China - Shenyang Industrial Reform Project

/ -Aw - J /7 J - -V Docment of The World Bank FOR OFFICIAL USE ONLY Report No. P-6290-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTOR^S ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $175 MILLION 'M0 THE PEOPLE'S REPUBLIC OF CHINA FOR A SHENTYANG INDUSTRIAL REFORM PROJECT AUGUST 10, 1994 M ICROGIRAPHI CS Report No: P- c;'9l (,HA Type: MOp 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 autherization.  CURRENCY EQUIVALENTS (as of February 1994) Currency Name = I\ nminbi (RMB) Currency Unit = Yuan (Y) I Yuan = 100 fen Y 1.00 = $0.11 $1.00 = Y 8.7 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet 1 square meter (m2) = 10.76 square feet 1 cubic meter (m3) = 35.3 cubic feet 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 10,000 square meters ABBREVIATIONS AND ACRONYMS CNC Computerized Numerically Controlled GOC Government of China HWTF Hazardous Waste Treatment Facility PFI Participating Financial Institution PMO Project Management Office SEPB Shenyang Environmental Protection Bureau SMG Shenyang Municipal Government SMTCL Shenyang Machine Tool Company Limited SOEs State-Owned Enterprises FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY CH`NA SHENYANG INDUSTRIAL REFORM PROJECT LOAN AND PROJECT SUMMARY Borrower: People's Republic of China Beneficiaries: Shenyang Municipal Government (SMG), Shenyang Machine Tool Company Limited (SMTCL), and Participating FinancialInstitutions (PFIs) Amount: $175 million equivalent Terms: US Dollar Single Currency Loan for tweo,1ty years, including five years of grace, at the Bank's standard LIBOR-based variable interest rate for US dollar denominated Single Currency Loans. Onlending Terms: The proceeds of the loan would be made available by the Borrower to SMG on the same terms and interest rate as that of the Bank loan. SMG would onlend $161 million of the loan proceeds as follows: (a) $121 million to SMTCL for 15 years including five years of grace at the Bank's variable interest rate plus at least 1.2 percent; and (b) $40 million to PFIs for a term of 20 years, including 5 years of grace, at the Bank's variable interest rate. The commitment charges would be passed on to SMTCL and PFIs and the loans would be denominated in US dollars. The PFIs would in turn extend US dollar subloans to eligible enterprises for a maximum period of 12 years including a maximum grace period of three years at a variable interest rate equal to the Bank rate plus at least 1.2 percent; subborrowers would bear the foreign exchange risks. This document has a restricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Flnancing Plan: Local Foreign Total ---------($ million) - IBRD 0.0 175.0 175.0 SMTCL 40.2 23.2 63.4 Domestic banks 110.6 0.0 110.6 Sponsoring enterprises 6.0 0.0 6.0 SMG 6.9 0.0 6.9 CRISPP (preparation) 1/ 0.0 0.9 0.9 Japanese Grant Facility 0.0 0.4 0.4 Tote 199.5 363.2 Economic Rate of Return: 26 percent for the SMTCL component. Poverty Category: Not applicable Staff Appraisal Report: Report No. 12415-CHA Maps: IBRD Nos. 25546, 25697 and 25698. 1/ China Reform, Institutional Support and Preinvestment Project (Cr. 2447-CHA).  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SHENYANG INDUSTRIAL REFORMI PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan of $175 million equivalent to the People's Republic of China to help finance a Shenyang Industrial Reform Project. The proposed loan would be a US dollar denominated Single Currency Loan with a maturity of twenty years, including five years of grace, at the Bank's standard LIBOR-based variable interest rate. SMG would onlend $161 million of the loan proceeds as follows: $121 million to the Shenyang Machine Tool Company Ltd. (SMTCL) for 15 years including five years of grace at the Bank's variable interest rate plus at least 1.2 percent; and $40 million to participating financial institutions (PFIs) for 20 years, including five years of grace, at the Bank's variable interest rate. SMTCL and the PFIs would assume the commitment charges, and the loans would be in US dollars. The PFIs would in turn extend US dollar subloans to eligible enterprises for a maximum period of 12 years including a maximum grace period of three years at a variable interest rate equal to the Bank rate plus at least 1.2 percent; subborrowers would bear the foreign exchange risks. 2. Background. Industry is China's largest productive sector, accounting for almost half of its gross domestic product and employing about one fifth of the country's total labor force. Between 1979 and 1992, the gross value of industrial production increased at a rapid 13.2 percent a year in real terms while manufactured imports grew from $5.4 billion in 1980 to $36 billion in 1992. Despite these achievements, China's industrial sector-in particular its State Owned Enterpises (SOEs)-has serious problems, including low and only slowly growing productivity, the need for substantial fiscal and quasi-fiscal public subsidies estimated at about $8 billion annually in recent years, often occurring in a disguised manner through the financial system, and a reliance on outdated and frequently highly polluting technologies. China's overall industrial structure is further characterized by (a) excessive and rigid pattems of corporate integration; (b) the virtual absence of multiplant economies of scale, especially across regions; (c) the prevalence of plants at less-than-minimum efficient scale; and (d) excessive investment in heavy industry at th.e expense of higher value-added activities, including services. 