China - Shanghai Machine Tool Project

Document of The World Bank FOR OmCLAL USE ONLY Report No. 13595 PROJECT COMPLETION REPORT CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) OCTOBER 12, 1994 Industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office 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.  CURRENCY EQUIVALENTS Currency Name - Renminbi Currency Unit - Yuan (Y) At appraisal (1987): $1.00 = Y 3.70 At PCR (1994): $1.00 = Y 8.70 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet 1 square meter (m2) = 10.76 square feet 1 cubic meter (m3) = 35.31 cubic feet 1 kilogram (kg) = 2.205 pounds 1 metric ton = 2,205 pounds ABBREVIATIONS AND ACRONYMS CNC - Computerized Numerically Controlled ERR - Economic Rate of Return GOC - Government of China ICB - International Competitive Bidding IRR - Internal Rate of Return MMBI - Ministry of Machine Building Industry NC - Numerically Controlled PCR - Project Completion Report PIU - Project Implementation Unit SBMEIA - Shanghai Bureau of Mechanical and Electrical Industries Administration SMG - Shanghai Municipal Government SMTC - Shanghai Machine Tool Corporation SMTW - Shanghai Machine Tool Works SPC - State Planning Commission TCC - Technical Cooperation Credit  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.SA. Office of Director-General Operations Evaluation MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China - Shanghai Machine Tool Proiect (Loan 2784-CHM) Attached is the Project Completion Report on China - Shanghai Machine Tool Project (Loan 2784-CHA), prepared by the East Asia and Pacific Regional Office, with Part II prepared by the Borrower. The project, approved in March 1987 and closed in December 1993, consisted of four subcomponents: (i) plant rehabilitation and modernization covering four cast iron foundries, one forging plant, six accessory equipment manufacturing plants, five metal cutting machine manufacturing plants, two metal forming machine manufacturing plants and two research institutes; (ii) technology transfer; (iii) management system reform; and (iv) training programs. These plants and research institutes were owned by two state owned enterprises. The PCR finds that, despite the absence of an explicit sector policy reform and conditionality, the project achieved most of its objectives. The quality of foundry and forged products improved substantially; the production of Numerically Controlled (NC) machines quadrupled; there were spill over effects on other manufacturing sectors, especially suppliers of parts and components; and exports of machine tools increased substantially. The ex-post economic rate of return is estimated at 16.6% for Shanghai Machine Tools Corporation and 19.4% for Shanghai Machine Tool Works. The project realized much of its institutional development objectives including transfer of technology, the creation of a management information system for each enterprise and the training for nearly 2230 persons. Based on the above findings, the project outcome is rated as satisfactory, and its institutional development impact as substantial. Given the sustained process of market-oriented reform in the industrial sector; the widespread dissemination and absorption of imported technology; and the existence of a vibrant and dynamic industrial market, skilled management and sound financial situation at the enterprise level, the sustainability of this project is rated as likely. The PCR is of satisfactory quality. An audit is planned. Robert Picciotto By H. Eberhard Kopp Attachment |his document has a retricted distribution and nay be used by recipients only in the perfornunce of their official duties. It contenta may not otherwise be disclosed without World Bank authorization.   CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) PROJECT COMPLETION REPORT Table of Contents Preface . ...................................... i Evaluation Summary ..................................... ii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity . ................................. 1 Background . ................................... 1 Project Objectives and Description ...................... 2 Project Design and Organization ....................... 2 Project Implementation ......... .................... 4 Project Results . ................................. 5 Project Sustainability ......... ..................... 7 Bank Performance ........... ..................... 7 Borrower Performance ......... .................... 8 Project Relationship .......... ..................... 8 Consulting Services .......... ..................... 9 Project Documentation and Data ....................... 9 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .... 10 Adequacy and Accuracy of Factual Information in Part IH ........ 10 Comments on the Analysis Contained in Part I ............... 10 Evaluation of Bank's Performance ........ .............. 13 Evaluation of Borrower's Own Performance ..... ........... 13 PART Im: STATISTICAL INFORMATION ..................... 15 Related Bank Loans .............................. 15 Project Timetable .............................. 15 Loan Disbursements ......... ...................... 16 Project Implementation ......... .................... 17 Project Costs and Financing .......................... 18 Project Results ........... ....................... 21 Status of Covenants .......... ..................... 25 Use of Bank Resources ........ ..................... 25   CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Shanghai Machine Tool Project in China, for which Loan 2784-CHA for $100.0 million equivalent was approved on March 3, 1987. The loan was closed on December 31, 1993 after a one-year extension of the closing date. The PCR was jointly prepared by the Industry and Energy Operations Division of Country Department II of the East Asia and Pacific Regional Office (Preface, Evaluation Summary, Parts I and III) and the Borrower (Part II). Preparation of this PCR started during the Bank's PCR mission in December 1993, and is based, inter alia, on the Staff Appraisal Report (SAR), the Loan Agreement, the Project Agreement, the supervision reports, correspondence between the Bank and the beneficiary enterprises (SMTC and SMTW), and internal memoranda of the Bank.   - 11 - CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) PROJECT COMPLETION REPORT EVALUATION SUMlMARY Project Objectives 1. The objectives of the project were: product rationalization and product upgrading; modernization and rehabilitation of manufacturing facilities; expansion of the design and engineering capabilities; and improvements in management systems for the machine tool sector in Shanghai. Project Design 2. As a first-generation industrial project in the Bank's China portfolio, the project design was simple and focused on technological restructuring of the project enterprises. There were no financial intermediaries or agents, and the loan was directly onlent by the Borrower to the two project enterprises: Shanghai Machine Tool Corporation (SMTC) and Shanghai Machine Tool Works (SMTW). This project concept may be understood in the context of political and economic environments that were not ripe for large-scale experimentation at the time of the project preparation. 3. Under the circumstances, the project was well prepared and designed. The project was prepared by numerous Bank missions and on the basis of feasibility studies that provided guidelines on restructuring the project enterprises technologically. Technology transfer agreements were negotiated in the early stages, and training as well as investment needs were adequately addressed. However, the project could have been improved in the areas of corporate building and project scope. Although building an integrated management framework was an important first step for SMTC which was transformed from an administrative agency to a corporate headquarters, the project design did not fully address this issue. As a result, the transformation was delayed as SMTC's 45 subsidiary factories individually entered into management contracts with the Shanghai Municipal Government (SMG). It was only in the later phase of the project implementation that SMTC was able to consolidate its financial operations. The project design could also have been improved in the areas of modern management building by addressing organizational behavior, business strategies and managerial finances of the project enterprises. In addition, there was no clear economic rationale presented for excluding almost two thirds  - iii - of the subsidiary factories from the project scope. Extending it to all factories could have been considered to enhance corporate building. Implementation Experience 4. Within the given constraints (as