China - Reform, Institutional Support and Preinvestment Project

6f2- Z LL17 _ 6/4/ Document of The World Bank ji FOR OFFICAL USE ONLY MICROFICHE COPY Report Ne. :P- 5908-CHA Type: (PR) Title: REFORM. INSTITUTIONAL SUPPORT Author: CRDARIO. PAUL Ext. :82-,5C Room:A 8037 Dept. :EfACO Reu,tNo. P-5908-CRA NEMORANDUM AND RECOMMENDATION OF TE PRESIDENT OF THE IITERNlTIONAL DElOl?PMT ASSOCIATION TO TME EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 35.5 MILLION TO THE PEOPLE'S REPUBLIC OF CEIINA FOR A REFORM. INSTITUTIONAL SUPPORT AND PREIRVESTIENT PROJECT NOVEBER 20, 1992 Ths document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may oot otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of November 3, 1992) Currency Name: Renminbi Currency Unit: Yuan (Y) $1.00 - Y k.5 Y1 - $0.18 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank CASS - Chinese Academy of Social Sciences EDI - Economic Development Institute of the World Bank IQTE - CASS's Institute of Quantitative and Technical Economics HOC - Ministry of Communications MO? - Ministry of Finance 1IME - Ministry of Materials and Equipment SNA - (UN) System of National Accounts SPC - State Planning Commission SRC - System Reform Commission/State Commission for the Restructuring of the Economic Systems SSB - State Statistical Bureau STB - State Tax Bureau TATD - Technical Assistance and Training Division of MOB's World Bank Department FISCAL YEAR January 1 to December 31  FOR OMCUL USE ONLY CHINA REFORM. INSTITUTIONAL SUPPORT AND PREINVESTNENT PROJECT Credit and Proiect Summary Borrower: People's Republic of China Amount: SDR 35.5 million (US$50.0 million equivalent) Terms Standard, with 35 years maturity Financint Plan: Local Foreign Total -U----- S$ million-------- Government 10.0 0.0 10.0 IDA .3.5 46.5 50.0 Total 13.5 46.5 60.0 Economic Rate of Return : Not applicable Staff Appraisal ReDort : Not applicable This document has a restricted distribution and may be used by recipients only in the performanc7 of their official duties. Its contents may not otherwise be disclosed without World Bank authorizatin.  MEMORANDUM 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 REFORM, INSTITUTIONAL SUPPORT AND PREINVESTMENT PROJECT 1. I submit for your approval the following memorandum and recommenda- tion on a proposed development credit to China for SDR 35.5 million (equiva- lent to US$50 million), on standard IDA terms with a maturity of 35 years, to help finance a Reform, Institutional Support and Preinvestment Project. 2. Backtround. Since 1980, the fundamental objective of the Bank's country assistance strategy in China has been to provide analytical and material support to the country's economic reform and modernization process. The latter, advancing through pragmatic, results-oriented experimentation and diffusion that has proved well suited to China's specific conditions, has helped to integrate its economy with the rest of the world; and, within China, the Bank's international perspective has made important contributions to the design and implementation of the country's development efforts. In this context, and complementing lending and economic and sector work, technical assistance and training have been, directly and indirectly, an important element of the Bank's assistance strategy. Initially, transfer of technology, mainly through preinvestment, project preparation and related training activities, was the principal focus of the Bank's technical assistance effort. Later, during the second half of the 1980s, this focus was broadened and deepened to include policy advice and Institutional development in China's key economic management and sectoral agencies. Following a difficult three-year period (1988-91) during which the authorities' preoccupation with macroeconom- ic stabilization caused a slow-down in reform efforts, the past year has vitnessed a revival in reform initiatives on several fronts. This renewed impetus, and the Government's conviction that only further reforms can solve the fundamental issues facing the economy, has increased the demand for technical assistance for policy advice, institutional development support and preinvestment. 