qualitative and quantitative increase, MOE has prepared an investment program for the subsector. Within the time slice of July 1985 to June 1989, the total expenditure for the engineering and economics/finance subsector is estimated to be on the order of Y 2.2 billion at 1985 prices with an annual average of about Y 0.4 billion. The projected development expenditures consist of about 55% for civil works, 34% for equipment and 11% for technical assistance. Bank Group Participation in the Education Sector and the Proposed Prolect 56. The introductory economic report stated that China's reconstruction programs would call for: (a) the revitalization of higher education as the most urgent task for the provision of scientific and technical manpower; (b) the development of vocational education and training for the supply of trained skilled workers; and (c) the strengthening of pre- and in-service teacher training for the improvement of primary and secondary school teachers. In line with these recommendations, the Bank Group has been supporting China's development in human resources by extending financing for higher education. A University Development Project (Ln. 2021/Cr. 1167-CHA, $200 million) was approved in 1981 and is assisting major universities in the fields of science and technology. The Bank Group has also extended two loans/credits totaling $144 million for the development of agricultural manpower in 1982 and 1984 (Cr. 1297-CHA, Ln. 2444/Cr. 1500-CHA), a credit of $85 million in 1983 to the development of polytechnics and a television university (Cr. 1411-CHA), and a credit of $85 million in 1984 to the improvement of rural health and medical education (Cr. 1472-CHA). 57. Experience gained to date in the projects and a continuous sector dialogue on matters concerning high-level manpower development stress two important lessons. First, many university issues stem from systemic factors related to policies and management practices. Future Bank lending to the university sector should therefore be increasingly designed to serve as an instrument in the Bank's continuing dialogue with the Government on university policy and reform. Second, the experience points out the importance of timely establishment of key implementation units to help ensure the success of a project. To address these findings, the proposed project is designed to be a step toward such policy-focused lending in order to provide the high-level technical and managerial manpower needed for economic development. The  - 17 - project would assist the Government with the acceleration of existing, as well as formulation and implementation of new, policy and institutional changes related to engineering and economics/finance education in the areas of enrollment, curricula, faculty and management. In addition, two groups of experts for the proposed project have been established at an advanced stage, viz., a Chinese review commission and an international advisory panel, so that their assistance and advice to MOE on project implementation would be timely, in particular for fellowship training and equipment purchase. PART IV - THE PROJECT Background 58. The proposed project was prepared by the MOE. It was appraised in March 1984. Negotiations were held in Washington from January 7 to 11, 1985. The Chinese delegation was led by Mr. Luo Qing, Deputy Director, External Finance Department, the Ministry of Finance. The Staff Appraisal Report (No. 5271b-CHA) is being circulated separately. Supplementary project data are provided in Annex III. Objectives and ScoPe 59. The proposed project would support the first phase (July 1985 - June 1989) of the Government's long-term program (1985-1994) to increase high-level technical and managerial manpower through adjustments in enrollment, quality and efficiency related to engineering and economics/finance education. To achieve this goal, the project would implement a program of action on policy and institutional changes which would address three basic issues of the subsector: low level and imbalanced structure of enrollment, inadequate quality, and inefficient planning and management. The Government submitted to the Association a signed letter of policy and the program of action describing the Government's objectives and planned course of action for the subsector. 60. To increase enrollment and redress structural imbalance the project would: (a) expand engineering, economics/finance and postgraduate education programs at differential growth rates to adjust the imbalance of the overall university enrollment structure in response to development needs; and (b) give priority in resource allocation to faculties which have relatively stronger implementation and leadership capacity in engineering and economics/finance, to create leading centers for training personnel for and from other institutions and related industries. 61. To improve quality the project would broaden undergraduate curricula in engineering and economics/finance by reducing the number of specialties, increasing the proportion of general and basic courses, and introducing new courses to produce graduates who could meet the demands emerging from the modernization program. In addition it would revitalize the teaching force in engineering and economics/finance by lowering the average age through enforce- ment of a retirement policy, transferring unsuitable staff to non-teaching jobs through the implementation of a displacement policy, accelerating in-service training as well as postgraduate education as the source for new  - 18 - teachers, and promoting outstanding young teachers as replacement for retired and displaced teachers. To improve experimental/research work as part of the required engineering and rconomics/finance curricula, existing laboratories and workshops would be modernized and new ones built with appropriate equipment. Finally, to strengthen academic support services the project would improve libraries, computer centers, and audio-visual centers. 