China - Enterprise Reform Project

 ICRR 12510 Report Number : ICRR12510 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 09/06/2006 PROJ ID :P060270 Appraisal Actual Project Name :Enterprise Reform Project Project Costs 5.0 5.2 US$M ) (US$M) Country :China Loan/ US$M ) Loan /Credit (US$M) 5.0 5.2 Sector (s):Board: ): US$M ) PSD - General public Cofinancing (US$M) administration sector (41%), General industry and trade sector (32%), Other social services (18%), Micro- and SME finance (9%) L/C Number :C3271 FY ) Board Approval (FY) 99 Partners involved : Closing Date 06/30/2002 12/31/2005 Evaluator : Panel Reviewer : Division Manager : Division : Elliott Hurwitz John H. Johnson Lily L. Chu IEGCR 2. Project Objectives and Components a. Objectives The Enterprise Reform Project (ERP) began as an effort to learn from innovative methods for the reform of China's state-owned enterprises (SOEs). However, just 4% of the funding allocated to this goal was disbursed, and the objectives were subsequently revised twice , as shown in the table below. In both cases, the change in objectives was approved by the Bank Board on a "no-objection" basis (information not contained in the ICR ). ERP Phases, Objectives, and Disbursements Project Phase Dates Objectives Disbursement: planned/actual 1. Original ERP 7/21/00- Learn from innovative methods for reform of SOE sector . Project US$5m/ 6/30/02 was expected to help deepen enterprise reform, contributing to US$0.2m CAS objective of maintaining structural reform momentum . DOs of this LIL included identifying and adapting potential improvements in enterprise reform methods to local circumstances, testing feasibility through pilot implementation, and promulgating lessons among local and central policy-makers, leading to their replication . 2. Snow Disaster early Assist Borrower in restoring social and economic infrastructure US$0/ Recovery 2003 to critical to herders devastated by the severe snowstorm in the US$2.2 Operation 5/31/03 Xinjiang Uyghur Autonomous Region, and enhance disaster million response capacity. 3. SARS and 7/10/03- (1) Address emergency needs for water and sanitation - related US$0/ Infectious 12/31/05 diagnosis, clinical management, and personal protection; (2) US$2.9 Disease support government efforts to strengthen public health capacity . million Response Program b. Components (or Key Conditions in the case of Adjustment Loans ): Original ERP components were: (1) Development of restructuring models pertaining to industrial Large and Medium Enterprises (LMEs), including model methods for LME transformation; restructuring and reform of selected LMEs; (2) Management development, including Executive recruitment and development; secondment and study visits for managers/officials; (3) Retraining and re-employment, including connecting information networks for retraining and re-employment; (4) Development of Small and Medium Enterprises (SMEs), including ownership transformation concepts, strengthening the property rights center, creation of a conducive environment for SMEs, and post-privatization assistance for SMEs . Snow Disaster Recovery Operation components were: Restoration of livestock sheds; Housing restoration; Pasture rehabilitation; Technical assistance and project management . SARS components were: 1. Program Planning, Coordination and Policy Development; 2. Clinical management of SARS patients; 3. Disease prevention and control . c. Comments on Project Cost, Financing, Borrower Contribution, and Dates See table above for costs and dates . Note: This ICR covers only the original objectives relating to enterprise reform (ICR, para 4.1.1). A Project Completion Note was completed on the Snow Disaster Recovery Operation (11/30/03); this ICN was not reviewed by OED. According to the ICR, the SARS activity under the project will be evaluated as part of the Basic Health Services Project (P003566), which is on-going. 3. Relevance of Objectives & Design : While the objectives were substantially relevant, the project design showed severe shortcomings, leading to an overall rating for relevance of negligible. With regard to its original objectives, the ERP was consistent with the 1997 CAS insofar as it promised to contribute to the momentum of structural reform, and addressed an important development barrier. However, the design was deeply flawed . The 4 locations selected for this pilot effort had little knowledge of Bank projects and procurement requirements, and the project did not provide adequate support to overcome this lack . The ERP was part of a package of grants and credits furthering enterprise reform (including grants from PHRD and from the ASEM Trust Fund that were in direct support of this project ); the variation in administrative requirements and financial terms between grants and credits caused confusion and delay . The ERP intended that restructuring studies of poorly-perfoming SOEs be undertaken, but did not take into account municipal requirements that the SOEs themselves had to pay for the studies; few poorly -performing SOEs had the funds to pay for such work . Finally, the 3-year period originally allotted for project completion was too short for the scope of activity specified . 4. Achievement of Objectives (Efficacy) : Efficacy was negligible. Two of the 4 pilot sites dropped out of the project within a year of effectiveness . Few innovative methods of SOE reform were developed --indeed, little activity of any type was undertaken under the project as it disbursed only 4% of the intended funding (although some grant-funded activity was useful). No improvements in enterprise reform methods were developed, and none were replicated in other locations . Two large Wuhu enterprises had restructuring studies done under the project, and one was privatized . Also in Wuhu, the first phase of management training was completed for 15 managers, and 77 additional individuals were given "MBA training." However, other management training was curtailed due to lack of sufficient time before project closing. An SME study was also completed, but implementation of its findings was not undertaken due to lack of time. Similarly, in Shenyang studies of the labor market and on enhancing retraining capabilities were completed, but there is no record of the extent to which these contributed to the capacity of the Department . 