3. To date, two Technical Cooperation Credits (Credits 1412-CHA and 1664-CMA) have financed technical assistance mainly related to project preparation. The first has been completed and a Project Completion Report (PCR) was issued on June 6, 1989. The second, while still under implementa- tion, has been substantially committed. Together, the two credits totalling $30 million helped finance the preparation of about 60 investment projects for subsequent Bank/IDA financing. In 1987, a Planning Support and Special Studies Project (Credit 1835-CMA) provided $20.7 million to finance planning studies as inputs to China's Eighth Five Year Plan (1991-95), special studies of an inter-sectoral or innovative nature, and institutional development support activities including in-service education and training for the central government agencies responsible for economic policy analysis and formulation and the implementation of economic, financial and industrial reforms. This project is proceeding satisfactorily, albeit somewhat slowly, owing to the coordinating agency's initial lack of experience and to protracted government procedures for approval of subprojects when the project was launched. A Financial Sector Technical Assistance Project, approved by the Executive  Directors on September 29, 1992, is designed to strengthen, inter alia, the accounting, policy and research, regulatory and supervisory functions of China's central bank and, indirectly, to support the development of ite key banking and financial institutions. Finally, a free-standing environment technical assistance projeat is currently under preparation. Overall, IDA's involvement in, and support for these diverse technical assistance activities in China has been effective, albeit with some variation in the impact of individual subprojects under the Planning Support and Special Studies Project. 4. The Bank's mandate in China, as in all borrowing countries, is to support broad-based economic development and to combat poverty. First, its country assistance program seeks to balance the needs for help with policy advice and institutional reform, technological modernization, physical and social infrastructure development, environmental protection and poverty alleviation. This requires a comprehensive policy dialogue at the national level, buttressed by a large program of economic and sector work. Second, it entails direct support to key economic agencies aimed at further enhancing their capability to undertake policy analysis and later to set in motion the principal reform measures. Third, it also includes a very substantial program of Bank/IDA lending, characterized by a multisectoral and increasingly robust reform content. The proposed project would make a significant contribution to this overall effort, through institutional support to the key agencies responsible for China's reform efforts and through preinvestment assistance for the country's economic development plan. 5. Lessons Learned from Previous IDA Operations. Experience under the three earlier projects noted above has suggested at least three important criteria for effective implementation of technical assistance activities in China, as follows: (a) detailed preparation and design of individual subprojects; (b) appropriate mechanisms and processes for periodic monitoring of subproject execution; and (c) flexible, but systematic overall project coordination and management. These criteria, and other lessons learned from these earlier projects, have been taken into account in the design and preparation of the proposed project. For example, unlike the Planning Support and Special Studies Project, the reform and institutional support component includes seven fully prepared and already appraised subprojects that have been reviewed by IDA staff and are essentially ready for immediate implementation. In addition, performance indicators have been developed for each subproject to facilitate monitoring of implementation, and the project's overall progress would be subject to a formal annual review by the Government and IDA jointly. Finally, the MOP's Technical Assistance and Training Division (TATD), estab- lished in 1988, would be responsible for overall project coordination and management, for the supervision of individual subprojects, and for the processing of subprojects still to be approved during project execution, in consultation with IDA. 6. Rationale for IDA Involvement. The rationale for IDA involvement in the proposed project is three-fold. First, the project's reform ^4d institu- tional support component, a direct response to the Government's r-ently reinvigorated and accelerated reform drive, is one that IDA, as an indepen- dent, international development agency, is uniquely qualified to support. IDA's involvement would bring its own, and other relevant international  - 3 - experience to bear on the complex reform measures and institutional develop- ment support activities that China has recently initiated; it would also complement and reinforce other elements of its country assistance strategy in China. Second, IDA's involvement in the project's preinvestment and project preparation component is justified by the scope, size and