62. Planning and management capabilities would be increased through improving the Planning and Research Office within the MOE. This would be achieved by introducing new procedures to improve planning and maintenance of facilities; increasing the student/staff ratio, utiliz, -n rates of class- rooms, laboratories and libraries, and the proportion of commuting students; and establishing a mechanism to monitor and evaluate education development projects by creating a central unit within the MOE and local units within individual universities. In addition, the proposed project would include studies to introduce new policies on quality and management. The studies would deal with university quality monitoring and evaluation, student admission, and the management of universities as institutions and as a system. 63. To assist in the above policy and institutional development objec- tives, the proposed project would contain: (a) about 35 subprojects with financing of mainly instructional and research materials, equipment, and civil works including furniture to meet the needs of individual universities; and (b) five national programs with financing of primarily technical assistance to meet the needs of the whole of the engineering and economics/finance subsector. Action Program Enrollment Level and Structure Adiustment 64. Concentration on Engineering and Economics/Finance. The project would concentrate on the expansion of engineering and economics/finance in support of the most acute manpower needs. The enrollment expansion of these disciplines would be guided by Government's policy objectives which call for faster increase particularly in economics/finance and postgraduate programs. The eligibility criteria for subprojects and the guidelines for allocation of credit proceeds would ensure the implementation of these project objectives. 65. Development of Selected Departments. In support of the Government's strategy of making effective use of limited resources, the proposed project would assist in the selective development of about 120 engineering and about 30 economics/finance departments. The eligibility criteria would ensure the selection of departments with relatively stronger academic and research programs supported by qualified faculty and physical plants. Quality Improvement 66. Curricula. To supply graduates with increased adaptability for modernization, a policy would be implemented to broaden the existing overspec- ialized curricula. The number of specialties in engineering and economics/ finance would be reduced and the composition of curricula would become less  - 19 - specialized by decreasing the proportion of specialized technical courses. On the other hand, new courses would be introduced to meet the demand created by the increasingly dynamic development process. 67. Teaching Force. The Government's policies would include the revita- lization of engineering and economics/finance faculty through several measures: implementation of the retirement age policy, transfer of unsuitable staff to nonteaching jobs, accelerated in-service training, accelerated promo- tion of promising young teachers and exchange of personnel between universi- ties and between universities and industries. To enhance the quality of teachers, the proposed project would assist in two types of in-service training: a program to upgrade educational and professional qualifications of teachers below 45 years old; and a program to create the main teaching force to fill senior positions. Under the management of the Cadre Development Department of MOE, about 3% of teachers would annually receive in-service training in the country. Out of the 805 institutions of higher education, 90 have been selected as centers for in-service training with an emphasis on new subject areas. The program for the creation of the main teaching force would build up about 3,000 core teachers. 68. The project would include financing for overseas fellowships and foreign specialist services in engineering and economics/finance. The project would also finance equipment for printing and copying for two training centers which would prepare materials necessary for in-service training to be estab- lished at Beijing Normal Uni.Tersity in the north and at Wuhan University in the south. Fellowships under the project would be awarded in accordance with the agreed selection procedures and guidelines (Section 3.07 of draft Development Credit Agreement). 69. Experimental Work. To help strengthen the engineering curriculum, the proposed project would improve the quality of experimental and research work by providing needed equipment at the subproject universities for both undergraduate practical training and graduate training and research related to priority specialties. The laboratory facilities would be either renovated or newly built. 