3. However, China recognizes that past patterns of industrial growth, based primarily on capital accumulation with only limited productivity increases and without regard for environmental externalities, are unsustainable. Its earlier reform agenda in 1986-90 is now being substantially expanded and deepened, with a focus on reform of its overall industrial organization. 4. The most recent and strildng statement of China's plan for enterprise reform was the November 1993 'Decision on Issues Concerning the Establishment of a Socialist  -2 Market Economic Structure" issued at the Third Plenary Session of the 14th Party Congress. This Decision outlines an ambitious 50-point agenda for economic reform to be attained by the end of the century across an unprecedented array of interrelated fronts, including (a) creating a 'modem enterprise system, ' based on the principle of corporadzation and full separation of the state's ownership role from enterprise management; and (b) encouraging the development of mixed ownership enterprises, including private, iplividual and foreign participation. The Decision also calls for a range of reforms in the crucial enabling environment supporting enterprise reform and growth, including major banking and financial market improvements, critical fiscal and legal reforms, enhanced labor market development, further liberalization of foreign trade and investment, and technology and science promotion. 5. The Decision's blueprint of principles has been followed up by concrete plans for initiating implementation of many of the reforms. One enterprise reform experiment will introduce new accounting standards and asset evaluation techniques in 10,000 SOEs, fully corporatize 100 SOEs as limited liability or limited liability shareholding companies, and carry out comprehensive enterprise, economic and social policy reform in 16 municipalities. A Company Law, that became effective in July 1994, provides rules for the incorporation of all enterprises into limited liability and limited liability shareholding companies, specifies governance structures, rules for transfer and sales of shares, and procedures for mergers and bankruptcy. A Competition Law (September 1993) provides safeguards and penalties against unfair methods of competition, including price fixing and collusion. Exchange rates were unified in January 1994, an interbank foreign exchange market is being phased in, and full currency convertibility is in the offing. Fiscal and tax reforms introduced include the unification of corporate income tax rates into a single 33 percent rate, consolidation of individual income tax regimes into one persor.al income tax system, establishment of a nationwide value-added tax and a consumption tax on luxury items, and, importantly, a new regime for tax revenue-sharing among the central, provincial and municipal governments, replacing the contract-based tax sharing system. 6. In these initiatves, China has established a relatively well-defined path for its industrial sector reform program. While much still remains to be done in terms of developing the policies and institutions needed to transform a centrally planned economy into a market economy, China's market-oriented industrial policy and strategy are realities. 7. Shenyang Municipality and its lndustr~l Sector. Shenyang, the capital of Liaoning Province and China's fourth largest city (about 6.5 million inhabitants at the end of 1992), is the traditional center of industry, commerce, and distribution in the northeastern region. Shenyang's diversified resource base and skdlled workforce have supported petroleum refining, iron and steel production, petrochemicals, timber and engineering industries. However, despite its historical legacy and natural resource endowment, Shenyang did not benefit from the 1980s' boom as much as China's coastal provinces. During 1987-91, for example, its GDP grew by an annual average of 4.1 percent, compared with the national average of 6.1 percent. This was in large part caused by the lingering effects of the central planning system, which wanslated into a higher level  -3- of technological obsolescencw and lower productivity than elsewhere. The passive approach to system reform and misallocation of resources have resulted in an inefficient, technologically obsolete industrial base, with a backlog of environmental, and worker health and safety problems. 8. The Municipal Government of Shenyang (SMG) recognized these problems and, at the prompting of its deeply reformist leaders who understood that effective industrial reform must be carried out in the context of a larger reform agenda, commissioned and in 1991 adopted an ambitious, wide-ranging Economic Structural Reform Plan for the municipality's long-term development. Based on that plan and with Bark assistance, SMG has now prepared a more focused, medium-term administrative and economic reform program addressing SMG's role and organization, corporatizing and placing budget constraints on municipal controlled enterprises, reforming the social, fiscal and financial sectors, spurring private sector development and ameliorating the environment. These reforms would be carried out under a time-bound Reform Action Program, which SMG has included in a Letter of Policy Statement addressed to the Bank (the Policy Statement is shown in Attachment 1). 