China - Tianjin Light Industry Project

1Dxcument of The World Bank FOR OFFICIAL USE ONLY Report No. P-4774-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF TdE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $154.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A TIANJIN LIGHT INDUSTRY PROJECT JANUARY 25, 1989 Ths document has a restricted distnbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENTS (As of DecemDer 31, 1988) Currency - Yuan (Y) 1 Yuan = 100 fens $1.00 = Y 3.72 Y 1.00 - $0.27 (In this report $ refers to US$) 'WEIGHTS AND MEASURES Metric system FISCAL YEAR January 1 - December 31 ABBREVIATIONS CIB - China Investment Bank DFC - Development Finance Company TA - Technical Assistance TMG - Tianjin Municipal Government  FOR OFFICIAI. tSE ONI CHINA TIANJIN LIGHT INDUSTRY PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiaries: Tianjin Municipal Government (TMG) China Investment Bank (CIB) Amount: $154.0 million equivalent. Terms: Twenty years, including five years grace at the Bank's standard variable interest rate. Onlending Terms: The proceeds of the loan would be made available to TMG, which in turn would make available the industrial credit component of $141.2 million to CIB. CIB would act as a full financial intermediary for $70.2 million allocated to textile dyeing and finishing and packaging subsectors and TMG would onlend this amount to CIB with a repayment period of 20 years including five yea.s grace and at a variable interest rate equal to the Bank rate. As regards the balance amount of $71.0 million for the paper subsector, CIB would act as a managing agency on behalf of TMG. The industrial credit component would be onlent to eligible enterprises for a maximum period of 15 years including up to 3 years of grace at a variable interest rate equal to the Bank rate plus a minimum spread of 1Z and subborrowers would carry the foreign exchange risk. Out of the technical assistance (TA) component of $12.8 million, TMG would make available $50,000 to CIB on terms and conditions satisfactory to the Bank. Financing Plan: Local Foreign Total ------- (S million) - IBRD - 154.0 154.0 CIB, other banks, & enterprises 70.4 - 70.4 TMG 2.2 1.0 3.2 Total 72.6 155.0 227.6 Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 7165-CHA, Dated January 25, 1989 Map: IBRD-20878 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.  FOR OFFICIAI. SE ONLY CHINA TIANJIN LIGHT INDUSTRY PROJECT Loan and Proiect Summary Borrower: People's Republic of China Beneficiaries: Tianjin Municipal Government (TMG) China Investment Bank (CIB) Amount: $154.0 milli.on equivalent. Terms: Twenty years, including five years grace at the Bank's standard variable interest rate. Onlending Terms: The proceeds of the loan would be made available to TMG, which in turn would make available the industrial credit component of $141.2 million to CIB. CIB would act as a full financial intermediary for $70.2 million allocated to textile dyeing and finishing and packaging subsectors and TMG would onlend this amount to CIB with a repayment period of 20 years including five years grace and at a variable interest rate equal to the Bank rate. As regards the balance amount of $71.0 million for the paper subsector, CIB would act as a managing agency on behalf of TMG. The industrial credit component would be onlent to eligible enterprises for a maximum ieriod of 15 years including up to 3 years of grace at a variable interest rate equal to the Bank rate plus a minimum spread of 12 and subborrowers would carry the foreign exchange risk. Out of the technical assistance (TA) component of $12.8 million, TMG would make available $50,000 to CIB on terms and conditions satisfactory to the Bank. Financing Plan: Local ForeiRn Total _______($ million)------ IBRD - 154.0 154.0 CIB, other banks, & enterprises 70.4 - 70.4 TMG 2.2 1.0 3.2 Total 72.5 155.0 227.6 Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 7165-CHA, Dated January 25, 1989 Map: IBRD-20878 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.  MEMORANDUh AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL EANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA ____ FOR A TIANJIN LIGHT INDUSTRY PROJECT 1. The following memorandum and recommendation on a proposed loan to the People's Pepublic of China for the equivalent of $154 million is submitted for approval. The proposed loan would have a repayment term of 20 years including 5 years of grace with interest at the standard variable rate. The Government would make available the loan proceeds to the Tianjin Municipal Government (TMG) which, in turn, would make available the industrial credit component of $141.2 million to the China Investment Bank (CIB). CIB would act as a full financial initermediary for $70.2 million allocated to textile dyeing and finishing sub"ectors and TMG would onlend this amount to CIB with a repayment period of 20 years including 5 years of grace, at a variable interest rate and commitment fee equal to that under the loan. As regards the balance amount of $71 million for the paper subsector, CIB would act as a managing agency on behalf of TMG and would receive a fee of 0.3X. The industrial credit component would be onlent to eligible enterprises for a maximum period of 15 years including up to 3 years of grace at a variable interest rate equal to the Bank rate plus a minimum spread of 1X and subborrowers would carry the foreign exchange risk. The residual loan amount of $12.8 million would be used by TMG for the TA component, except for $50,000 that would be made available to CIB for its staff training on terms and conditions satisfactory to the Bank. 2. Background. Industry is China's largest productive sector accounting for nearly half of its GDP. The sector employs over 83 million workers, i.e., 172 of China's total