70. Academic Support Services. The proposed project would improve academic support services in subproject universities such as computer centers, audio-visual centers and libraries. The project would assist identified universities in equipping computer centers with suitable size computer and necessary micro and personal computers, and in developing the use of audio- visual aids to teaching in language courses and production of TV programs to reach students in remote areas. The project would also increase and improve the subproject universities' libraries. Computers and software programs selected would be compatible with those within a university or locality to increase computer flexibility and power once networking becomes technically feasible. Planning and Management 71. Manpower Deve.lopment Planning. To improve the longer-term planning of manpower and enrollment requirements, the project would strengthen the  - 20 - Planning and Research Office created within the MOE in 1983. The project would support the Office with specialist services and fellowships in relevant areas of economics, education and statistics to improve the data base and planning methodology. 72. Facilities Planning and Maintenance. To improve facilities and equipment planning, the project would finance specialist services in the areas of architecture and equipment planning. In addition, a study on depreciation allowances for the replacement of unserviceable and obsolete equipment would be conducted as part of the larger study on university management under the project. Depending upon the outcome of the study and initial experience in selected subproject universities, MOE would suggest to the Government the introduction of a depreciation allowance system. This system would then be gradually extended to the entire subsector and to higher education in a time span compatible with the Government's financial capability. 73. Resource Utilization. To increase physical and human resource utilization, the proposed project would improve three types of efficiency- related coefficients. First, the expansion of teachers and students would reduce the teacher:student ratio from the present 1:4 in engineering and 1:6 in economics/finance, to 1:6 and 1:7 in 1987, and to 1:7 and 1:10 in 1990, respectively. Second, the utilization of laboratories and libraries would increase as they received more equipment and books. Third, the proportion of students who commute to universities would be increased from the present 3% of all university students, to 5% in 1987, and to 10% in 1990. It is expected that by 1990 the adjustments in these coefficients would lower the unit capi- tal costs for civil works by approximately 10%. To assist in the adminis- tration of university resources, the project would finance specialist services in such areas as scheduling of classes and laboratory work, management of support services, and personnel and budget planning. 74. Monitoring and Evaluation. The project would introduce a system to monitor and evaluate policy objectives and the course of action for output increase, quality improvement, and planning and management development. The system would consist of a central unit within the MOE, and a local unit at each of the subproject universities. The central unit has been created under a steering committee of five members representing MOE's Departments I and II of Higher Education, the Department of Planning and the Foreign Investment and Loan Office, and the Education Bureau of the State Planning Commission. The unit itself consists of two professionals and one administrative staff. Subproject units have also been established within the office of the president or the vice president of subproject universities. The Government would monitor and evaluate the progress achieved in carrying out the action program, and maintain the monitoring and evaluation units with competent staff in adequate numbers, and with functions and responsibilities agreed with the Association, until such date as may be agreed between the Government and the Association (Section 4.03(a)(b) of draft Development Credit Agreement). Studies 75. In order to provide an information base for the Government to further develop policy objectives and an implementation strategy, the project  - 21 - v.ould support studies in the areas of: monitoring and evaluation of university standards; the entrance examination; and the management of higher education institutions, both individually and as a system. The studies would be carried out in accordance with terms of reference and schedules agreed with the Association and a summary and analysis of the findings of the studies would be promptly prepared and furnished to the Association when they are available (Section 3.08 of draft Development Credit Agreement). Management and Implementation 76. Management. The preparation and appraisal of suLwrojects and national programs under the proposed project would be prepared, appraised and implemented by the Government, specifically by MOE, with selective review by Association staff. This management arrangement would be feasible given MOE's strong past performance in previous education projects and satisfactory project management arrangements. This approach would also help further build up the management capacity of MOE, other ministries and universities and contribute to institutional development in China. It would also be advantageous because of the large number of institutions geographically dispersed throughout the country and the wide coverage of specialties. National programs and subprojects would however be processed according to agreed procedures, criteria and guidelines to ensure effectiveness and efficiency in achieving their objectives (Section 3.06 of draft Development Credit Agreement). 