9. A central part of the reform program is SMG's industrial development strategy to, among other things: (a) separate commercial and industrialfinctionsfirom government; (b) restructure and corporatize SOEs; (c) promote ownership dive?sification; (d) improve industrial policies; (e) strengthen industrial pollution control and workers' safety; and (f) develop sound financial markets. SMG's bold reform objectives and its economic importance in the northeast have caused the Government to designate it as one of the 16 municipalities targeted for comprehensive enterprise, economic and social reforms (para. 5). The proposed project would assist SMG in launching the reforms. 10. One of the main targets of SOE restructuring under the reform program would be Shenyang's important engineering industry, which accounts for 40 percent of its industrial output and for a much larger share of its extraregional sales and exports. Shenyang's engineering industry is key to the city's (and the country's) drive to upgrade product quality and production efficiency, and has a comparative advantage stemming from decades of technological and skill development, which has withstood the years of relative neglect. Its promising prospects for future expansion and diversification into high value- added products have prompted SMG to select this industry as the principal vehicle for in- dustrial growth. Within the engineering industry, the machine tool subsector is seen as critical to the area's economic future by being dedicated to producing machines that make machines. As such, it forms the core of the engineering industry as well as other key industries. 11. Shenyang was previously the leader and hub of China's metal-cutting machine tool industry, accounting in 1981 for 12 percent of national machine tool output. But, because of a slow adjustment to the econoinic reforms of the 1980s, redundant labor, insufficient investments in facilities modernization, and an inappropriate strategy for the introduction of western technologies, Shenyang fell behind the other Chinese centers of machine tool manufacturing in technology development, output and performance. As a  -4 - result, during the 1980s, the growth of Shenyang's output was considerably below the average national levels. 12. Shenyang's machine tool manufacturing has been concentrated in three enterprises, which accounted for over 60 percent of Shenyang's machine tool industry output in 1992. The efficiency and financial performance of the enterprises have, however, suffered due to inappropriate plant configurations, redundant facilities and labor, poor coordination of different operations, excessive vertical integration, with little reliance on external, cheaper sources of inputs, use of outdated and inappropriate technologies, and poor financial management practices. Product mix and quality, particularly in computerized-numerically controlled (CNC) machines, have also suffered from the enterprises' lack of a market orientation. But despite these problems, the three enterprises provided about 10 percent of the national metal-cutting machine tools output value in 1992 and, with proper restructuring, could become market leaders. SMG therefore commissioned an exhaustive restructuring study which, among other things, recommended the merging of the three machine tools companies and a CNC systems manufacturer to form a single integrated corporation-the Shenyang Machine Tool Company Limited (SMTCL). SMTCL was formally established in April 1993 and is regarded by SMG as a model for the implementation of enterprise reforms under its medium-term Reform Action Plan. The Central Government has further recognized the importance of SMTCL's ongoing restructuring by designating it one of the 100 enterprises to be fully corporatized (para. 5). 13. SMG's reform agenda emphasizes pollution control, an obvious failing of industrial policy in Shenyang which is one of China's most polluted cities, primarily because of its heavy dependence on coal. Air quality is Shenyang's major environmental problem: ambient sulfur dioxide and particulate levels are respectively, three and four times the World Health Organization's acceptable levels. In addition, the Hun River's water quality is poor due to the lack of treatment of waste water discharges. Hazardous waste storage, transport, and disposal are basically unregulated. Shenyang generates considerable quantities of hazardous wastes, of which the heavy industry sector generates a major part. Therefore, reducing pollution has become a priority, and figures prominently in the SMG action program. 14. Project Objectives. The reform momentum in China has provided Shenyang with an opportunity to expedite the marketization of its economy through policy reforms, reorganization of the municipal government, restructuring of its industry, and promotion of the private sector. The proposed project would assist SMG to redefine its role in relation to the market, and help reform and reorganize Shenyang's industry-especially the engineering inidustry-by creating a modern, corporate-led sector, with substantial private participation, that will increasingly allocate resources on the basis of competitive market forces. The project would help create a new model of business organization, with focus on separating productive economic activities from the government bureaucracy and organizing them into corporate entities. It will also help expand private !t,ftor activities. Finally, it would buttress the enforcement of environmental standards to  redress the substantial environmental degradation of the past, and ensure that new industrial activity is environmentally sustainable. 