China - Rural Industrial Technology (Spark) Project

Docuent of The World Bank FOR OFFICIAL USE ONLY 4AV 32 7' rcn-C4 < 2 / 6 - R-epot No. P-4923-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 45.1 MILLION (US$64.3 MILLION EQUIVALENT) AND A PROPOSED LOAN OF US$50.0 MILLION EQUIVALENT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A 4 RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT OCTOBER 22, 1990 This document bas a restricted distribution and may be used by recipients only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AN) EOUIVALENTS (August 1, 1990) Currency Name - Renminbi Currency Unit - Yuan (Y) 1 Yuan - 100 Pen from July 5, 1986 to December 15, 1989 $1.00 - Y 3.72 since December 15, 1989 $1.00 Y 4.72 FISCAL YEAR January 1 - December 31 ABBREVIATIONS ABC - Agricultural Bank of China CIB - China Investment Bank GOC - Government of China ISTIC - Institute of Science and Technology Information of China JEDIC - Jilin Province Economic Development Investment Corporation JGF - Japanese Grant Facility SSTC - State Science and Technology Commission STC - Science and Technology Commission TVE - Township and Village Enterprise  FOR OMCIAL USE ONLY RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Credit/Loan and Project Sfmiarv Borrower: The People's Republic of China Beneficiaries: Jiangsu and Jilin Provinces and Shanghai Municipality China Investment Bank (CIB) Agricultural Bank of China (ABC) and Jilin Province Economic Development Investment Corporation (JEDIC) Credit Amount: SDR 45.1 million (US$64.3 million equivalent). Loan Amount: US$50.0 million equivalent. Terms of Credit: 35-year repayment, including 10 years of grace, on standard IDA terms. Terms of Loan: 20-year repayment, including 5 years of grace, at the standard variable interest rate. Onlending Terms: The Government would relend US$114.3 million equivalent to Jiangsu and Jilin provinces and Shanghai municipality. on terms and conditions acceptable to the Bank Group. The commercial credit subcomponent, which is equivalent to about 90% of the above amount, would be onlent to the financial intermediaries for 15 years, including 5 years of grace. For foreign currency subloans, intermediaries would receive credit/loan proceeds from the provincial/ municipal governments at the Bank's standard variable interest rate and relend funds to enterprises at the Bank's variable interest rate plus a minimum spread of 2%. Subborrowers would bear only the risk between the US dollar and the renminbi and would pay a fee of at least 0.5% to cover SDR/currency pool risk. For local currency subloans, intermediaries would relend funds to enterprises at the prevailing rates for township and village enterprises with the provinces/municipality bearing the foreign exchange risk and receive funds from the provincial/municipal governments at the prevailing rates minus a minimum 2%. As regards the precommercial credit subcomponent (US$3.3 million equivalent) in Jiangsu, CIB and ABC, acting on an agency tasij for the Province, would pass on funds according t' a rI k- sharing formula to include, for successfujl subp'ojects, an interest rate related to financial retu- *, and at least 2 percentage points above the equivalent commercial rate. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - FinMing flan: Local Foreign Total ----------(US$ million)---------- IBRD/IDA 53.9 60.4 114.3 Central Government 1.0 - 1.0 Provincial Governments 8.3 - 8.3 Financial Intermediaries 35.4 - 35.4 Enterprises 61.4 - 61.4 JGF -. _1,7 1.7 Total 16062.1 222. Economic Rate Not applicable to project as a whole, but enterprise of Return: modernization subprojects will demonstrate estimated rates of return of at least 12%. Staff Anpraisal Report: Report No. 7484-CHA IBRD No. 21063  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT 1. I submit the following memorandum and recommendation on a proposed credit of SDR 45.1 million (US$64.3 million equivalent) and a proposed loan of US$50.0 million equivalent to the People's Republic of China to help finance a Rural Industrial Technology Project in support of the Government's Spark Program (para. 5), which seeks to upgrade standards of technology and management in rural non-State enterprises. The proposed credit would be on standard IDA terms with 35 years maturity. The proposed loan would have a repayment term of 20 years including 5 years of grace, with interest at the Bank's standard variable rate. The government of Japan is providing a cofinancing grant of US$1.70 million equivalent. 2. Background. With the progressive lifting of earlier restrictions, China has, in recent years, witnessed dramatic growth of non-State enterprise activity in industry, commerce and other sectors, especially in rural areas, where small, usually community-owned, township and village enterprises (TVEs) have emerged as a dynamic force. Non-State firms overall grew from 18.8% of total industrial output in 1975 to 43.2% by 1988, of which industrial TVEs from 5.1% to 25.8%. Rural industry now employs an estimated 34 million people (and temporary workers would increase this figure). More than 95% of TVE output falls entirely outside the Plan. TVEs have been responsive to market opportunities, and have effectively tapped rural savings, an expanding workforce released by agricultural progress, and the entrepreneurial talent within local communities. Despite this, the sector still suffers, by comparison to State industry, in terms of allocation of resources, including formal banik credit, foreign exchange and qualified technical and managerial personnel, and in access to business support services, such as information networks on markets and technology. Although TVEs make relatively efficient use of available resources, prevailing technology standards are frequently backward, and product quality variable. 