77. Responsible Organizations. Overall responsibility for coordination and decision-making on matters related to the proposed project would be with a Central Coordinating Committee which has already been established. This Committee is composed of representatives of the State Planning Commission (SPC), the Ministry of Finance (MOF) and the MOE. Day-to-day implementation work and the liaison between the Government and the Association would be the responsibility of the MOE's Foreign Investment and Loan Office. Specific responsibilities would be assigned to other MOE departments and related agencies. A working group composed of members from seven MOE departments and assisted by staff seconded from project universities would provide the secretariat for the Central Coordinating Committee; the education departments in other ministries which are in charge of the institutions under their ministries would participate in the working group whenever appropriate and serve as the liaison between MOE and other ministries/agencies concerned. Each subproject university would establish an implementation unit to assist the *-entral unit on implementation matters and also for monitoring and evaluation. To assist and advise MOE in overall implementation of the propcsed project, a Chinese Review Commission and an International Advisory Panel, each consisting of three experts in engineering, economics and finance, have also been created. The costs for the Commission and the Panel incurred before credit signing are paid from the proceeds of the first University Development Project. These two bodies and the Central Coordinating Committee would be maintained until such time as the Government and the Association determine (Section 3.01(b) and 4.04 of draft Development Credit Agreement). 78. Implementation. Procedures for equipment and technical assistance procurement acceptable to the Association have been prepared. The project  - 22 - would support the implementation period of four and a half years between July 1985 and December 1989. The Completion Date would be December 31, 1989, and the Closing Date December 31, 1990. 79. Reportina and Review. The Foreign Investment and Loan Office would be responsible for reporting to the Government and the Association. The Office would prepare an annual progress and evaluation report for submission to the Association for review. These reports, including quantitative progress on agreed project target indicators, would form the basis of comprehensive annual reviews with the Association by November of each year during which targets for the subsequent year would be set. An in-depth, mid-term review of progress towards the targets and of the overall investment program would also take place with the Association in around November 1987 (Section 4.03(c)(d) of draft Development Credit Agreement). 80. Status of Prolect Preparation. MOE received 45 subproject appli- cations and after appraisal selected 34 for approval. All subprojects have now been approved by MOE and the State Council. The Association reviewed a representative sample of about 15% of subprojects and five national programs and found that the proposed eligibility and appraisal criteria had been applied and the subprojects and national programs were acceptable. Draft terms of reference for specialists to be appointed in the first year of implementation have been prepared and will be reviewed and finalized in early 1985. All terms of reference and schedules for studies have been prepared and are acceptable to the Association. The commercial terms within the bidding documents used for previous Bank-assisted education projects would continue to be used. The first phase of equipment procurement would include equipment mainly for basic training and the second phase would include equipment for advanced training and research. Initial schedules of requirements and technical specifications for basic training equipment have been prepared and will be finalized in early 1985 after review by the Chinese Review Commission and the International Advisory Panel. Equipment procurement for first phase implementation, technical assistance and studies would therefore proceed soon after credit signing. Investment Program and Financing 81. The total amount of the subsector investment program to be carried out between July 1985 and June 1989 is estimated at about Y 2.2 billion or $0.8 billion equivalent excluding contingencies. The investment program is reasonable in relation to needs and feasible as its annual average represents only about 2% of the expected annual average total investment for education. The program costs include: (a) construction and renovation of physical facilities, and furniture; (b) locally procured and imported equipment, books and journals; and (c) technical assistance for specialist services, exchange programs, fellowships, studies and future project preparation. The Association would finance $145 million equivalent (about 12.4% of total program cost), which would represent about 31% of the estimated foreign exchange costs. The Government would finance the remaining costs. All cost estimates are based on January 1985 prices. Construction costs were based on recent unit prices and building areas discounted at about two thirds of MOE standards for improved