labor force. In 1986, this sector contributed gross output valued at Y 1,119 billion ($324 billion), almost equally shared between light and heavy industry. Despite its rapid growth, the industrial sector is characterized by low efficiency and productivity and a limited variety of products which are often of inferior quality. This is mainly due to inappropriate economic policies, outdated equipment and technology, inadequate infrastructure and weak support institutions. The Bank is assisting the Government to address the above problems through its economic and sector work and lending operations. Bank's studies of state enterprise management systems, the embryonic financial system and investment, external trade and capital have been important vehicles for advising the Government economic reforms. Lending operations have included direct loans for large industrial projects including restructuring and DFC-type lending mainly for the modernization of light industry. 3. With the gradual decentralization of investment responsibilities under China's ongoing economic reform process, it is becoming increasingly important that the above-mentioned industrial issues should also be addressed at the provincial level. The Bank is, therefore, initiating a series of provincial operations designed to complement its nationally focused sector work and projects. These new operations will focus inter alia at the subsector and enterprise level and attempt to assist the provincial authori- ties in the identification and resolution of policy and system reform issues in conjunction with specific enterprise level restructuring. The proposed project is the first in a series of such provincial projects. It would  - 2 - support the restructuring of three important subsectors, textile dyeing and finishing, paper and packaging, of light industry in Tianjin. These industries are presently characterized by obsolete equipment, inefficient use of raw materials, inadequate concentration on those products in which Tianjin has a comparative advantage and suboptimal allocation of product lines between plants. 4. Rationale for Bank Involvement. The project is consistent with the Bank's overall strategy for assistance to the industrial sector in China and is designed to assist the municipal government in improving the overall policy framework and strengthening subsectoral planning; building sound support institutions; and promoting and implementing technology upgrading and plant restructuring. To this end, Bank staff, with the assistance of the Tianjin government, have carried out an indepth study of the three subsectors focussing on sectoral policies and systems; management and technical structure of enterprises, their operational performance and trends, and plans for restructuring; and the role and adequacy of institutional infrastructure. TMG has prepared and formally adopted a development program and strategy for the three subsectors based on the conclusions and recommendations of this study. The development program and strategy outlines, inter alia, various reform measures which will be introduced (including price and production planning reforms, granting of direct export rights to enterprises, use of economic criteria in investment planning, and steps designed to increase labor mobility and improve financial intermediation in Tianjin) and investment strategies for eachl of the three subsectors. It is expected that the Bank's study will serve as a model for other subsectors in Tianjin for which the municipal government will now assume direct responsibility. 5. Project Objectives. The main objective of the project is to assist TMG in the implementation of above-mentioned development program and specific strategies formulated for the above subsectors. It would, thus, aim to: (a) expedite system reforms at the regional level leading to greater autonomy for and accountability of enterprise management while encouraging the municipal authorities to focus their activities on supporting and guiding enterprises rather than direct control; (b) modernize and restructure enterprises including increased product rationalization between plants and the support of high priority investments; (c) improve internal enterprise management and systems; (d) strengthen institutional infrastructure (including research and design institutes and vocational training schools); and (e) support the preparation of a long-term overall industrial developnment strategy for Tianjin. 6. Project Description. The project would include financial assistance in the form of an industrial credit of $141.2 million to be onlent through CIB to enterprises for the restructuring and modernization and TA of $12.8 million for the overall industrial restructuring program including strengthening of the institutional infrastructure in Tianjin. On the basis of TMG's development program and strategy and considering the subproject pipeline, it is estimated that CIB would onlend $36.6 million to the textile dyeing and finishing subsector, $71.0 million to the pulp and paper subsector, and $33.6 million to the packaging subsector. While the list will be subject to change during project implementation, 15 enterprises in the 3 subsectors are presently expected to be restructured under the financial assistance component. These subprojects, which would be consistent with and part of the provincial government's strategy for the restructuring of the three  subsectors, would result in significant improvements in product quality and production efficiency and would promote increased concentration on those product lines in which Tianjin has comparative advantage. While the investments in the pulp and paper and packaging subsectors would also result in production increases, the textile component concentrates on quality and efficiency upgrading without an increase in basic production capacity. As international textile export quotas apply to quantity only, the quality improvements are expected to result in increased foreign exchange earnings; in addition some beneficiary enterprises should also be able to increase export volumes for those products in which China has not been able to meet its quotas owing to shortfalls in quality standards. 