above), the project was satisfactorily implemented despite some of the usual problems that the Bank's other China projects also encountered. They were problems in: scheduling, provision of domestic funds and procurement. The project closing was delayed by one year, partly because domestic counterpart funds were not sufficiently available in the initial phase of the implementation. There were procurement problems due to tight budgets or quality of equipment procured. Most of these problems were eventually resolved and the modernization of productive assets and training progressed at a fairly regular pace. 5. The project, however, had limited successes in the areas that were identified during the project preparation as having risk: technology and market. Post licensing technology risk-absorption and dissemination of transferred technology-was well taken care of during the project preparation. Pre-licensing risk-identifying willing sources of technology-seemed well taken care of too until the project had difficulty finding sources for 2 technologies. This difficulty arose because the technology sought for was so advanced that only a few specialized international firms could supply, and the project enterprises did not offer enough incentives to the prospective licensors. If bundling the technology with future profit potential as joint venture arrangements had been considered, the project might have had better chances of obtaining the technology. 6. As to the market risk, new products manufactured with transferred technology were marketed at a scale lower than forecasted. This was primarily due to unpredicted macroeconomic environment changes and partly to optimistic market forecasts. The austerity measures in macroeconomic policy during 1988-91 were an unexpected blow to the project. They adversely affected the project with disappearing demand and intensifying financing problems. This explains the major part of the performance variances between the actual and the appraisal. Optimistic market forecasts might explain the remaining part. Despite the intended conservatism in forecasting, the project performed consistently below the SAR projections and even had difficulties meeting financial covenants. Although the sociopolitical environment that led to the austerity measures was unique and unpredictable, at least the cyclical characteristics of the machine tool industry that had been so often observed in many economies could have been reflected into the market forecast. Project Results 7. The project accomplished the objectives of technological restructuring. The project enterprises rehabilitated their production facilities by installing 1,040 new machine tools including 345 imported ones. They rationalized the product mix by phasing out 35  - iv - models, upgrading 16 models, and introducing 117 new models. Technology transfer agreements with 13 different technology houses were established. A total of 2,300 staff members were trained including 730 staff members trained overseas. Both project enterprises installed computer systems and were advised by international management consultants on setting up MIS systems. 8. Although having performed more poorly than expected on both economic and financial indicators, the project yet managed to prove that it was economically viable with actual economic rates of return surpassing the Bank threshold rate of 10-12 percent: 16.6 percent for SMTC and 19.4 percent for SMTW. Furthermore, the project was completed within a reasonable range of cost variances. The enterprises finished the project with a total of $243 million equivalent against the appraisal estimates of $223 million equivalent. Sustainability 9. There is no doubt that technological benefits of the project will be sustained for some time; however, assessment on the financial and managerial sustainability is mixed. Rehabilitated production capacity will remain productive for years to come, and transferred technology will continue to be disseminated within the project enterprises and indirectly within the Chinese machine tool sector. However, the enterprises will have to face myriad challenges to be financially and managerially sustainable operations. To meet these challenges, the project enterprises need to continue to put great efforts in organization building and management improvement. This is partly because building an efficient managerial framework takes longer than the time horizon of this project and because the project enterprises had never been seriously exposed to the ultimate tests of the market yet. Financial and managerial sustainability is important because it will eventually affect the technological sustainability in the long run. Flndings and Lessons 10. The major findings and lessons are: (a) Access to advanced technology is not necessarily always possible with licenses. Bundling technology with future profit potential as joint ventures could enhance chances of getting top-notch technology; (b) Although market risk assessment is always difficult, sector-specific driving forces behind market development need be brought into consideration when forecasts are made. In the machine tool sector, the cyclical nature of market development could have been addressed;  v (c) Restructuring a managerial framework is more difficult than physical restructuring of productive capacity or technical restructuring of product engineering; (d) Restructuring is an ongoing process that cannot be accomplished with the completion of a single project but should be a continuing challenge to management; (e) Similarly, improvements in technology will continue even after the official closing of a project as it takes time for technology to mature; (f) Project preparation including feasibility studies for facility renovation, training arrangements, and financial planning is a sine qua non for an effective start on a major industrial restructuring project.  - 1 - CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identity Name Shanghai Machine Tool Project Loan Number 2784-CHA RVP Unit East Asia and Pacific Region Country China Sector Industry B. Background 1. With the open-door policy of the Government of China (GOC) in late 1970s, China's policymakers realized the technological backwardness of the Chinese machine tool industry and need for its technological restructuring. For nearly three decades before, China had solely depended upon indigenous technical resources and had been isolated from technological advances that had been taking place in the world. The machine tool subsector was among those most affected by this slow and costly indigenous technological development. 2. The machine tool sector has strategic importance in any economy and was expected to play a significant role in the 1980s China. This sector is strategically important because it has the capacity of regenerating productive assets by making machine- making machines. It was expected to play a significant role in China because the Chinese industrial sector as a whole was seriously outmoded and antiquated in its productive assets and needed to be extensively resupplied with new, technically advanced machines. With massive demand emerging on the horizon, it was an urgent concern to policymakers to ensure that China could have a reliable, economical source of domestic supply for the high- tech machine tools that would otherwise have to be imported. 3. The project chose two enterprises, Shanghai Machine Tool Corporation (SMTC) and Shanghai Machine Tool Works (SMTW), to lead the technological restructuring of the Chinese machine tool sector. Shanghai was chosen because it had a high concentration of machine tool users in this area and carried weight in the machine tool  industry in China. Shanghai was and still is, inter alia, the most industrialized city in China and there were many machine tools users including booming light industry businesses. The Shanghai machine tool industry covered a wide spectrum of metal-cutting and metal-forming machines and accounted for about 10 percent of the country's machine tools output and about 20 percent of the exports. Thus, a project aimed at the rationalization and modernization of the Shanghai machine tool subsector was timely and appropriate in the then prevailing economic transition in China. SMTC and SMTW were chosen as the project beneficiaries since they accounted for most of the machine tool production in the area and had been successful machine tool exporters, though on a limited scale.l/ C. Project Objectives and Description 4. The major objectives of the project were: (a) product rationalization; (b) rehabilitation and modernization of production capacity; (c) expansion of design and engineering capabilities; and (d) improvement in management systems. 