efficiency. Equipment costs were based on MOE stand-  - 23 - ards and recent bid prices under ongoing Bank Group-assisted educacion pro- jects. The foreign exchange components are estimated as follows: ci- 1 works, 11%; equipment, 90%; specialists services, 90%; exchange programs, 10%; fellowships including local training, 20%; studies, 60%; and preparation of future projects, 6%. The low foreign exchange estimate for civil works is consistent with estimates in the Agricultural Education II Project approved in June 19841 The contingency allowance includes physical contingencies estimated at 10% of base costs. For the calculation of price contingencies, * it is assumed that exchange rate adjustments will, on average, be made to maintain 'purchasing power parity' during the project implementation period. On this basis, price escalation for both foreign and local costs: (a) when expressed in US dollars, is based on expected international inflation rates of 8% in 1985, 9% in 1986, 1987 and 1988, 7.5% in 1989, and 6% in 1990 and 1991; (b) when expressed in Yuan, is based on expected domestic inflation of 3% p a. in 1985-91. Price contingencies thus represent 33.3% of base cost estimates plus physical contingencies expressed in US dollars and 10% of the same total expressed in Yuan. Cost estimates exclude duties and taxes, from which project-financed goods would be exempt. Annual recurrent expenditures generated by the program are estimated at about $39 million equivalent in 1990 (at 1985 prices) or about 4% of the total recurrent expenditures for higher education, which would be a reasonable zhare of the sector. Procurement 82. Procurement arrangements would be largely the same as those used in previous education projects in China and are summarized in the table below:  - 24 - PROCUREMENT ARRANGEMEUTS /a ($ million) Procurement method Total ICB LCB Other N.A. cost Civil works /b - - 643/c - 643 - - (0) - (0) Equipment and instructional 108 145 145/d - 398 materials (108) (0) (12) - (120) Specialist services - - 16 - 16 (5) - (5) Exchange programs - - 45 - 45 _ _ (1, - (1) Fellowships - - 24 24 48 = _ (14) (0) (14) Studies and preoaration of - - 12 - 12 future projects - - (5) - (5) Total 108 1415 885 24 1,162 (to8) (0) (37) (0) (145) /a This table covers the entire subsector investment program; figures in parentheses are the respective amounts to be financed by the Association including contingencies. /b Including furniture. Tc By assigning contracts for civil works, the traditional procurement pro- cedure in China. /d Direct purchase for proprietary items or where justified by need for standarization, limited international tendering. Civil works including furniture, not financed by the Association, would be procured through established local procedures. The proposed credit would finance about $120 million equivalent of equipment, books and journals, and about $25 million equivalent of technical assistance. About 90% of the equipment from credit proceeds would be procured through international compe- titive bidding (ICB) and the remainder through direct purchase or limited international tendering. 83. The China National Technical Import Corporation (CNTIC) would be the procurement agency responsible for inviting bids, participating in bid evalu- ation and signing and enforcing contracts as under previous projects. Equip- ment items for the project would be grouped into packages to the extent  - 25 - possible for bulk procurement. Contracts estimated to cost $200,000 or more would be awarded in accordance with the procurement procedures under inter- national competitive bidding as sec out in the Bank Guidelines for Procurement dated August 1984. Local manufacturers would be eligible to participate and would be extended a 15% preference margin, or the prevailing customs duties, whichever is lower, in bid evaluation. Items or groups of items estimated to cost less than $200,300 in each contract and not exceeding an aggregate amount of $12 million may be procured through: (a) limited international tendering whereby contracts would be awarded on the basis of comparison and evaluation of quotations obtained from at least three suppliers; or (b) direct purchase for proprietary items or where justified by the need for standardization. Books and journals to an aggregate value of $2 million would be procured directly from suppliers after negotiations for the best discount. Awards on contracts valued at $200,000 or more would be subject to prior Association review. This review is expected to cover about 11% of the contracts and 58% of their value. These estimates reflect the expected similarity with the procurement experience under the first University Development Project. All soecialists would be selected in accordance with principles and procedures satisfactory to tthe Association on the basis of the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency dated August 1981. Disbursement 84. Disbursement would be made on the basis of: (a) 100% of the foreign expenditures on imported equipment, books and journals, or the ex-factory cost of locally manufactured equipment; (b) 75% of the invoiced cost of imported equipment procured locally; (c) 100% of the expenditures for specialist services, exchange programs, overseas fellowships and study tours, and (d) 60% of the cost of study contracts and preparation of future projects. In order to facilitate the Association's processing of disbursement applications, a minimum level for withdrawal application would be $200,000. The proposed credit of $148 million would be disbursed over a period of 5-1/2 years. This length is proposed based on the following: the disbursement speed of the first University Development Project is substantially faster than the regional average for education prujects; subprojects have already been appraised and approved and all national programs have commenced implementation; in addition, equipment procurement is at an advanced stage of preparation because bidding documents are expected to be completed by April 1985. 