15. Project Description. The project has four components. The first, the Reform Program Support Component, includes joint SMG/Bank monitoring of implementation of the Reform Action Program (para. 8) and the provision of technical assistance and training to underpin key aspects of SMG's reorganization. The Program focuses particularly on reducing government intervention in the operations of Municipal- Controlled Enterprises (MCEs) and, concomitantly, restructuring and downsizing the government's operations. The restructuring would entail changing the terms of employment of all MCE staff from permanent to contract status, corporatizing 150 MCEs, amending implementing regulations of the Bankruptcy Law and enforcing bankruptcy procedures, developing an information system and a property rights market to enhance mergers and acquisitions, establishing a labor market information system to help unemployed workers find jobs, adopting financial sector reforms, and enforcing national industrial safety standards. 16. The second component is for SMTCL's restructuring, includes rehabilitation and modernization of the existing facilities, rationalization of manufacturing processes, improvement of product quality to international standards, and establishment of an effective management system. The restructuring would implement the recommendations of a comprehensive study of SMTCL's physical, technological, workforce and management needs. The third component is for modernization and restructuring of industrial enterprises other than SMTCL through the provision via participating financial institutions (PFIs) of a $40 million line of credit, with at least $10 midlion targeted for the private sector. The last component, for environmental protection, would support SMG's policy of improving the enforcement of existing regulations by financing a wastewater monitoring network, a hazardous waste treatment facility (HWTF), and strengthening of the Shenyang Environmental Protection Bureau (SEPB). 17. Project Implementation. Overall project implementation would be administered by a Shenyang Leading Group, headed by a Deputy Mayor, and a Project Management Office (PMO). The Reform Program Support Component would be managed by a training leading group to be established under the Director, Shenyang Planning and Economic Commission. A project implementation unit, satisfactory to the Bank, has been established in SMTCL to handle the restructuring program. The Shenyang branches of the Industrial and Commercial Bank of China and the Bank of Communications will be responsible for appraising, selecting and supervising subprojects to be financed under the project's line of credit, using an agreed appraisal methodology and eligibility criteria for subproject selection. The SEPB would be responsible for implementing the environmental component. 18. The estimated project cost is $363.2 million equivalent (including interest during construction), with a foreign exchange component of $199.5 million (55 percent). The Bank would finance $175 million, accounting for 48 percent of total and 87 percent of the foreign exchange financing required. The project meets the eligibility criteria for the Bank's Single Currency Loan program. SMTCL is a limited liability shareholding  -6 - company, with full financial and managerial autonomy from the central and municipal governments. It is responsible for managing its own foreign exchange risk, has more than 30 years of experience in generating foreign exchange by exporting its products, and has a need for a US dollar lean to better match its projected US dollar export revenues. A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events, and the status of Bank Group operations in China are given in Schedules C and D, respectively. Maps on the project location (IBRD Nos. 25546, 25697, 25698) are also attached. The Staff Appraisal Report, No. 12415, dated August 10, 1994, is being distributed separately. 19. Project Sustainability. The project would provide an opportunity to improve the enabling environment necessary to sustain the development of a market- oriented economy in Shenyang, including implementation support to SMG's reform action plan through a technical assistance and training program. Restructuring SMTCL and other enterprises is of high priority and critical to Shenyang's industrial development. SMG's strong commitment to its reform program and an effective management system to be established for SMTCL would provide the needed institutior.al framework and sustain the expected benefits generated by the project. The project's financial performance targets for SMTCL and stringent lending criteria under the line of credit component would ensure the financial viability of all commercial entities undL. project. The PFIs' full autonomy in selecting subprojects and clients would foster devC- mrent of the private sector and promote more efficient financial intermediadon in future. Giver, SMG's equally strong commitment to pollution abatement and institutional strengthening to be supported under the project, the environmental protection efforts initiated under the project are expected to be sustained. 