3. For much of 1989, in the context of the government's austerity program initiated in late 1988, TVEs became subject to a more restrictive policy environment, including tight bank credit ceilings. Growtai slowed from 30% in 1987-88 to 15.9% in 1989. While it appears that industrial TVEs have fared reasonably well, it is estimated that overall about 3 million rural enterprises (out of a total of more than 17 million) went out of business. Starting in late 1989, and as the government's austerity program has eased, there has been a distinct improvement in the environment for TVEs. Growth in the sector has picked up, and key officials have publicly acknowledged the importance of TVEs in achieving growth and employment objectives. Recently formulated targets envisage continued strong growth of TVEs. 4. China is making major changes in its technology policies, although the pace of change has varied, and moves in the direction of decentralization have recently been subject to the overriding pressure to reestablish macroeconomic stability. For 20 years prior to 1979, aggregate productivity  - 2 - trends in Chinese industry revealed negligible benefits from technical progress. Research institutes were frequently isolated by bureaucratic planning systems (or served only large State-owned firms), and transfer of technology to industry was stymied by the absence of technology markets and by distorted enterprise-level incentives. Under reforms institutes have become increasingly dependent on contracts and fees from industry to finance their activities. A patent system is being established and other forms of technology markets are being pioneered. Enterprise reforms have been gradually breaking down barriers which formerly isolated State firms from market pressures to innovate, and the growing non-State sector (para. 2) operates essentially in a market-oriented environment. In keeping with the reforms, China's State Science and Technology Commission (SSTC) is moving from central planning control of resources to policy formulation and innovation. 5. The Sgark Program, launched by SSTC in 1985-86, is an initiative to involve the technology sector in support of rural enterprise development. Implemented nationwide through SSTC's lower level counterpart Science and Technology Commissions (STCs) and other local agencies, the Program undertakes: (a) enterprise modernization subprojects for TVEs and other small rural enterprises, which introduce improved technology and management methods with high potential for replication, and are designed and implemented with assistance from technical partners such as research institutes or larger firms; (b) focused training programs ("Spark training"), in technical and managerial areas, for rural enterprise staff; and (c) reorientation of the technology information network of SSTC's affiliate, the Institute of Science and Technology Information of China (ISTIC), to meet business information needs of small non-State enterprises. The Program also helps selected localities with expert support for preparation of comprehensive development strategies. The Spark Program takes its name from the adage that "one small spark can start a prairie fire," a reference to the program's anticipated catalytic effect on rural enterprise development. The Program has already approved almost 14,000 enterprise modernization subprojects for financing, provided mostly through targeted bank credit, and officials estimate that Spark training courses may have reached 4 million people. 6. Rationale for Bank Group Involvement. The project would be the first Bank Group-supported operation to focus entirely on China's rural non- State enterprise sector. Bank Group review of the Spark Program indicates that it represents a serious approach to priority needs of the TVE sector. SSTC is providing thoughtful leadership and guidance and there has been an enthusiastic local response. Early indications are that most enterprise subprojects are well chosen and efficiently implemented, and that Spark training is meeting TVE needs not adequately addressed by existing programs. However, the Spark Program is still relatively young, its institutional basis is underdeveloped, and it addresses problems of a sector with which SSTC and the STCs have had little previous experience. The review indicates the need for upgrading management and execution of Spark through: clarification of policies and subproject eligibility criteria; strengthening of STC capability by recruitment and training; and establishment of an effective management information system (MIS). In addition, potential has been identified for substantially improving the relevance and effectiveness of current Spark training through transfer of adult training techniques pioneered by the business sector in industrial countries; ISTIC also recognizes it needs technical assistance in transforming its focus from an urban and bibliographic emphasis, appropriate to researchers, to meeting the requirements of small  - 3 - rural enterprises. It was also agreed that an experiment should be launched in the use of risk-sharing financial instruments for funding smaller, precommercial technology subprojects (developing prototypes, building pilot plants, etc.) The provision of credit to fund TVE-sponsored technology projects would serve as a catalyst to demonstrate to a financial system still largely oriented towards State-owned enterprises that such projects can be financially viable and worthy of the system's support. 