85. To meet the Association's documentation requirements, disbursement applications for contracts valued at $200,000 or more would be submitted to the Association with two copies of the contracts. For expenditures below $200,000 statements of expenaiture (SOEs) certified by authorized government officials would be used. In this case contracts and supporting documents would be retai-ned by the Foreign Investment and Loan Office of HOE, Beijing, and made available for review by visiting Bank missions. Disbursements against SOEs would be made on the basis of a consolidated summary, each not less than $200,000.  - 26 - 86. Under the proposed credit, a special account would be set up and maintained in US dollars in a bank acceptable to the Association to facilitate disbursement for components financed by the Association. The initial deposit of the US dollar equivalent of SDR 7,200,000 would represent the highest three months expenditure under the proposed project with a margin of about 20%. Applications for replenishment of the special account would be submitted quarterly, or more frequently if necessary, with certified SOEs as supporting documentation for disbursements against expenditures under $200,000. Full documentation would be used for disbursements against all other items. Accounts and Audit 87. The Government would establish and maintain accounts for the national programs and subproject institutions expenditures as well as accounts to record expenditures of credit proceeds. The Audit Administration of the People's Republic of China (AAPRC) would audit all of these accounts, including documentation of SOEs. Annual audit reports would be submitted to the Association within eight months of the end of the Government's fiscal year (Section 4.01(c)(ii) of draft Development Credit Agreement). The Government would also submit a project completion report to the Association within six months after the Closing Date (Section 3.04(d) of draft Development Credit Agreement). Benefits and Risks 88. Benefits. The principal benefits of the proposed project would be related to quantitative and qualitative gains in technical and managerial man- power, efficiency improvement and institution building. Those benefits would accrue through Government's action on engineering and economics/finance sub- sector policies and institutions with its effect on performance and management of the subsector. The shares of engineering and economics/finance enrollment in the subsector would be adjusted to 31% and 8S respectively by 1990 to meet projected requirements. The proportion of postgraduates in those fields would gradually increase to 7-8% by 1990. New students would undergo programs designed to provide broader qualification in theory and practical work, taught by increasingly younger, higher quality faculty. The project would generate savings to the Government with the improvement in planning and utilization of physical facilities and staff resources. The present comprehensive dormitory system would be modified further under the project with an increase in the proportion of commuting students. These efficiency measures are expected to decrease the capital cost per student by about 10%. The project would continue to assist the Government in strengthening its subsector planning and implementation machinery. Finally, the project would help introduce changes in monitoring and evaluation of university quality, student admission, and university management organization through support to studies on these topics. 89. Risks. An important risk associated with the proposed project is the difficulty of coordinating implementation by some 35 subproject universities managed by a number of ministries (about 20 are expected) and several national programs with their impact on the entire programs of engineering and economic/finance education. To reduce this risk, a Central Coordinating Committee, comprising representatives of the State Planning  - 27 - Commission, the MOE and the MOF has been created. Also a working group has been formed in the MOE including representatives of selected subproject universities to be responsible for day-to-day implementation. PART V - LEGAL INSTRUMENTS AND AUTHORITY 90. The draft Development Credit Agreement between the People's Republic of China and the Association, and the Recommendation of the Coummittee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 91. Special conditions of the project are listed in Section III of Annex III. A special condition of effectiveness is that China's State Council shall have approved the Development Credit Agreement. 92. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 93. I recommend that the Executive Directors approve the proposed credit. A.W_ Clausen President Attachments February 5, 1985 Washington, D.C.  -28- ANNY T Page I of 6 ~ir&. isnan ER. OF - SOCUL ISDCAVOAS MT SI5 cUZN&. KOFW s . or Rz cs (