20. Agreed Actions. The following key assurances and agreements have been obtained during negotiations. SMG would (a) exchange views with the Bank on progress in implementing the reform program in Shenyang and implement the reform support program agreed with the Bank; (b) prepare regulations for hazardous waste management and fully implement these regulations within the Municipality taking Bank comments into consideration; (c) introduce a tariff structure, satisfactory to the Bank, by January 1, 1998 to recover the costs of collecting, treating and disposing of hazardous wastes; and (d) maintain the project management office with functions and responsibilities acceptable to the Bank. SMTCL would: (a) implement the agreed management restructuring plan in a manner acceptable to the Bank; (b) train staff according to an agreed training program; (c) take measures to achieve satisfactory financial performance targets; and (d) annually furnish to the Bank a rolling five-year financial plan. The PFIs would eiisure that eligible subprojects meet the PFIs' lending criteria and be consistent with environmental standards satisfactory to the Bank. 21. Lessons from Previous Bank Operations. The proposed project is based on a large body of Bank economic and sector work as well as experience gained from previous projects. Bank studies of enterprise reform have covered the industrial restructuring needs of the electronics sector, an economy-wide industrial policy study, an industrial restructuring study focused on three municipalities and a machine tool sector  -7 - study. Bank lending to Chinese inaatry has focused on supporting the modernization of firms (mainly SOEs) in selected subsectors and in the cities of Shanghai and Tianjin. Lessons learned from other economies in transition have also been considered. 22. Lessons learned from the previous municipally focused industrial projects have particularly benefitted preparation of the proposed project, by indicating the need for municipal government and enterprises' commitments at an early stage of project preparation, ensuring real integration of the project companies before project approval, securing sufficient counterpart funding, agreeing on improved and accelerated procurement procedures, and establishing a strong project management capability for all components. 23. Rationale for Bank ..ivolvement. The proposed project is consistent with the Bank's Country Assistance strategy for China, as presented to the Board on August 3, 1993. In the industrial sector, that strategy includes support for separating the government and productive sectors by introducing corporate forms, promoting ownership diversification, and creating an enabling environment for the nonstate sector by, among others, labor market reforms and competitive market policies, including promoting freedom of entry and exit for both public and private producers, and access by nonstate enterprises to Bank support. All of these initiatives are reflected in the proposed project. 24. Shenyang was selected for these reforms because (a) it is the largest repository of accumulated capital and skills in the northeast, with serious productivity and pollution problems and yet the potential to be internationally competitive; (b) its municipal government was strongly committed to reform, including revamping ownership structures to allow for a more flexible industrial organization and dynamic business decision-making, as well as establishing a regulatory framework that allows for rapid growth of the nonstate, private sector; and (c) it has strong support from the central government to become a pilot city for both economic and industrial reform. The Bank is in a good position to assist Shenyang in effectively achieving its reform objectives in view of our experience in this area and our intense dialogue with the Government on enterprise reform. Achievements and lessons from this operation also have a potential "demonstration effect' on other northeastern cities and provinces, and could influence and shape national policy in the area of combining industrial restructuring with enterprise reform. 25. Environmental Aspects. An environmental assessment report prepared for the project was reviewed by the Bank and found satisfactory. The project is expected to have a positive impact on the environment by contributing to improved wastewater monitoring, management of hazardous wastes, and a strengthened SEPB capability. The water quality monitoring network would cover 19 enterprises producing about 50 percent of the total pollution load for Shenyang. The HWTF would have a capacity of 26,000 tons per year, providing economical and secure handling of wastes from the large number of small hazardous waste generators. Institutionally, the project would upgrade SEPB's monitoring, research and planning capabilities, with a view to improving the enforcement of environmental regulations. 26. Project Benefits. The major benefits of the project would include (a) the development of market-based policies and strategies at the govemment level; (b) efficiency  -8 - gains expxted through corporatization in the industrial sector; (c) improved capability of SMG to deal with industrial pollution control; and (d) the acceleration of private sector development. The project would sponsor reform measures across the industrial sector in Shenyang municipality, resulting in a more market-oriented machine tool subsector, there- by serving as a model for industrial reforms elsewhere in China. The selection of a US dollar loan for this project will benefit SMTCL and the subborrowers by onlending to them in the currency of their expected export revenues. The SMTCL component is expected to have an economic rate of return of about 26 percent. 27. Risks. The major risk stems from the counterparts' iack of experience in implementing a Bank-financed project. This risk would be mitigated by the enthusiasm and commitment of SMG's senior officials, which has been demonstrated by the Mayor's Office's active participation in project preparation and implementation. 