complexity of China's iavestment program and its demand for external capital, incl4ding increased borrowing from the Bank during the next few years. In this connec- tion, while the engineering quality of preinvestment and project feasibility studies prepared by local consultants and design institutes has improved in recent years, their selection of appropriate technology and appraisal of economic, financial and institutional options often requires substantial strengthening. Consequently, the experience of internationally-recruited consultants is often still needed to ensure optimal project design and scope. Third, while UNDP (around US$40 million a year), the Japanese Grant Facility (roughly US$10 million annually), and bilateral donors provide grant financing for preinvestment work in China (including the preparation of projects for Bank/IDA financing), the amount and flexibility of funds available from these sources vary and, in the case of bilateral grants, are often earmarked for specific sectors and purposes. Thus, IDA involvement in the preinvestment component of the proposed project is needed to ensure a certain and flexible means of financing for project preparation, when other sources are unavail- able. 7. Obiectives. Against this background, the proposed project would support China's overall economic reform and modernization effort and help to strengthen selected key institutions responsible for policy and research, training and implementation. It would also help prepare selected public investments and projects, in particular those potentially suitable for external, including Bank/IDA, financing. 8. Proiect DescriDtion. The proposed project has two components. The first, for reform and institutional develooment support, with an estimated cost of about $27 million, would comprise approximately 10-12 discrete subprojects to be executed by selected institutions involved in policy and research, training, implementation and other activities related to China's economic reform program. About $13 million allocated to this component would be committed for subprojects already prepared, appraised and approved by IDA for the following seven agencies: (a) the State Statistical Bureau (SSB), to stren8then professional capability for economic and statistical analysis; (b) the Chinese Academy of Social Sciences (CASS), to improve their capability to undertake quantitative analysis of the economy; (c) the System Reform Comiis- sion (SRC), to support its program of studies and research, including enter- prise reform; (d) the State Tax Bureau (STB), to strengthen its capacity to formulate and implement tax policy; (e) the Ministry of Materials and Equip- ment (MME), to support its program of reform of the distribution system for major goods; (f) the Ministry of Finance, to carry out China's program of economic and sector analysis in support of the economic reform program; and (g) training networks in health and transport (as specified in para. 23 of the attached Technical Annex), to increase training outreach and better meet the unmet demand for training. The remaining $14 million allocated to this compo- nent, would be committed later under subproject preparation, appraisal and approval procedures acceptable to IDA confirmed at negotiations. The attached  - 4 - Technical Annex describes this component's, and the overall project's, institutional context and detailed features, and procurement, disbursement and management arrargements. 9. The second component, for greinvestment and iroiect iregargtion, with an estimated cost of $33 million, would be similar in design, purpose, and scope to the two previous Technical Cooperation Credits (Credits 1412-CRA and 1664-CRA). As such, it would consist of a line of credit available to finance feasibility studies, preinvestment and other technical assistance needed to prepare projects for external, specifically BankJIDA, financing. In certain exceptional circumstances, it could also be used to finance technical assis- tance activities related to project implementation--including, for example, the national components of provincially-based and funded investment projects-- as well as selected project-related studies. Preinvestment and project preparation subprojects under this component would be approved on a case-by- case basis in accordance with agreed criteria and procedures acceptable to IDA. An illustrative list of subprojects, of which several are at an advanced stage of preparation, is included in the Technical Annex. 