5. The project consisted of: (a) rehabilitation and modernization of 18 plants and 2 research institutes of SMTC and SMTW; (b) technology transfer; (c) establishment of a modern management structure and system; and (d) training programs. D. Project Design and Organization 6. As a first-generation industrial project in the Bank's China portfolio, the project design was simple and focused, with direct lending to the two project beneficiaries. This approach may be considered to have been adequate to meet the objectives of the project. There were no financial intermediaries or agents in the project. The project did not have a policy component that would enhance the roles of central or municipal governments in creating an enabling environment for industrial restructuring for the Shanghai area or for the Chinese machine tool sector. The two project beneficiaries were the only project agencies, and the Shanghai Municipal Government was not even a party of the project agreement. This may be largely and understandably because the political and economic environment was not ripe for large-scale social experimentation at the time of project preparation. One could say that the role of the Shanghai Machine Tool Project as a first-generation industrial project was building a foundation for the next-generation projects: for the Chinese side, getting acquainted with the Bank's approach of restructuring; and for the Bank, getting to know about the Chinese industry. Next- generation industrial projects began to address the roles of governments and institution building with increasing sophistication, and understanding and experiences gained through the Shanghai Machine Tool Project proved to be a useful springboard. 1/ The combined output of machine tools of SMTC and SMTW amounted to over $100 million equivalent in 1982, corresponding to about 50 percent of India's machine tool production in that year. Staff Appraisal Report, para. 3.1.  7. Given the above project concept, the project was well prepared and designed. The project was prepared with numerous Bank missions and with four Bank- financed feasibility studies intended to provide guidelines on: the foundries and the machine tool complex; the forge works; SMTW; and, rehabilitation of SMTC. Based upon the priorities identified through these preparatory phases, the 16 factories and 1 research institute from SMTC's 44 factories were selected into the project scope, together with SMTW. The project also incorporated into its scope the introduction of modem management practices and human resources building. Within this project scope, the roles and the responsibilities of the project agencies were also well defined. 8. The project design, however, could have been improved in the area of corporate building. SMTC was created only in 1984, the year during which the project was prepared, by transforming an administrative agency of the Shanghai Municipal Government into a corporate headquarters supposedly responsible for managing 44 formerly independent factories. Transforming an administrative unit into a functioning corporate headquarters and building an integrated managerial framework was a particularly important first step for SMTC in pursuing the strategy of "interdependency among factories. "2/ Although this was partly addressed in the project design with the introduction of Management Information System (MIS), the project did not address sufficiently in its design the question of how to forge the 44 independent factories into one coherent corporate structure. The introduction of modem management practices was only translated into setting up a computerized system, while building a corporate management framework was ignored. As a result, SMTC's role as the headquarters remained limited and the 44 factories individually entered into management contracts with SMG under the contract responsibility system. This situation was rectified only in the later phase of the project when SMTC replaced 44 individual management contracts with its own contract with SMG. SMTW did not have this problem but still could have benefited in a similar manner as SMTC if modern corporate management building like organizational behavior, business strategies and managerial finance were more emphasized in the project design phase. 9. There was no economic rationale presented for excluding about two thirds of SMTC's subsidiary factories from the project scope. Out of SMTC's 44 factories, only 16 factories were included into the project scope. Limited funds to support physical restructuring might be a reason. However, organizational restructuring and training for all factories would have been possible without major outlays and would have enhanced the organization building. 2/ Staff Appraisal Report, para. 4.3.  - 4- E. Project Implementation 10. Within the given constraints, the project was satisfactorily implemented, despite some of the usual problems that the Bank's other China projects also encountered. They were problems in: scheduling, provision of domestic funds and procurement. The project closing was delayed by one year partly because domestic counterpart funds were not sufficiently available in the initial phase of the implementation. There were procurement problems due to tight budgets or quality of equipment procured. Most of these problems were eventually resolved as the project came near to the completion. 11. The project, however, had some successes in the areas that were identified during the project preparation as having major implementation risks. They were: technology risk-whether the technology can be transferred to the project enterprises; and market risk-whether the products developed under the technology transfer could be marketed at an anticipated scale. The post-licensing technology risk-absorption and dissemination of transferred technology-was well taken care of during project preparation. However, prelicensing risk-identifying willing sources of technology-became an implementation problem when the enterprises had difficulty finding sources for two technologies in the electrodischarge machine and levels. This difficulty arose because the technology sought for was so advanced that only a few specialized international firms could supply, and the project enterprises did not offer enough incentives to the prospective licensors. The licensors had no incentives to sell off their future income potential without assurance for sharing future prospects together. If bundling the technology with future profit potential like joint-venture arrangements were considered, the project enterprises could have had a better chance of obtaining the technology desired. 12. As to the market risk, new products manufactured with transferred technology were actually marketed at a scale lower than forecasted in the appraisal. This was primarily due to unpredicted macroeconomic environment changes and partly to optimistic market forecast. The austerity measures in macroeconomic policy during 1988-91 was a totally unpredicted blow that affected the project most adversely with disappearing demand for machine tools and intensifying domestic financing problems. Because of disappearing demand, all products showed poorer marketing and sales performances than the appraisal forecast, although new products in general performed better than old ones. Partly as a result of domestic financing problems, the project was delayed and adversely affected by opportunity losses from foregone sales as the new production capacity was not fully ready for the surging demand in the postausterity boom in 1992 and 1993. 13. Optimistic market forecasts may also explain part of the variance between the appraisal estimate and actual performances in sales and profitability of the project. That the project could be subject to an adverse macroeconomic environment apparently was not brought into the market risk analysis even as a remote possibility. On the contrary, the market forecasts were thought to be very conservative at the time of the appraisal and  the risk of too much optimism in market forecasting was ruled out as only minimal. Although the sociopolitical environment that led to the austerity measures was unique and unpredictable, the cyclical characteristics of the machine tool industry that had been so often observed in many economies could have been reflected into the market forecast. Despite the purported conservatism in forecasts, the project performed consistently below the SAR projections and even had difficulties meeting the financial covenants. Although the financial covenants were met thanks to preferential tax concessions from the Shanghai Municipal Govemment, the project enterprises could have better prepared if their operational plans were based upon conservative forecasts. F. Project Results 14. The project accomplished most of the project objectives when the project results were judged on the operational indicators. The project enterprises rehabilitated their production facilities with the installation of 1,040 new machine tools including 345 imported ones. They rationalized the product mix by phasing out 35 models, upgrading 16 models, and introducing 117 new models. Technology transfer agreements with 13 different technology houses were established. A total of 2,300 staff members were trained, including 730 staff members trained overseas. Both project enterprises installed computer systems and were advised by international management consultants on setting up MIS systems. 