28. The restructuring of SMTCL carries three major risks. The first relates to the integration of three machine tool companies into one effective corporate entity and timely implementation of the project. This risk is being addressed by an ongoing management consulting exercise to help build corporate goals and management systems. The second risk involves the possibility of a delay in the transfer of technology and the restructuring of production facilities; however, the responses received from potential technology partners to date indicate that leading intemational tool manufacturers are willing to license to the SMTCL because of the attraction of the large Chinese market. The third risk concerns the pace at which the SMTCL will be able to reduce its labor force and to divest its nonproductive assets effectively. This risk is reduced as Shenyang's leadership and SMTCL's management have demonstrated their commitment to the reform and the central government has chosen the city as one of the 16 cities for comprehensive reform. 29. With respect to the environmental component, a risk exists that implementation of the HWTF subcomponent by the SEPB would take longer than projected, with the attendant risk of cost overruns. Mitigating this risk is the strong ownership of the project within the SEPB and a recognition of these possible problems. In addition, international consultants will advise the project team and the bureau during implementation. 30. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Washingtoia, D.C. August 10, 1994  -9- A1TACHMENT 1 February 28, 1994 Mr. Zafer Ecevit Acting Director China & Mongolia Department The World Bank Dear Mr. Ecevit: 1. In order to establish the socialist market economic system in Shenyang so that its economy can meet international economic rules and practices, which has been required by the state; and to ensure successful cooperation between the Shenyang Municipal Government (SMG) and the World Bank in the implementation of the Shenyang Engineering Industry Project (SEIP) so as to lay the foundation for future cooperation, we have prepared a reform action plan, based on economic rules and international practices, as well as on the suggestions of the Appraisal Mission. Below is a sumfmlary of the plan. Reform Objectives of Shenyang 2. The basic framework of the market economic system will be initially established in Shenyang within three years, from now to the end of 1996. The major components of this framework include: (a) a reoriented and restructured municipal government economic management system, which mainly relies on macroeconomic, indirect means, and is in conformity with the requirements of a market economy; (b) a modem enterprise system in conformity with a market economy, under which property rights and other rights and obligations are clearly defined, the regulatory and social service functions of the government are separated from the functions of enterprises, who will have the authority to operate with autonomy in decision-making, modern enterprise management is practiced, and there is corporaization of enterprise structure, conduct and performance; (c) a multiple enterprise ownership structure, under which various types of enterprise ownership can develop in tandem, with the growth of the private and individual sector being especially encouraged; (d) a social security system, which covers the whole society and is conducive to a market economy and social stability; and  -10- A1TACHMENT 1 (e) a program to protect the environment-a program that is based on the principle that economic development and environmental protection can proceed in tandem, and thereby society benefits on both counts. Mjor Reform Tasks 3. Government reorganization and standardization of government functiors, to meet the requirements of a market economy. As a major component of the reorganization, the number of government employees and agencies will be reduced. The government functions related to the economy will be standardized, so that the government will no longer directly manage enterprises and will not interfere with enterprise operations. 4. Acceleration of reforms In state enterprises under municipal government jurisdiction (MCEs), so that the modem enterprise system can be established as soon as possible. First, in accordance with the Company Law and the Regulations on the Transformation of Enterprise Management Mechanism, the 14 rights will be delegated to enterprises in a way that they may really enjoy those rights. Second, enterprises wiUl be transformed, based on the Company Law, into limited liability shareholding companies, limited liability companies, or companies solely owned by the state. In this regard, there will continue to be transformation of MCEs into fully autonomous shareholding companies with the same rights, in this respect, as those granted to joint-venture companies, with the goal of completing the transformation process for a cumulative total of at least 150 enterprise conversions by the end of 1994. Third, in accordance with the Company Law, for those enterprises whose liabilities cannot be offset by their assets, or who have suffered persistent losses without any prospect for recovery, bankruptcy proceedings will be initiated, or they will be closed down without any protection. Fourth, the employment system reform will be accelerated to convert, within 1994, all regular employees to the contractual employment system in enterprises under SMG's jurisdiction. 5. Encouragement and support of development of the nonpublicly owned sector. TI'e government will provide broad investment opportunities and a favorable policy framework and social environment for the growth of the 1ionpublic economy. The sector will enjoy an enabling environment that provides a level playing field vis a vis other enterprise types. 