7. Project Objectives. The project will support implementation of the Spark Program in three diverse areas of China: (a) Jiangsu Province, which has the largest and probably the most diversified TVE sector in the country; (b) Jilin Province, a leading agricultural producer with a large State _ndustry presence but an underdeveloped TVE sector; and (c) Chongming Island, a rural county wLthin Shanghai municipality, selected by Spark for comprehensive development assistance (see map). In these areas, the project will support implementation of enterprise modernization subprojects selected according to agreed criteria and the upgrading of enterprise staff training and business information system services and facilities. In Jiangsu, it will pioneer the use of precommercial credits. It will also seek, through technical assistance components covering both national level and the project areas, to equip Spark Program personnel with relevant improved skills and techniques in the areas of subproject evaluation, management information systems, training needs assessment and training program preparation, and the design and implementation of business-oriented information systems. 8. Project Descrintion. The project has four components. Enterprise Modernization: Under the commercial credit subcomponent, financial intermediaries in the three project areas 1/ will provide credit for rural industrial subprojects approved by the STCs as meeting agreed Spark criteria and also satisfying the intermediaries' own standards of viability and creditworthiness. Lending rates to enterprises would be in line with prevailing terms and are expected to be positive in real terms over the life of subloans. The precommercial credit subcomponent, in Jiangsu Province, will introduce the use of risk-sharing financial instruments on a pilot basis. Spark Trainin2: Program managers and selected trainers will benefit from technical assistance and workshops in contemporary methods of adult training, including guided practical experience in course design; facilities at four training bases will be upgraded. Nongovernmental organization (NGO) participation in providing the necessary technical assistance is under active review. Technology Information: Technical assistance and training in design and implementation of business-oriented technology and marketing information systems would be provided and computers and other related equipment upgraded. Institutional Development: (a) design and implementation of a simple microcomputer-based MIS for Spark Program management in SSTC, Jiangsu and Jilin; (b) preparation and delivery of specially tailored courses for STC staff in the systematic evaluation of small industrial subprojects involving innovative technology; and (c) support for agreed staff training programs in participating financial intermediaries. Under the latter three components, expenditures at the national level would be cofinanced under a grant facility established by the Government of Japan and administered by the Bank. A breakdown of costs and financing plan are shown in Schedul3 A. Amounts and 1/ The China Investment Bank (CIB) in Jiangsu; the Agricultural Bank of China (ABC) in Jiangsu and Chongming; and the Jilin Province Economic Development Investment Corporation (JEDIC) in Jilin.  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. 7484-CHA dated October 22, 1990, is being distributed separately. 9. Agreed Actions. The following major actions have been agreed: (a) GOG would inform the Bank Group in advance on changes in the National Spark Policy Statement; (b) COC and the project provinces/municipality would carry out technical assistance and a training study under terms of reference agreed with the Bank Group and sign contracts for the technical assistance and overseas training as a condition of disbursement for the non-credit components; (c) enterprise and subproject eligibility would be as agreed with the Bank Group and include enterprises to be TVEs or county collectives, subprojects to meet environmental standards, to have a technology content beyond the standard expansion/modernization and to have minimum 12% financial and economic rates of return, the maximum subloan size to be US$2.5 million and subborrowers to provide normally 30% and a minimum 20% of subproject costs; (d) Spark Fund resources would not be used to subsidize subloan interest rates; (e) project areas would ensure the representation on their leading (management) groups of representatives of the local environmental protection bureau; (f) onlending/relending terms and spreads on the enterprise modernization component would be as agreed with the Bank Group (see Project Summary); and (g) CIB and JEDIC would consult with the Bank Group on any proposed changes to their policy statements (and in the case of CIB also its strategy statement). 