15. Although having performed more poorly than expected on both economic and financial indicators, the project yet managed to prove to be economically viable with actual economic rates of return surpassing the Bank threshold rate of 10 to 12 percent, as shown below: Financial IRR (% Economic IRR (% SMTC a. SAR 24.5 30.5 b. PCR 12.8 16.6 SMTW a. SAR 23.1 30.6 b. PCR 12.4 19.4 Actual financial rates were lower than economic rates but still managed to show respectable return of 12 percent. The discrepancy between economic and financial rates was because the project's products were sold at the price level of 60 to 70 percent to the international prices for comparable products. 16. Even within the same macroeconomic environment, there was a wide disparity among factories and products in how they performed financially. Factories like  - 6 - No. 2 and No. 4 Machine Tool Works of SMTC that produced high-tech products outperformed other factories. All foundries, forge shops and grinding wheel shops showed poor financial performances with very low rates of return. Although the foundry performances might have been better but for equipment problems with the new sand treatment systems, these poor financial performances clearly showed that factories producing mundane products need to continue rationalizing their products toward the high value-added end of the range. Though financially disappointing, these foundries made positive contributions to the project with the supply of high-quality raw materials at low prices. These low prices could be interpreted as cross-subsidies from the foundries, and the economic rates of the foundries were higher than their financial rates when the prices were adjusted to the international level. Yet, they still could not reach the 12 percent threshold. Dismal performances at the No. 8 Factory and Level Works resulted from the failure in establishing technology transfers in the planned products, electrodischarge machines and levels. The wide disparity among factories and products presents a strong case for continuing restructuring that should continue after the completion of the project. 17. The project made some, if not enough, contributions to the growth of the machine tool sector and related industries despite the absence of an explicit sector policy component in the project. The production of NC machine tools quadrupled through the project. This increase had great multiplying impacts on the machine tool subsector as many NC machine tools users were themselves machine tool producers producing precision machine tools, NC machine tools included. The project also made positive impacts on backward industries through raising quality expectations when inputs were inspected according to international standards of the technology licensors. Quality of foundry and forge, producer of important raw materials, also improved because of production capacity rehabilitation under the project. In addition, there had been spillover effects to other manufacturing sectors as the project's outputs replaced antiquated manufacturing facilities. Another contribution of the project to the Chinese economy was made through increased machine tool exports, which grew from less than $10 million to over $40 million during the project life. This increased exports clearly indicated the increasing quality level and acceptability of the products manufactured by the project enterprises. 18. But for the overruns in the renminbi portion of the budget, the project enterprises managed the project costs within a reasonable range of the appraisal estimates. The project actually costed Y 484 million for domestic expenditures and $136 million equivalent for foreign exchange expenditures. Compared with the appraisal estimate of Y 332 million plus $133 million equivalent, the actual renminbi portion incurred cost overruns of about 45 percent. These cost overruns were largely the results of inflation that had taken place simultaneously with the project implementation with the accompanying 50 percent devaluation of renminbi against the US dollar during the same period. When the local project costs in US dollar equivalent were compared between the appraisal and the completion, the cost variances were about 10 percent of the appraisal estimates with the completion costs of a total of $243 million equivalent and the appraisal estimates of a total of $223 million equivalent.  19. Local and overseas training were conducted for managerial, professional staff as well as technicians and operators. The equipment suppliers provided technical training to the project enterprises' staff. Managerial training was conducted by foreign consulting firms. A total of 732 people were trained abroad, among which 412 were SMTC employees and 320 SMTW. A total of 1,500 people were trained locally, among which 900 were SMTC employees and 600 SMTW. G. Project Sustainability 20. There is no doubt that technological benefits of the project will be sustained. Rehabilitated production capacity will remain productive for years to come and transferred technology will continue to be disseminated within the project enterprises and indirectly within the Chinese machine tool sector. Having had its own indigenous development capabilities for long, the Chinese machine tool sector has the technical capacity to maximize the leverage of the project benefits by quickly adapting transferred technology into innovations. 21. Assessment on the financial and managerial sustainability is mixed with some positive and negative prospects. The project enterprises would have good prospects because the demand for machine tools would rise with the growth of China's economy. Moreover, with the enterprise reform continuing in China, the project enterprises would be allowed greater freedom in business decisions and would have chances to raise operational efficiency and profitability. However, they also face a number of difficulties. Adopting generally accepted intemational accounting principles would negatively affect reported incomes of the enterprises in a short to medium term. The preferential tax concessions that helped the project enterprises meet the financial covenants would be gone with the tax reform, and the enterprises will have to face hard budget constraints. All these opportunities and problems pose demanding challenges to the managerial capacity of the project enterprises. 22. To meet these challenges, the project enterprises need to continue to put great efforts in organization building and management improvement. This is partly because building an efficient managerial framework takes longer than the time horizon of this project and because the project enterprise have not yet been seriously exposed to ultimate tests of the market. In addition, the project enterprises should continue to restructure their productive assets as evident from the great disparity in financial return among products or factories. This is important because the technological sustainability in the long run will be affected by how successful the enterprises would be in pursuing financially and managerially sustainable operations. H. Bank Performance 23. The Bank missions played an important role during project preparation in developing project scope and evaluating available options. This project was one of the first  - 8 - industrial projects in China and there were not many precedents from which to draw experiences and lessons. In addition, China was going through then unparalleled social and economic experimentation. In this difficult environment, the Bank missions laid out helpful analytical steps to provide guidelines for undertaking the project. These included: commissioning four feasibility studies; helping the project enterprises prepare detailed cost estimates and financial proforma; helping prepare training programs; helping identify areas for management improvement. 