5. Efficiency : Efficiency was very low; the project produced few benefits and disbursed around US$ 200,000 while incurring Bank Administrative costs of over US$ 500,000. 6. M&E Design, Implementation, & Utilization: The M&E conceptual framework outlined in the PAD is good . However, there is insufficient attention to the responsibility for data collection, and no evidence is presented that M&E data were used during implementation . 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): 8. Ratings : ICR ICR Review Reason for Disagreement /Comments Outcome : Unsatisfactory Highly Unsatisfactory Considering the project's failure to achieve any major objectives, combined with negligible relevance and low efficiency, a rating of highly unsatisfactory is indicated. Institutional Dev .: Negligible Negligible Sustainability : Unlikely Highly Unlikely As acknowledged in the ICR, the project did not advance the enterprise reform  program, and thus was highly unlikely to sustain any benefits. Bank Performance : Unsatisfactory Highly Unsatisfactory Quality at Entry was highly unsatisfactory : --Project design was deeply flawed (sec 3). --Institutional analysis was poor, including the capacity of local governments, as well as important requirements, e.g., that weak SOEs pay for their own restructuring studies. The Bank's inattention to the details of local conditions led to damage to the relationship with the Borrower (see sec 9 below). --Readiness for implementation was poor, with no prior action on procurement or on-lending arrangements. --The haste with which the project was prepared, to make the deadline for China to borrow on IDA terms (ICR para 3.5.5), probably contributed to the highly unsatisfactory quality at entry . Supervision was highly unsatisfactory : --Lack of timely identification of implementation and development impact problems. --Inadequate supervision capacity and resources, rapid turnover in staff, and uncertainty in the supervision budget (ICR para 4.1.4) --Reorganization of the Bank unit responsible for supervision caused an initial delay in assignment of staff (ICR para 7.2.1). --Important project records were missing . A Shenyang study on enterprise reform and industrial development was completed in 2001, and reviewed with the Bank, but no record could be found of its implementation. Borrower Perf .: Unsatisfactory Unsatisfactory Quality of ICR : Unsatisfactory NOTES NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness . 9. Lessons: When the Bank doesn't do its "homework, " it risks damage to its reputation : The ERP reflected inadequate knowledge of local capacity and conditions in the pilot sites . This lack contributed to delays, the exit of 2 pilot localities, and the failure to achieve PDOs .* The Bank did not exercise pro -active management and identify problems in a timely manner . Even when it became clear that project achievement was falling far short of what was envisioned, the PSRs do not reflect a pro-active determination to diagnose problems and take action to remedy them . In some cases, reporting indicates that the Bank knew there were problems but did not know the source . Haste makes waste : The project was prepared hastily so it could be approved in FY 99, the last year during which China could borrow on IDA terms (ICR para 3.5.5). It is likely that in the rush to prepare the project before the deadline, critical aspects of quality at entry were not given adequate attention, which contributed to the poor design and ultimate highly unsatisfactory outcome . *"Damage to the relationship with two ...participating cities....has resulted in two cities pulling out of the program ." (PSR, 6/22/01) 10. Assessment Recommended? Yes No Why? 11. Comments on Quality of ICR: The ICR is unsatisfactory . While it is exceedingly frank and presents a great deal of useful information, it suffers from 2 fundamental flaws: (1) it should have been completed earlier, when the effort to achieve the original objectives ended; (2) there should have been an ICR mission . These shortcomings are elaborated below . (1) Considering the total change in project objectives, and the completion of the PCN on the second phase of project activity, the ICR should have been completed earlier, when memories were fresher and more individuals connected with the project were available (acknowledged in ICR section 8,1). (2) An ICR Mission probably would have enabled assessment of many more aspects of project performance : Assessment of the utilization of capacity created for municipalities' retraining and re -employment activities (ICR, para 4.2.12). A Shenyang study reviewing performance of large local SOEs was completed, but project records do not provide information on how it was utilized (para 4.2.3). A bankruptcy study agreed to by the Bank which built upon other work in this area in China was completed . Bank staff reviewed the report and discussed it with the Shenyang Bankruptcy office . However, project records do not indicate whether there was any further use made of these findings (para 4.2.5). In Shenyang, studies of the labor market and on enhancing retraining capabilities were completed, but there is no record of the extent to which these contributed to the capacity of the Department . Finally, the ICR should have indicated whether the 2 changes in project objectives were approved by the Board .