10. Proiect Implementation. Implementation of the proposed project would be managed and coordinated by the Ministry of Finance. The project cost is estimated at US$60 million equivalent, with a foreign exchange component of US$46.5 million equivalent (77.51). The total financing required is US$60 million, of which the Association would finance US$50 million (1002 of the foreign exchange and 831 of the total). Retroactive financing of up to US$3 million for expenditures incurred after November 15, 1992 will be provided in respect of consultants' services and training in subprojects under the preinvestment and project preparation component. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. 11. Asreed Actions. During negotiations, agreement was obtained on the followings (a) criteria for subproject selection, processing and approval (for the reform component, those with the objective of strengthening departments and agencies involved in the reform program, and for the investment support, those for the preparation of feasibility studies of proj-:ts to be financed by IBRD or IDA and in exceptional cases, for their implementation); (b) terms and conditions at which credit proceeds are to be made available to the beneficia- ry agencies for subprojects; and (c) project coordination, management and supervision arrangements. In addition, an understanding was reached on the content and size of seven subprojects under the reform and institutional development support component. The project is expected to be completed by December 31, 1997, with a closing date of June 30, 1998. 12. Benefits and Risks. The project's principal benefits would be to reinforce the Government's overall economic reform process, to strengthen the key institutions involved, and to finance the preparation of sound investment projects for financing by the Bank/IlDA and, as appropriate, other external sources. Given the satisfactory experience under two earlier Technical Cooperation Credits, there are no special risks to implementation of the  -5- project's preinvestment component. Similarly, the advanced preparation of, and prior agreement on seven subprojects minimize the potential risk of a delay in the initial implementation of its reform and institutional support component. 13. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President By: Ernest Stern Attachments Washington, D.C. November 20, 1992  - 6 - Schedule A CHIA REFORM. INSTITUTIONAL SUPPORT AND PREINVESTMENT PROJECT Estimateci Costs and Financing Plan ($ million) Local Foreign Total Estimated Project Cost /a A. Reform and Institutional Development Tax Reform 0.9 3.2 4.1 Statistics 0.4 0.7 1.1 Modelling/Forecasting 0.2 0.6 0.8 Studies in Support of Reforms 0.7 0.9 1.6 Training Networks 1.9 1.9 3.8 Economic and Sector Analysis 0.5 0.0 0.5 Materials Distribution System 0.2 1.1 1.3 Others (to be agreed) 3.3 10.1 13.4 Subtotal 8.1 18.5 26.6 B. Preinvestment and Project Preparation Subtotal 5.4 28.0 33.4 Total Project Cost L3 2 46.5 SQ4Q Financing Plan Government 10.0 0.0 10.0 IDA 3.5 46.5 50.0 Total 13.5 46.5 60.0 /a, Project is exempt from taxes and duties.  7 Schedule B Page 1 CoINA REFORM. INSTITUTIONAL SUPPORT AND PREINVESTMRNT PROJECT Procurenent Method and Disburssments (S million) Procurement _ethod Project Element LCB Other Total cost Advisory Services 31.7La 31.7 (26.5) (26.5) Training 16.2La 16.2 (12.0) (12.0) Equipment 9.1 3.0/. 12.1 (8.7) t2 8) (11.5L Total 9.1 50.9 60.0 (8.7) (41.3) (50.0) La Services to be procured in accordance with Bank Guidelines. 'k International shopping (to a limit of $3 million). Notes Figures in parentheses are the amounts financed by IDA. Disbursement. Category Amount of 2 of Expenditure. Credit Allocated to be Pinanced (1) Subprojects under the Reform Component A. Equipment 4.0 1002 of total foreign expenditures, 1002 of local expenditures (ex- factory cost) and 752 of local expenditures for other items procured locally B. Consultants' services and training 16.0 1002 (2) Subprojects under the Preinvestment Component A. Equipment 7.5 100S of total foreign expenditures, 1002 of local expenditures (ex- factory cost) and 752 of local expenditures for other items procured locally B. Consultants' services and training 22.5 1002 Total 50 Q  - 8 - Schedule B Page 2 Estimated IDA Dlsbursements IDA Fiscal Year FY93 FY94 -X95 FY96 FY97 FY98 ($ million) Annual 3.0 13.8 14.5 10.8 5.8 2.1 Cumulative 3.0 16.8 31.3 42.1 47.9 50.0  - 9 - Schedule C CH REFORM. INSTITUTIONAL SUPPORT ADD PREINVESTMRNT PROJECT Timetable of Rev Proiect Processlg Evegt. Time taken to prepare the projects /a 9 months Prepared by: Government with IDA and consultant assistance First IDA mission: March 1992 Appraisal mission departure: July 1992 Date of Negotiations: November 1992 Planned Date of Effectiveness January 1993 Relevant PCRs and PPARs: Credit No. Proiect PCR Date Credit/1412-CHA Tetan