7. Although the project is basically for assisting the three preidentified subsectors, CIB will be allowed the flexibility to finance subprojects in other subsectors to be agreed between the Bank and TMG, on the basis of studies and development strategies to be prepared by TMG. CIB will be responsible for the appraisal and supervision of subprojects to be financed under the proposed Bank loan. It has already received, so far, four industrial credits from the Bank Group for a total amount of $645.4 million equivalent and the overall experience with their utilization is satisfactory. The Bank has also provided considerable support to CIB's institutional development. CIB has expanded rapidly since its establishment in 1981 and now has 31 branches. It has a total staff of 1,040, of which a large number has received training--both inside and outside China. Foreign training of staff is presently being carried out under the TA component of the Bank Group's fourth loan/credit to CIB. CIB is diversifying its sources of financing. It started borrowing from international commercial sources in 1986 and also received a loan of $100 million from the Asian Development Bank in 1987 for onlending to industry. CIB's quality of portfolio and financial position is satisfactory. 8. The TA component of the proposed Bank loan will be used for (a) strenthening of institutional infrastructure ($11.65 million) through import of testing equipment, pilot plants, computer hardware and software, teaching aids, etc., and staff training; (b) development of internal enterprise management systems ($0.50 million); (c) short-term consultant services for light industry ($0.3 million); (d) a study to prepare a long-term development strategy for the paper subsector ($0.3 million); and (e) staff t:aining of CIB Tianjin branch ($0.05 million). The total cost of the project i3 tentatively estimated at $227.6 million equivalent, with a foreign exchange component of $155.0 million (682). Final cost estimates would depend upon the inAividual subprojects that CIB will finance under the industrial credit component. Retroactive financing up to a total of $8.0 million will be allowed for expenditures incurred after December 1, 1988. It is expected that the financing ($1.0 million) for the preparation of an overall industrial strategy for Tiarjin will be provided from the Second Technical Cooperation Credit (Credit No. 1664-CHA). A breakdown of tentative cost estimates and the financing plar. is 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. A map is also attached. The Staff Appraisal Report, No. 7165-CH, dated January 25, 1989, is being distributed separately.  9. Agreed Actions. TMG has reached understandings with the Bank on the implementation of its development program and strategy for the project subsectors, including economic and system reforms and strategies for subsector restructuring. For the project TMG agreed on the following major actions: (a) making available the industrial credit component of $141.2 million to CIB; (b) implementation of the program for strengthening of institutional infrastructure; (c) preparation of overall industrial development strategy for Tianjin; (d) carrying out of both the enterprise management system and the paper subsector studies; (e) ensuring the availability of local currency funds for implementation of the project; (f) maintaining the light industry support unit to assist enterprises in locating required short-term expertise; and (g) continuation of the existing project task force and the project implementation unit to coordinate and monitor the implementation of the project. CIB agreed to the following major actions and conditions: (a) eligible subprojects to be consistent with TMG's development program and strategy for three subsectors, to meet CIB's lending criteria including a minimum ERR and FRR of 122 and to be sponsored by enterprises with satisfactory projected financial position; (b) subprojects to comply with Bank's guidelines on pollution control; (c) CIB's debt/equity ratio not to exceed 5:1; and (d) CIB to exchange views with the Bank on its interest rates. :0. Benefits. The acceleration of policy and system reforms, improved services of support institutions and restructuring of enterprises would result in improvement of subsectoral efficiency and performance. The subprojects would meet economic viability criteria and would contribute to improvements in product quality, production efficiency, higher export earnings and efficient import substitution. The project, which would be first of its kind in China, is expected to serve as a model for the development of future projects in Tianjin and other provinces. 11. Risks. There are two main project risks: (a) unanticipated and adverse future macro-economic developments could inhibit the implementation of the policy and system reforms agreed with TMG; and (b) the complexity of the project and the large number of institutions involved may result in delays in implementation. However, given the government's strong commitment to the reform process and the institutional arrangements agreed with TMG for project supervision, these risks are unlikely to pose a serious threat to the success of the project. 12. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. January 25, 1989  5 Schedule A CHINA TIANJIN LIGHT INDUSTRY PROJECT ESTIMATED COST AND FINANCING PLAN Estimated Costs /a Local Foreign Total