10. Benefits and Risks. The project will support implementation of an innovative program which has made a strong start in upgrading levels of technology and management in rural non-State enterprises. Program management will be placed on a firmer footing through more explicit institutionalization of policies and criteria, strengthening of program staffing and development of effective internal management information systems. In addition, specific improvements in methodology will be transferred in subproject evaluation, precommercial financing, Spark training and business-oriented information systems. These improvements will offer a basis for diffusion to the rest of the country. Subproject approval criteria, STC staff training and involvement of financial intermediaries are intended to ensure that appropriate subprojects are selected and that risks associated with technology upgrading and the marketing of new or improved products are adequately assessed. Risks associated with implementation of the technical assistance activities will be addressed by ensuring that each is implemented under a contract with an experienced entity acceptable to the Bank Group. 11. Recommendation. I am satisfied that ~;he proposed credit and loan would comply with the Articles of Agreement of the Association and Bank, and recommend that the Executive Directors approve the proposed credit and loan. Barber B. Conable President Attachments Washington, D.C. October 22, 1990  Schedule A CHNA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Summary, of Proiect Costs and Financing Plan by Component Local Foreign Total Estimated Costs -(US$ million)- Enterprise Modernization Commercial Credit 144.5 53.5 198.0 Pre-commercial Credit 4.9 1.8 6.7 Subtotal 149.4 55.3 204.7 Spark Training. Technology Information and Institutional Development Civil Works 3.7 0.5 4.2 Equipment/Furniture 4.0 3.8 7.9 Technical Assistance/Training 0.8 1.7 2.5 Program Support 1.1 - 1.1 Subtotal 9.6 6.0 15.7 Total Base Costs 159.0 61.3 220.4 Physical and Price Contingencies 1.0 0.7 1.7 Total Project Costs 160.0 62.1 222.1 Financing Plan IDAIIBRD 53.9 60.4 114.3 Central Government 1.0 - 1.0 Provincial Governments 8.3 - 8.3 Financial Intermediaries 35.4 - 35.4 Enterprises 61.4 - 61.4 JGF _ 1.7 1.7 Total 160.0 62.1 222.1  Schedule B Page 1 of 2 MM&L I STRIA_ (SPAMK) PR CT Pracuxremet Method *nd Disburs8emets --------SS million)----- Procurement Method Proiect Element LCB Other Total Cost Enterprise modernization component 204.7 204.7 (106.6) /a (106.6) Technical Assistance and training for Spark training, technology information and institutional development components 2.7 2.7 ( 1.1) 1b ( 1.1) Civil works under Spark training component 4.7 4.7 C 2.1) ( 2.1) Equipment/Materials/Furniture under Spark training, technology information and institutional development components 8.8 8.8 C 4.5) Ic C 4.5) Program support 1,2 1.2 Total Financing 4.7 217.4 222.1 ( 2.1) (112.2) (114.3) Note: Figures in parenthesis are the amounts to be financed by the Bank Group. Ia Subborrowers will seek at least three quotations except in the cases of proprietary technology, not expected to exceed 152 in total, for which direct negotiations would be permitted. /b Consultant services to be procured in accordance with Bank Group guidelines. /c Procurement to take place in accordance with packages and methods (local or international shopping) as agreed with the Bank Group. This is appropriate given large number of mainly small items to be procured at diverse locations.  Schedule B Page 2 of 2 Disbursenents (US$ million) Disbursement Category Amount Percentage to be Financed Enterprise modernization 106.6 10O2 of amounts disbursed component on subloans. 1/ Civil works Z.1 50X of expenditure Consultant services and training 1.1 1002 Goods under Spark training, 4.5 100? of foreign expendi- technology information and tures, 1002 of local institutional development expenditures (ex-factory components. cost) and 752 of local expenditures for other items procured locally. Total 114.3 1/ Subloans will cover the greater of 100? of foreign expenditures or 502 of total project costs, excluding land. Estimated Disbursementst (US$ million) Fiscal Year FY91 FY92 FY93 FY94 FY95 FY96 Annual 6.0 6.1 31.4 32.4 22.8 15.6 Cumulative 6.0 12.1 43.5 75.9 98.7 114.3  Schedule C cil RURL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: 15 months (b) Prepared by: Government with Bank Group assistance (c) First Bank mission: March 1987 (d) Appraisal mission departure: June 1988 (e) Date of Negotiations: February 26 - March 5, 1990 (f) Planned Date of Effectiveness: February 1991 (g) List of relevant PCRs: Not applicable  Schedule D Page 1 of 3 STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 30, 1990) Loanl AmouLt (US$ million) Creilt Bor- neor canceltos Num er FY rower Purpose Ban IDA Undisb. (a) Six loans and ten credits have been fully disbursed. 447.8 523.9 - 0? vhich SECALs 296711932 88 PRC Rural Sector Adj. 200.0 100.0 - ______________ 2231 83 PRC Petroleum I (Daqing) 162.4 - 0.5 2252 83 PRC Petroleum I IZhongyuan-Wenliu) 100.8 - 15.0 1411 84 PRC Po technic TV Univr 85.0 17.6 1417 84 PRC Rber Development 100.0 12.0 2382 84 PRC Luhuge Hydroe ectric 145.4 1 25.5 2394 84 PRO Raila 220.0 -1.0 1472 84 PRC Rural Health & Medical Educ. - 85.0 12.2 2416 84 PRO Peaurol III (Karamy 92.5 -5.7 2434 1491 84 PRO Indusetial Credit II (CIB II) 105.0 70.0 0.9 2444 I1500 84PRO Alric ftura EduLCation II 45.3 (23.5)b 6. 8 15 6 85 PRO A ricultural Research II - . 6 1 145531 885 PRC Ufliverity Development II 1 145.0 26.2 2493 85 PRO Power II 117.0 -16.7 2501 85 PRC Chanccun (Luan) Coal Mining 79.5 - 55.2 1577 85 PRO Seed s 40.0 1.1 1578 85 PRC Rural Water Supply 42. 80.0