24. The Bank remained accessible to the management and staff of SMTC and SMTW throughout the project and mounted two supervision missions on average every year to keep in touch with substantive issues or problems that the project enterprises encountered during the implementation phase. The Bank also maintained the communication channel open with the Shanghai Municipal Government and promptly notified it of the issues that needed its immediate attention. The Bank remained helpful to the Chinese side by positively responding to its requests for problem solving. I. Borrower Performance 25. With full knowledge of their plants and development needs, the project enterprises participated constructively in project preparation. They also satisfactorily implemented the project despite some initial difficulties in familiarizing themselves with the Bank procedures. As agreed upon with the Bank, the project agencies established the Project Implementation Units, observed the Bank procurement guidelines, and submitted quarterly progress reports and audited financial statements in a timely manner. The project enterprises' staff were extremely helpful and cooperative with the Bank missions. The Shanghai Municipality also remained supportive all the time through the project and provided timely support such as preferential tax measures when the financial health of the enterprises were in doubt. Thanks to this support, the project enterprises managed to meet the project financial covenants. J. Project Relationship 26. The Borrower and the Bank maintained a cooperative and responsive relationship. The project enterprises, especially SMTC, responded positively to Bank's comments on improving business plans with genuine efforts and interest in making improvements. The Bank also remained involved with the project enterprises by providing expertise whenever sought by the project enterprises. The 1991 October mission to help the enterprises develop a long-term financial forecast was such an example. The procurement exercises, though time-consuming, introduced transparency and objectivity into the Chinese procurement system, lessons of which could be drawn later for China's own projects. However, with Chinese experiences on international competitive bidding process being accumulated, future Bank projects could be designed to delegate more procurement decisions to the Chinese side. The Shanghai Municipal Government remained  - 9 - involved with the project and remained open in its dialogue with the Bank on the project- related matters. K. Consulting Services 27. Management consultants played an important role in setting up the management information systems. Foreign equipment suppliers also provided useful technical services that helped the project enterprises gain technical insights and train their technical staff. Technology licensors were critical sources of advanced technology in the areas where the project enterprises were left behind from the ever-evolving world-class machine tool technology. L. Project Documentation 28. The Loan and Project Agreements for Loan 2784-CHA were adequate and appropriate for achieving the project objectives in all the key areas. The staff appraisal report and the project files in Asia Information Service Center provided an adequate background to the Bank missions for efficient review of the project implementation. However, information in the Bank MIS database, though useful, were not compiled exactly to meet the need of the PCR. Improvement in this area would be helpful. The project enterprises have provided statistics for their individual components. They have also provided additional information requested by the Bank. This Project Completion Report began to be prepared by a Bank mission in December 1993.  - 10 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. Adequacy and Accuracy of Factual Information in Part m 1. The factual information of Shanghai Machine Tool Project (the Project) presented in the tables of Part III, prepared by the Borrower's related institutions including Shanghai Electrical and Mechanical Industries Administration (SEMIA), Shanghai Machine Tool Corporation (SMTC) and Shanghai Machine Tool Works (SMTW), were reviewed and cross-checked thoroughly with the Bank's mission in December 1993. They are adequate and accurate. B. Comments on the Analysis Contained in Part I 2. Most of the analyses made by the Bank are based on the factual information in the tables of Part III. The comments and analyses made by the Bank are comprehensive, fair and objective. 3. The Bank's analysis of project implementation was compared primarily on the basis of the staff appraisal report (SAR) prepared in 1985. If compared with the actual status of the project implementation, the results are as follows: SAR Actual Comparison Project completion date End-1992 End-1993 Delayed by one year mainly due to the cost overrun Project cost Foreign ($ million) 100.0 112.6 Increased by 12.6 Local (Y million) 124.5 222.8 Increased by 98.3 Of which: SMTC Foreign ($ million) 64.0 73.6 Increased by 9.6 Local (Y million) 66.3 132.8 Increased by 66.5 Of which: SMTW Foreign ($ million) 36.0 39.0 Increased by 3.0 Local (Y million) 58.2 90.0 Increased by 31.8 4. Because the solution of the issue for the project cost overrun (including foreign exchange and local fund) took long time, the procurement was delayed. Besides, the implementation for the training of SMTC managerial staff was delayed. Therefore, the project completion date was delayed by one year as compared with that in SAR. During the period of project implementation, due to the factors including the devaluation of US dollars against other foreign currencies and the rising in the price of imported equipment, the project cost in foreign exchange was overrun by $12.6 million. Meanwhile, because - ~~ - - - - - - -_  - 11 - of the rising in the price of domestic raw materials (including materials for civil works and equipment) and the increase in other expenses (including expenses for transportation installation, commodity inspection), the project cost in local currency was overrun by Y 98.3 million. 5. The Project is the first industrial project using Bank loan for sector technical renovation in Shanghai, China, it plays an important role and has far-reaching impact on China machine tool industry, which are reflected in the following aspects. (a) After the implementation of the Project, Shanghai machine tool sector was provided with the ability of developing and producing high level and high value added products (NC machine tools, precision machine tools and high class presses) and the ability of producing high quality castings, welding parts and accessories for precision products. Moreover, the production environment was improved and the product-mix was changed. With the transfer of foreign advanced technology for designing and manufacturing and under the guidance and services of foreign consultants, the ability of developing new products was greatly improved. During the period of project implementation, the Project developed 117 kinds of new product of which SMTC 64 kinds and SMTW 53 kinds; the Project upgraded 12 kinds of existing products of which SMTC 12 kinds and SMTW 4 kinds. The level of Shanghai machine tool products is close to that of machine tool products of foreign advanced countries and the requirements on the domestic and overseas markets can be met with. (b) The Project procured international advanced NC equipments, automatic production lines and high precision measuring and testing instruments resulting in the remarkable improvement in manufacturing technology and quality of machine tool products, in the enhancement in the ability of supplying complete set of equipment, in the narrowing gap with the international manufacturing level for machine tools and in the strengthening of the sustainability of Shanghai machine tool industry. (c) With the help of foreign consultants including Booz Allen & Hamilton Co., USA and Voest-Alpine Industrial Services, Austria, the factories involved in the Project use computers in the whole process of production and manage the factory with MRPII advanced management system improving the level of factory management. (d) Local and overseas training were conducted for medium and high ranking managerial staff, technicians, operators and maintenance workers for equipments and precision instruments of the headquarters and the factories involved in the Project. The staff trained abroad amounted to 732 of which SMTC 412 and SMTW 320; the staff trained locally amounted to 1,500 of  - 12 - which SMTC 900 and SMTW 600. Therefore, the capability of the staff was elevated. 6. The direct benefits derived from the Project were summarized as below. (a) The product-mix was changed greatly. 