6. Establishment of State Assets Management Bureau (SAMB), to exercise state ownership rights and to manage, retain and increase the value of state assets. SAMB will operate as a bona fide bureau, and its functions will not be subordinated to those of other SMG bureaus. The structure and functions of the State Assets Management (Investment) Company will be improved based on accumulated experience. 7. Improvement of the property rights market. The existing property information exchange facility will be improved to foster property rights intermediation and the channelling of relevant information. This will assist in the strengthening of the property rights market and the creation of favorable conditions for enterprise mergers, acquisitions, and leasing.  -11- AITACHMENT 1 8. Inplementation of state labor safety standards, and improvement of the safety regime. This is to be achieved mainly through the implementation of the relevant rules and regulations set by the state, and the preparation and improvement of the safety regime. The number of qualified safety inspectors should be increased, and the quality of inspection should be improved. 9. Establishment and improvement of the social security system, to enhance the mechanism for ensuring social stability. While its coverage is being expanded, retirement insurance will be gradually transformed into a regime under which the collection and delivery of pensions are solely managed by the relevant fund. Unemployment insurance will be extended to all members of the society and strengthened to ensure that the unemployed can maintain a minimum standard of living. Medical insurance reform will start when appropriate, to meet the basic medical needs of employees. 10. Opening up Shenyang to foreign fmancial Institutions. Efforts will be made to ask the state to allow foreign financial institutions to operate in Shenyang. Meanwhile, consent should be sought from the state to open a securities exchange in the municipality. I1. Mitigating industrial pollution and environmental damage. There will be a strengthening and extension of municipal regulations to protect the environment, particularly against the effects of industrial pollution, and an upgrading of the capabilities of government agencies to ensure that environmental regulations are enforced. The necessary infrastructure (waste water and hazardous waste treatment facilities) to treat and dispose of liquid and solid wastes will be provided. Further Improvement of the Organizational Structure and Operations of Shenyang Machine Tool Company Limited (SMTCL) and of other MCEs 12. The organizatiotial structure and operations of SMTCL will be improved in accordance with the Company Law and regulations of the state on shareholding companies, as well as international practices in this regard, so that SMTCL will become a real shareholding company, which is autonomous and accountable for profits and losses. 13. Other MCEs related to the SEIP project will be transformed into limited liability shareholding companies or limited liability companies. Furthermore, review will be made from time to time on the experience of SMTCL, which can serve as a model to be extended to other enterprises. 14. The "Shenyang Municipal Government Reform Agenda-Action Plan' has been prepared based on the conditions of the social and economic development in the municipality, and has taken into full consideration the suggestions of the World Bank Appraisal Mission. This action plan has been discussed and reviewed time and again by the relevant government agencies. We are committed to complete in time the reforns in  -12- AMACHMENT I various fields as provided in the action plan. The Shenyang Municipal Government welcomes the World Bank's SEIP supervision team to monitor jointly with SMG the implementation of the action plan and other facets of the SEIP project. People's Government of Shenyang People's Republic of China  - 13 - SCHEDULE A CHINA SHENYANG INDUSTRAL REFORM PROJECT Estimated Costs and Financing Plan ($ million) Local Foreign Total Estimated Costs: SMTCL Restructuring 42.6 104.8 147.4 Line of Credit 20.0 40.0 60.0 Environmental Protection 3.8 8.6 12.4 Technical Assistance & Training 2.1 4.0 6.1 To1 Base Cost 685 157.4 225.9 Physical contingency 1.8 6.3 8.1 Price contingency 3.7 11.8 15.5 Total Project Cost La 74.0 175.5 249. Interest during construction /. 14.2 17.4 31.6 Incremental working capital 75.5 6.6 82.1 Total Financing Required 16. 136.2 Financing Plan: IBRD 0.0 175.0 175.0 SMTCL 40.2 23.2 63.4 Domestic Banks 110.6 0.0 110.6 Sponsoring Enterprises 6.0 0.0 6.0 SMG 6.9 0.0 6.9 CRISPP (preparation) Lc 0.0 0.9 0.9 Japanese Grant Facility (preparation) 0.0 0.4 0.4 T Wa 163.7 129 SYOU3 La Project-financed goods are exempt from import duties and taxes. Lb Interest during construction (IDC) is based on onlending rates for projected disburse- ment of loan proceeds. The foreign exchange portion of IDC is based on the Bank's standard variable interest rate. LQ China Reform, Institutional Support and Preinvestment Project (Cr. 2447-CHA)  - 14 - SCHEDULE B Page 1 CBINA SHENYANG INDUSTRIAL REFORM PROJECT Procurement Method and Disbursements ($ million) Procurement method Item ICB Other La NBF l& Total SMTCL Civil Works - - 18.9 18.9 Equipment and Materials 73.0 28.8 26.6 128.4 (73.0) (28.8) (101.8) Foundries Equipment/Materials - - 7.9 7.9 Technology Transfer - 14.6 1.4 16.0 - (14.6) - (14.6) Technical Assistance/ - 4.6 0.4 5.0 Services & Training - (4.6) - (4.6) -T~otal 73. .0 4.0 176.2 (73.0. (48.0) : (121.0) SEPB Civil Works - - 3.6 3.6 Equipment and Materials 5.5 2.0 1.1 8.6 (5.5) (2.0) - (7.5) Equipment/Software 1.1 - 1.1 - ~~(1. 1) - (1. 