1985 1993 Percentage Percentage accounted accounted Comparison NC machines and Output for the Output for the Percentage precision machines (set) total output (set) total output increased The Project 648 3.34% 1,264 8.78% 5.44% Of which: SMTC 502 2.92% 1,050 8.40% 5.48% SMTW 146 6.57% 214 11.30% 4.73% (b) After the technical renovation, the export of the two enterprises from 1985 to 1993 was raised from $9.6 million to $39.5 million of which SMTC from $8.5 million to $35 million increased by 3.12 times and SMTW from $1.1 million to $4.5 million increased by 3.09 times. (c) After technical renovation under the project, the productivity of SMTC was from Y 12,170/man to Y 37,500/man increased by 2.08 times and that of SMTW was from Y 9,565/man to Y 30,900/man increased by 2.23 times. 7. The indirect benefits derived from the Project were summarized as below. (a) Because the production of technology intensified and high value added products was increased, from 1985 to 1993 the output of machine tools of SMTC was decreased from 17,186 sets to 12,000 sets and that of SMTW was decreased from 2,221 sets to 1,894 sets reducing the consumption of raw materials and energy. (b) Because the adoption of the advanced resin sand castings technology and the closing of foundries in downtown, the environment was greatly improved with pollution controlled. (c) The development of China machine tool industry was accelerated.  - 13 - 8. Therefore, the Project was successful and the result of project implementation is good. C. Evaluation of Bank's Performance 9. From the experience gained under the Project, we found that the Bank's project cycle procedures and management in handling its projects are scientific and effective. It played an important role in making possible the successful achievements of the Project. We are very grateful to the Bank for providing assistance in fund arrangements introduction of ICB procedures for equipments, financial projection and staff training. Meanwhile, we are also grateful to the consultants for their successful and effective role in preparing feasibility study report and bidding documents and providing management consultancy and staff training for the Project. 10. The supervisions made by the Bank mission were strict. During the implementation period, the visits and supervisions made by the Bank mission twice a year were imperative, especially the assistance provided to help us solve the issues in the crucial period of cost overrun was timely, proper and principled. When problems and conflicts occurred between the suppliers and us in the procurement of equipments or difficulties met in technology transfer or the progress delayed in management consultancy and staff training, valuable assistance was also provided timely by the Bank. 11. The feasibility study reports were prepared separately in accordance with the requirements of the Bank and our government. It took two and a half years to have the reports prepared, examined and approved. It was one of the reasons taking a long period for the early preparatory stage of the Project. According to the Bank's requirement for the procurement of equipment, ICB must be followed for any equipment and instrument worth more than $200,000, but ICB procedures were quite complicated which took long time to go through. We think these can be improved and simplified. 12. Technology transfer was one of the key components of the Project. Referring to the characteristic of the Project, technology transfer was quite difficult to have the negotiation successful. Therefore, we think that various ways should be dealt with in technology transfer for different types of projects. D. Evaluation of Borrower's Own Performance 13. We concurred fully with the observations made by the Bank in Part I regarding the Borrower's performance. Full support was provided to the Project by State Planning Commission, Ministry of Finance, Ministry of Machine Building, Shanghai Planning Commission, Shanghai Economic Commission, Shanghai Electric and Mechanical Industries Administration (SEMIA), Shanghai Finance Bureau and Shanghai Key Projects Engineering Office. SEMIA, as agency responsible for the overall management of the Project, played an effective and successful role in coordinating, supporting and managing  - 14 - among the consultants, the designer, No. 6 Design Institute of Ministry of Machine Building (No. 6 DI) and the beneficiaries. With the assistance of consultants, No. 6 DI did an excellent job in the design for engineering and construction of the Project. 14. In the preliminary stage of the Project, Shanghai Electrical and Mechanical Industries Design Institute (SEMIDI) collected a great deal of data and information for the Project which provides good base for foreign consultants to work out feasibility study report. The foreign consultants dispatched experts to make investigation on spot and exchanged views with SEMIDI and beneficiaries and worked out a detail feasibility study report which was conducive to the smooth implementation of the Project. 15. With the assistance and guidance of the Bank, the Project Implementation Unit (PIU) of the beneficiaries worked diligently, conscientiously and efficiently in accordance with the Bank's guidelines for procurement and management and met with relative requirements. 16. Lessons learned from the Project are: (a) The foreign consultants did successfully a lot of work in the implementation of the Project but their work could not be separated from the cooperation of SEMIDI in consultancy. It is desirable that the method of joint employment of local and foreign consultants be adopted for the projects later on. (b) The construction period of industrial projects is required to be shortened so that the products can be supplied on the markets as soon as possible and the economic benefits can be gained. Otherwise, it will not be competitive. Therefore, we hope that the Bank will improve its complicated and time- consuming procedures such as the procedures for procurement should be further simplified and improved. (c) In order to have the project implemented according to the schedule of the SAR, the changes in external condition should be taken into account adequately such as fluctuations in exchange rate among foreign currencies and the rising in the prices of equipments and materials so as to prevent the project from suffering shortage of funds to affect the implementation of the project. (d) Because the time required for the preparatory and implementation period was quite long (it took nine years for the Project), reasonable adjustment should be allowed for the completion status of the project in accordance with the actual changes happened so that the objectives of the project can be reached.  - 15 - PART III: STATISTICAL INFORMATION 1. Related Bank Loans Approval Loan Title/Number Purpose Date Comments Tianjin Light Industry Project Technological restructuring of 1989 $154 million, (Ln-3022) the light industry sector completion date: 06/30/96 Shanghai Industrial Development Development of four industrial 1991 $150 million, Project (Ln-32880, Ln-32881, Subsectors in Shanghai completion date: Ln-32882, Ln-32884) 06/30/96 Tianjin Industrial Development policy and enterprise reform at 1993 loan has not yet Project (Ln-35720) the regional level been signed 2. Project Timetable Items Actual Date Identification Mission September 1983 Project Brief June 1984 Preparation Mission June 1985 Appraisal Mission October 1985 Loan Negotiations January 1987 Board Approval March 3, 1987 Loan Signature October 8, 1987 Loan Effectiveness December 16, 1987 Loan Closing December 31, 1993 Loan Completion April 27, 1994 COMMENTS: The original loan closing date was December 31, 1992 and was extended by one year to December 31, 1993.  - 16 - 3. Loan Disbursements Cumulative Estimated and Actual Disbursements ($ million) Year Appraisal Revised Actual/ Semester Estimate Estimate Actual Revised (%) 1987 0.9 II 9.5 1988 I 23.8 2.6 0.9 5 II 40.3 17.2 1.84 1989 I 57.0 32.1 2.38 7 II 70.7 50.2 10.2 20 1990 I 82.0 63.8 21.4 34 II 91.1 77.5 44.5 58 1991 I 97.4 86.6 56.4 65 II 99.6 95.7 69.9 73 1992 I 100.0 98.7 81.2 82 II 100.0 86.2 86 1993 I 90.8 91 II 96.3 96 1994 I 96.5 97  - 17 - 4. Project Implementation Component completion dates Indicators Appraisal Actual Estimate SMTC Civil Works June 1992 December 1992 Equipment Procurement June 1990 October 1993 Technology Transfer September 1991 February 1993 Management System June 1990 October 1993 Training June 1992 December 1993 SMTW Civil Works December 1990 December 1990 Equipment Procurement June 1990 June 199lLa Technology Transfer: September 1991 December 1993 Cylindrical grinder technology August 1992 3-D measuring machine technology August 1991 NC system technology July 1993 High-strength cast-iron technology December 1993 Management System June 1990 December 1993 Training June 1991 December 1993 La Procurement was almost completed by this date with a few accessories procurement being delayed until December 1993. COMMENTS: (1) Price increases in raw materials and resulting shortage of domestic counterpart funds caused delay in civil works. (2) The implementation of management information system was adversely affected with the delay in computer hardware procure- ment.  5. Project Costs and Financing A. Poect Costs Appraisal Estimate Actual Local Foreign Total Local Foreign Total Local Foreign Total Local ForeignTotal ------ (Y million) --- ($ million) ------ (Y million) - (S million) - SMTW Plant Cost 55.6 104.3 159.9 15.0 28.2 43.2 88.0 152.4 240.4 19.4 29.448.8 Engineering/Management 2.6 7.5 10.1 0.7 2.0 2.7 2.0 6.6 8.6 0.5 1.62.1 Training - 4.1 4.1 - 1.1 1.1 - 5.5 5.5 - 1.01.0 Technology Transfer - 16.6 16.6 - 4.5 4.5 - 35.6 35.6 - 6.76.7 _ Base Cost Estimate 58.2 132.5 190.5 15.7 35.8 51.5 90.0 200.1 290.1 19.9 38.758.6 Physical Contingencies 5.8 13.2 19.0 1.6 3.6 5.2 - - - - -- Price Escalation 12.5 11.0 23.5 3.4 2.9 6.3 - - - - - Installed Cost 76.5 156.7 233.2 20.7 42.3 63.0 90.0 200.1 290.1 19.9 38.758.7 Incremental Working Capital 44.4 4.0 48.4 12.0 1.1 13.1 75.0 - 75.0 17.8 -17.8 Interest During Construction 10.0 10.7 20.7 2.7 2.9 5.6 16.4 29.4 45.8 3.9 7.010.9 Total for SMTW 130.0 171.4 302.3 35.4 46.3 81.7 181.4 229.5 410.9 41.6 45.787.3 ... Continued  5. Project Costs and Fnancing (cont'd) A. Proect Costs (cont'd) Ampraisal Estimate Actual Local Foreign Total Local Foreign Total Local Foreign Total Local ForeignTotal - (Y million) -- ($ million) ---- (Y million) - ($ million) - SMTC Plant Cost 61.3 197.4 258.7 16.5 53.4 69.9 125.9 309.0 434.9 27.5 63.390.8 Engineering/Management 5.0 13.0 18.0 1.4 3.5 4.9 6.9 11.6 18.5 1.8 2.44.2 Training - 10.3 10.3 - 2.8 2.8 - 8.3 8.3 - 1.51.5 Technology Transfer - 17.0 17.0 - 4.6 4.6 - 33.4 33.4 - 6.4 6.4 Base Cost Estimate 66.3 237.7 304.0 17.9 64.3 82.2 132.8 362.3 495.1 29.3 73.6102.9 Physical Contingencies 6.6 23.8 30.4 1.8 6.4 8.2 - - - - - Price Escalation 9.7 25.4 35.1 2.6 6.9 9.5 - - - - - - Installed Cost 82.6 286.9 369.5 22.3 77.6 99.9 132.8 362.3 495.1 29.3 73.6102.9 Incremental Working Capital 96.5 8.4 104.9 26.1 2.3 28.4 130.0 10.9 140.9 28.3 2.330.6 Interest During Construction 22.5 25.9 48.4 6.1 7.0 13.1 40.0 73.0 113.0 8.3 14.723.0 Total for SMTC 201.6 321.2 522.8 54.5 86.9 141.4 302.8 446.2 749.0 65.9 90.6156.5 Total Financinsf Reauired 332.5 492.6 825.1 89.9 133.2 223.1 484.2 675.7 1J159.9 107.5 136.3243.8 Notes: Currency equivalents: $1.00 = Y 3.7 as in the appraisal estimate. As in actual disbursements, historical exchange rates are used as below:  - 20 - 5. Project Costs and Financing (cont'd) B. Project Financing Appraisal Estimate Actual Foreign Foreign Local Exchange Local Exchange (Y million) ($ million) (Y million) ($ million) SMTW World Bank Loan - 36.0 - 34.0 Domestic Loans 86.6 9.2 150.0 4.7 Self-generated funds 44.3 1.1 31.4 7.0 SMToItOal 130.0 46.3 181.4 45.7 SMTC World Bank Loan - 64.0 - 62.7 Domestic Loans 105.2 20.6 241.8 10.9 Self-generated funds 96.4 2.3 61.0 17.0 SMTC TOW 201.6 8.9 302.8 90.6 Total Project Financing World Bank Loan - 100.0 - 96.7 Domestic Loans 191.8 29.8 391.8 15.6 Self-generated funds 140.7 3.4 92.4 24.0 Total 352.5 133.2 484.2 136  - 21 - 6. Project Results A. Direct Benefits Appraisal Actual at Indicators Estimate Closing Date Product Rationalization SMTC Phased-out product models (number) 33 29 Upgraded models 18 12 New models 52 64 SMTW Phase-out models 7 6 Upgraded models 4 4 New models 13 53 TOTAL Phased-out models 40 35 Upgraded models 22 16 New models 65 117 Production Capacity Rehabilitation SMTC New equipment installed - domestic (sets) 390 390 New equipment installed - imported 236 236 SMTW New equipment installed - domestic 305 305 New equipment installed - imported 109 109 TOTAL New equipment installed - domestic 695 695 New equipment installed - imported 345 345 Total 1Q4Q 1.040 Technology Transfer SMTC Number of technology transfers 11 9 SMTW Number of technology transfers 4 4 TOTAL Number of technology transfers 15 13  - 22 - 6. Project Results (cont'd) A. Direct Benefits (cont'd) Appraisal Actual at Indicators Estimate Closing Date Training SMTC Overseas training (staff members) 250 412 Domestic training 400 900 SMTW Overseas training 100 320 Domestic Training 150 660 TOTAL Overseas training 350 732 Domestic training 550 1,560 Management Information System SMTC Computer hardware yes installed Management Information System yes introduced SMTW Computer hardware yes installed Management Information System yes introduced  - 23 - 6. Project Results (cont'd) B. Economic Impacts Economic Rate of Return Appraisal Estimate (%) Actual at the Closing Date (%) SMTC 30.5 16.6 SMTW 30.6 19.4 Underlying Assumptions: (1) The economic life of the project assets was assumed to be 20 years for the rate-of- return analysis, starting from 1987. (2) Same conversion factors as those in the SAR were used. COMMENTS: The variances between the rates of return at the time of appraisal and completion could be explained with adverse macroeconomic environment in 1989/90 and too optimistic market forecasts at the time of appraisal. The project enterprises had difficulties meeting financial covenants at one point during the project implementation. These diffi- culties were resolved with preferential tax measures from the municipal- ity. Although the performance was below than appraised, economic rates of return surpassed the Bank threshold of 10 to 12 percent. C. Financial Impacts Financial Rate of Return Appraisal Estimate (%) Actual at the Closing Date (%) SMTC 24.5 12.8 SMTW 23.1 12.4 COMMENTS: Although the actual rates are lower than what were predicted at the time of appraisal, the project proved to be a financially viable one with the rates higher than 12 percent. However, there is a wide disparity among individual factories in financial performances. Two factories among SMTC's 16 project factories showed return higher than 20 percent, while 6 factories were below 10 percent. This disparity could be explained with the fact that profitable factories were manufacturing high-tech products, while loss-making ones produced low value-added products. Specifically, No. 2 and 4 factories produced NC during lathes and milling machines that could ask for premium prices in China. The poor performances of No. 8 factory and Level Works is linked to their failure in establishing technology transfer agreements for the planned products. Foundry, forge and grinder factories produced low value-added products. Following is rates of return for individual facto- ries in SMTC.  - 24 - 6. Project Results (cont'd) Financial Rates of Return for SMTC Project Plants l_________________ SAR ACTUAL No. 1 Foundry 18.3 5.6 No. 3 Foundry 15.1 - No. 5 Foundry 11.1 1.1 Forge 25.1 - No. 1 Accessory Plant 13.J 14.6 No. 3 Accessory Plant 27.6 15.9 No. 6 Accessory Plant 13.2 12.7 Gear Plant 32.0 13.1 Grinding Wheel Plant 32.6 12.3 Level Works 34.4 - No. 2 Machine Tool Works 46.9 26.6 No. 3 Machine Tool Works 27.8 9.7 No. 4 Machine Tool Works 19.3 21.1 No. 8 Machine Tool Works 30.2 1.2 Metal Forming Works 35.6 18.8 No. 2 Metal Forming Works 33.7 15.7 SMTC Project Plants Consoli- 24.5 12.8 dated = - Denotes negative rate D. Studies The following five studies were prepared during project preparation. 1. 'Development of the Machine Tool Foundries," eight volumes, prepared by Foundry Management and Design Co. Ltd., UK, October 1985. 2. 'Feasibility Study of the Forge Works," three volumes, prepared by Forging Devel- opments (International) Ltd., UK, October 1985. 3. "Feasibility Study of the Shanghai Machine Tool Works," two volumes, prepared by Roland Berger and Partner of the FRG in association with Hayek International Ltd. of Switzerland, August 1985. 4. "Feasibility Study for Rehabilitation and Modernization of Shanghai Machine Tool Corporation's Selected Plants and Research Institute," six volumes, prepared by Ingersoll Engineers, Inc., United States, October 1985. 5. Detailed cost and benefit data by plant; prepared by the Appraisal Mission January 1986 and updated October 1986.  - 25 - 7. Status of Covenants Covenant Subject Status Project Agreement 2.02 Employ consultants Complied with 2.04 Maintain the Project Implementation Unit Complied with 2.07 Training program was prepared and finished to the Bank Complied with 4.01a Maintain records and accounts adequate to reflect corpo- Complied with ration's operations and financial conditions 4.01b Corporations accounts, financial statements and the spe- Complied with cial account for each year audited by independent auditor and the audited financial statements and auditor's report furnished to the Bank not later than six months after the end of the year. 4.01c Maintain separate records and accounts for all expendi- Complied with tures on the basis of Statements of Expenditure available for the Bank's examination 4.02 Maintain a ratio of current assets to current liabilities not Complied with less than 1.5 4.03 Maintain the debt service coverage ratio not less than 1.5 Complied with Loan Agreement 2.02(a) The closing date shall be December 31, 1992 Extended for one year 2.06 Interest and other charges shall be payable semiannually Complied with on March 15 and September 15 in each year 3.02(a) Sign the subsidiary Loan Agreement with Ministry of Complied with Finance 8. Use of Bank Resources A. Staff Inputs Stage of project cycle Actual Staff-weeks Project Preparation 225.9 Project Appraisal 26.5 Loan Negotiation 13.2 Supervision 137.5 ToQ 40Q3.  - 26 - 8. Use of Bank Resources (cont'd) B. Missions /a /b /c Stage of Month/ No. of Days in Specialization Performance Types of project cycle year persons field represented rating status problems Through Appraisal Preparation 1 09/83 8 35 EN, EC, 0, S, F Preparation 2 02/84 3 14 EC, F, S Preparation 3 06/85 3 6 EC, F, S Appraisal 10/85 7 35 EC, F, S, EN, 0 Appraisal through Board Approval Mission 1 04/86 1 3 Board Approval through Effectiveness Mission 1 05/87 3 5 Mission 2 11/87 1 3 Supervision Mission 1 06/88 2 15 EN, 0 1 Mission 2 12/88 2 10 EN, 0 2 Fl Mission3 06/89 3 10 EN, O, F 2 F1, O Mission4 11/89 3 10 EN, O, F 2 F1, O Mission 5 06/90 3 15 EN, 0, S 2 Fl, P Mission 6 10/91 2 10 EN, 0 2 F2 Mission 7 11/91 2 3 Mission 8 05/92 6 10 EC, O, F, EN, S 2 F2 Mission9 11/92 3 10 EC, EN, O 2 F2 Mission 10 08/93 2 10 EN, 0 1 Mission 11 12/93 2 10 EN, EC 1 /a EN: Engineer, EC: Economist, F: Financial Analyst, 0: Operation Officer, S: Specialist (Machine tool specialist/Financial specialist/Consultant). Lb 1 = Problem-free or minor problems; 2 = Moderate problems; 3 = Major problems. /c Fl: Financial problems due to lack of funds, F2: Financial problems due to project enterprise prof- itability, P: Project management problems, 0: Operational problems resulting in delayed procure- ment.  SMTC KEY FINANCIAL INDICATORS, 1988-92 (Y'000) 1988 1989 1990 1991 1992 Year Ended Dec. 31 SAR Actual SAR Actual SAR Actual SAR Actual SAR AckE Sales Revenue 439.2 552.4 517.5 592.3 599.9 588.9 699.6 708.6 840.1921.5 Gross Profit 121.1 87.5 157.7 78.6 172.2 35.8 195.0 45.3 278.064.3 Net Income (income retained) 41.3 36.5 75.0 37.1 86.4 20.2 106.1 19.4 185.832.0 Gross Profit Income Ratio (%) 27.6 15.8 30.5 13.3 28.7 6.1 27.9 6.4 33.17.0 (gross profit/sales revenue) Return on Sales (%) (net income/sales revenue) 9.4 6.6 14.5 6.3 14.4 3.2 15.2 2.7 22.13.4 Total Assets Tumover Rate (sales revenue/total assets) 0.62 0.72 0.6 0.6 0.64 0.4 0.71 0.4 0.780.4 Return on Total Assets (%) (net income/total assets) 5.8 4.8 8.7 3.8 9.2 1.4 10.7 1.1 17.31.0 Pixed Asset Turnover Rate (sales rev) (net fixed asset + work in progress) 0.97 1.8 0.91 1.7 0.98 1.1 1.21 1.0 1.541.0 Debt Service Coverage Ratio 12.7 7.8 7.6 4.3 3.1 4.44 4.0 4.13 3.91.58 Current Ratio 2.6 1.83 2.7 1.61 3.0 1.57 3.0 1.66 3.71.49 Acid Ratio 0.56 0.44 0.69 0.4 0.81 0.55 1.04 0.8 1.530.73 Long-term Debt (long-term debt + equjty)(%) 38.0 24.0 43.0 31.0 42.0 49.0 36.0 61.0 28.069.0  SHANGHAI MACHINE TOOL WORKS KEY FINANCIAL INDICATORS, 1988-92 (Y million) 1988 1989 1990 1991 1992 Year Ended Dec. 31 SAR Actual SAR Actual SAR Actual SAR Actual SAR A" Sales Revenue 108.4 101.6 129.0 109.1 158.5 109.4 206.7 160.3 242.5190.2 Profit (before tax) 34.3 16.83 40.8 17.03 39.0 13.68 44.6 4.86 64.87.6 Net Profit 19.5 6.63 26.0 7.11 24.2 4.69 29.8 3.55 49.95.54 Profit (before tax /sales) (%) 31.7 17.0 31.6 15.6 24.6 12.5 21.6 3.04 26.74.0 00 Return on Sales 18.0 6.5 20.2 6.5 15.3 4.3 14.0 2.2 20.62.9 Turnover of Total Assets 56.0 70.5 45.6 54.2 45.8 36.4 54.0 39.2 62.339.4 Earning Power of Total Assets 10.0 4.6 9.2 3.5 7.0 1.6 7.79 0.9 12.81.1 Turnover of Fixed assets (%) 101.3 195.0 72.2 156.0 68.1 119.0 86.6 126.0 112.463.0 Debt Service Coverage Ratio - 5.7 6.5 2.65 2.0 2.53 2.5 2.4 2.11.4 Current Ratio 3.6 1.61 3.4 1.39 3.0 1.51 2.6 1.53 2.91.55 Quick Ratio 17.8 16.0 16.6 18.7 17.0 20.0 14.1 42.2 15.772.09 LT Debt/LT Debt + Equity (%) 49.0 20.1 59.0 28.24 63.0 56.26 60.0 70.1 51.078.69  SMTC BALANCE SHEET, 1988-92 (Y million) 1988 1989 1990 1991 1992 SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual Cash 65.40 10.20 85.90 9.40 103.10 52.20 158.20 71.50 236.60 79.50 Receivables 5.00 89.70 5.60 138.60 6.20 286.60 6.90 372.50 8.10 413.70 Prepaid expenses 5.00 - 5.60 - 6.10 - 6.80 - 7.90 32.00 Inventories 177.70 308.70 196.80 395.10 216.00 448.80 240.20 478.50 277.90 542.00 Current assets 253.10 408.60 293.90 543.10 331.40 787.80 412.10 922.50 530.50 1,067.20 Government bonds - - - - - 22.80 - 28.20 - 42.00 Gross fixed assets 592.20 388.00 721.60 415.50 780.00 445.90 795.50 482.80 809.00 740.60 Depreciation 190.60 176.00 204.40 191.80 218.70 203.90 266.40 217.90 314.80 232.80 Net fixed assets 401.60 212.00 517.20 223.70 561.30 242.00 529.10 264.90 494.20 507.80 Special assets 5.30 145.40 51.30 217.10 51.30 307.09 51.30 493.20 51.30 529.00 Total Assets 706.00 766.00 862.40 983.90 944.00 1,360.50 922.50 1.708.80 1.076.00 2.146.00 Current liabilities Advances from customers 23.10 114.90 25.50 163.40 28.00 304.20 31.20 347.90 36.10 148.00 Other payables -0.2 - -0.2 - -0.2 - -0.2 - -0.2 371.00 Short-term loan 62.00 109.60 62.00 169.20 62.00 174.30 62.00 208.30 62.00 203.00 Unpaid taxes 13.30 -0.8 20.20 4.00 22.10 0.40 45.90 -1.00 45.90 -0.70 Subtotal liabilities 98.30 223.70 107.50 336.60 111.90 478.90 138.90 555.20 143.80 716.00 Long-term liabilities 229.80 128.50 326.90 200.10 352.80 453.40 309.40 709.30 263.10 990.00 Equity State fixed funds 171.80 212.10 190.40 220.90 208.50 246.00 219.70 270.80 231.10 n.a. State circulating fund 76.50 79.50 76.50 79.90 76.50 78.00 76.50 78.00 76.50 n.a. Enterprise circulation fund 0.10 3.10 0.10 4.00 0.10 5.00 0.10 5.50 0.10 n.a. Special funds 129.60 119.10 161.00 142.40 194.20 99.20 247.90 90.00 361.40 n.a. Subtotal equity 378.00 413.80 428.00 447.20 479.30 428.20 544.20 444.30 669.10 439.00 Total Liabilities and Equitv 706.00 766.00 862.40 983.90 944.00 1.360.50 992.50 1.708.80 1,076.00 2.146.00 ti  SMTW BALANCE SHEET, 1988-92 (Y million) 1988 1989 1990 1991 1992 SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual Assets Current assets Operating cash & deposits 2.2 1.5 2.6 2.5 3.2 5.5 4.1 7.4 4.8 30.7 Accounts receivable 1.8 4.4 2.2 10.5 2.7 10.9 3.5 30.3 4.1 48.0 Prepaid expenses 1.6 - 1.9 0.3 2.4 0.2 3.1 0.4 3.6 5.7 Surplus cash 28.0 - 36.0 - 31.3 - 38.3 - 51.6 - Inventories Finished goods In transit 4.3 9.7 5.2 25.1 6.3 40.0 8.3 - 9.7 - In warehouse 4.9 5.7 6.3 9.9 8.1 9.2 11.2 23.9 13.9 9.8 Semifinished goods 24.6 40.4 27.6 42.7 31.7 54.4 38.6 60.8 42.0 51.3 Materials & consumables 18.6 18.0 22.4 23.5 27.8 21.6 36.5 22.7 43.3 28.3 Total Inventories 52.5 73.8 61.4 101.2 74.0 125.2 94.6 107.4 108.8 89.4 Total Current Assets 86.2 79.7 104.1 114.5 113.5 141.8 143.7 145.5 173.1 173.8 Gross fixed assets 165.0 102.4 241.2 109.1 299.8 109.7 329.1 112.1 329.5 180.7 Less: Depreciation 69.9 70.0 74.4 75.9 79.1 80.6 102.3 89.3 125.7 95.6 Net Fixed Assets 95.1 32.4 166.8 33.2 220.7 29.1 226.9 22.8 203.8 85.1 Government bonds 0.3 2.1 0.3 2.4 0.3 2.4 0.3 2.4 0.3 2.4 Special assets 11.9 30.0 11.9 51.2 11.9 127.5 11.9 238.2 11.9 221.5 Total Assets 193.4 144.1 283.1 201.3 346.3 300.8 382.7 408.9 389.0 482.8 ... Continued 3I~  SMTW BALANCE SHEET, 1988-92 (cont'd) (Y million) 1988 1989 1990 1991 1992 SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual Liabilities and Equity Current liabilities Advances from customers 8.6 15.7 10.2 1.1 12.5 28.2 16.3 25.3 19.2 30.8 Accounts payable 1.3 0.8 1.5 24.3 1.9 6.2 2.5 12.5 2.9 9.5 Short-term loans 8.6 32.5 8.6 50.4 8.6 55.0 8.6 59.4 8.6 62.5 Unpaid taxes 0.1 0.4 0.1 6.3 0.1 4.6 0.1 -2.1 0.1 0.4 Long-term debt due 5.5 - 10.2 - 13.2 - 28.4 - 28.4 9.4 Total Current Liabilities 24.1 49.4 30.7 82.1 36.4 94.0 55.9 95.1 59.2 112.6 Long-term debt World Bank loan 46.8 2.5 84.9 6.2 119.2 44.2 119.9 115.2 106.2 143.5 Domestic loans 36.9 11.0 64.5 21.0 75.3 41.0 75.2 62.0 60.1 109.9 Other loans - 5.5 - 6.4 - 31.2 - 42.8 - 38.0 Total Long-Term Debt 93.8 19.0 149.4 33.6 194.5 116.4 195.1 220.0 166.7 291.4 Equity State fixed funds 11.4 32.4 17.4 33.3 26.2 29.5 31.7 29.9 37.1 29.9 State circulating funds 17.6 17.2 17.6 17.2 17.6 17.2 17.6 17.2 17.6 17.2 Enterprise circulating fund - 0.5 - 1.0 - - - - - 1.4 Special reserved funds 28.8 25.6 24.2 34.1 16.8 1.2 12.7 1.4 8.8 30.3 Current-year profit 27.9 - 43.8 - 54.9 42.5 69.5 45.3 99.6 - Total Equity 85.6 75.7 103.0 85.6 115.5 90.4 131.6 93.8 163.1 78.8 Total Liabilities and Equity 193.4 144.1 283.1 201.3 346.3 300.8 382.7 408.9 389.0 482.8 m