1) Technical Assistance/ 1.4 0.5 1.9 Services &Training - (1.4) - (1.4) Ibta Q1 41 21 (5.5) {4.5) _ {10.0  -15- SCHEDUE B Page 2 Procurement method Item ICB Other La NBF Lk Total SMG Equipment - 1.0 0.3 1.3 (1.0) - (1.0) Technical Assistance & Training - 3.0 2.4 5.4 - (3.0) (3.0) Line of Credit Industrial Subloans 10.0 30.0 11.4 51.4 (10.0) (30.0) - (40.0) GRAND ITOAL 74.5 2429 f88.5) (86.5) @,l (175,.0 Note: (1) Figures in parenthesis are amounts to be financed by the Bank. (2) Figures may not total exactly due to rounding. (3) Figures include contingencies. La Other procurement methods include LIB, international and local shopping, direct contracting, consultant services (recruited in accordance with the Bank's Guidelines) and training. L NBF denotes non-Bank financing.  - 16 - SCHEDULEB Page 3 Disbursements Category Amount Percentage of ($ million) Expenditures to be financed (1) Subloans 40.0 100 percent of amounts disbursed by a Financial Intermediary (2) Goods including technical services 113.0 100 percent of foreign expenditures, 100 percent of local expenditures (ex-factory) and 75 percent of local expenditures for other items pro- cured locally (3) Consultants' services and training 8.5 100 percent of expenditures (4) Unallocated 13.5 TRWal 175.0 Estimated Disbursements Bank FY 1995 1996 1997 1998 1999 2000 2001 -- - ------,- ($ million) -------------------- - -------------- Annual 10 26 58 42 27 10 2 Cumulative 10 36 94 136 163 173 175  -17 - SCHEDUILE C CEINA SHENYANG INDUSTRIAL REFORM PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare: 2 years (b) Prepared by: Shenyang Municipal Government and Shenyang Machine Tool Corporation Limited (c) First Bank mission: April 1992 (d) Appraisal mission departure: January 1994 (e) Negotiations: July 1994 (f) Planned date of effectiveness: December 1994 (g) List of relevant PCRs and PPARs: None The project was appraised by the following: A. Hu (Senior Operations Officer, Task Manager), J. Fritz (Environmental Engineer), H. Broadman (Economist), E. Sun (Financial Analyst), R. Heath (Principal Engineer), K. Sato (Technical Assistance Specialist), F. Jensen (Principal Financial Policy Analyst), N. Lu (Operations Officer), R. Amin (Consultant), E. Su (Consultant Financial Institutions Specialist). The peer reviewers include Ms. B. Kafka (Division Chief), Messrs. A. Ewing (Manager, PSD) and H. Sethi (Procurement Advisor). The Division Chief is R. Newfarmer and the Department Director is N. Hope.  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 June 30, 1994) Loan/ Amount (USS million) Credit Sor- (net of cancellations) NuTber FY rower Purpose Bank IDA Undisb.(a) 24 loans and 39 credits have been fully disbursed. 2,300.9 2,339.9 Of which SECAL: 2967/1932 88 PRC Rural Sector AdJ. 200.0 93.2 - .............. 2540 85 PRC Railway 11 220.0 1.8 1664 86 PRC TechnIcal Cooperation Credit II - 20.0 1.9 2678/1680 86 PRC Third RaiLway 160.0 (70.0)(b) 23.2 2689 86 PRC TIanjin Port -130.0 4.6 2706 86 PRC Beilungang ThermaL Power 225.0 - 5.2 2707 86 PRC Yantan Hydroelectric 52.0 - 0.2 2723/1713 86 PRC Rural Health & Preventive Mad. 15.0 65.0 15.2 1764 87 PRC XinJiang Agricultural Dev. - 70.0 2.9 2794/1779 87 PRC Shanghai Sewerage 45.0 (100.0)(b) 22.1 2811/1792 87 PRC Selijng-Tianjin-Tanggu Expressway 25.0 125.0 10.3 2812/1793 87 PAC Cansu Provincial Dev. 20.0 150.5 36.9 1835 87 PRC Plaming Support & Special Studies - 20.7 6.2 2838 87 PRC Fertil.zr Rationalization 97.4 1.1 2852 87 PRC WuJfng Thermal Power 190.0 - 20.4 1871 88 PRC Rural Credit III - 170.0 0.1 2877/1845 88 PRC Huangpu Port 63.0 (25.0)(b) 20.6 1885 88 PRC Northern Irrigation 103.0 16.9 2924/1887 88 PRC Coastal Lands Dev. 40.0 (60.0)(b) 2.2 2943 88 PRC Pharmaceuticals 127.0 2.2 2951/1917 88 PRC Sichuan Highway 73.0 (50.0)(b) 32.4 2952 88 PRC Shaanxi Highway 50.0 - 0.5 2955 U8 PRC Beilungang 11 165.0 24.3 2958 88 PRC Phosphate Dev. 62.7 '11.7 2968 88 PRC Railway IV 200.0 - 24.1 1984 89 PRC Jiangxi Provincial Highway. 61.0 5.1 99r 89 PRC Shaanxi Agricultural Dev. * 106.0 22.9 2006 89 PRC Textbook Development 57.0 2.1 2009 89 PRC Integrated Reg. Health - 52.0 17.4 3006 89 PRC Ningbo & Shanghai Ports 76.4 - 21.2 3007 89 PRC Xiamen Port 36.0 - 6.9 3022 89 PRC Tianjin Light Industry 154.0 - 72.4 3060/2014 89 PRC Inner Nongolia Railway 70.0 (80.0)(b) 19.1 2097 89 PRC Shandong Agriculture Dev. * 109.0 1.0 3066 89 PRC Hubei Phosphate 137.0 83.9 3073/2025 89 PRC Shandockg Prov. Highway 60.0 (50.0)(b) 26.4 3075 89 PRC Fifth Industrial Credit 300.0 92.6 2097 90 PRC Jilangxi Agric. Dev. - 60.0 9.4 2114 90 PRC Vocational & Tech. Educ. * 50.0 11.2 2145 90 PRC Natfonal Afforestation - 300.0 117.6 2159 90 PRC Hebef AgrIcultural Oev. - 150.0 56.1 2172 91 PRC kid-Yangtze Agricultural Dev. 64.0 17.7 3265/2182 91 PRC Rural Credit IV 75.0 200.0 53.6 3274/2186 91 PRC Rural Indust Tech (SPARK) 50.0 64.3 38.2 3286/2201 91 PRC Nediuw-Sized Cities Dev. 79.4 52.9 59.6 3288 91 PRC Shanghai Industrial Dev. 150.0 147.9 2210 91 PRC Key Studies Development 131.2 50.1 2219 91 PRC Lfaonfng Urban infrastructure 77.8 10.6 3316/2226 91 PRC Jiangsu Provl. Transport 100.0 (53.6)(b) 44.0 2242 91 PRC Henan Agricul. Dev. - 110.0 68.9 3337/2256 91 PRC Irrig. Agrfcut. Intenif. 147.1 187.9 136.3  Schedule D Page 2 of 3 Loan/ Amount (US$ milLion) Credit Bor- (net of cancellations) Number FY rower Purpose ank IDA Undiab.Ca) 3387 92 PRC Ertan Hydroelectric 380.0 85.6 2294 92 PRC Tarim Basin 125.0 77.4 2296 92 PRC Shanghai Metro Transport 60.0 27.5 3406 92 PRC Railways V 330.0 196.1 3412/2305 92 PRC Daguangba Multipurpose 30.0 37.0 24.8 2307 92 PRC Guangdong ADP 162.0 125.5 3415/2312 92 PRC Beijing Environmmnt 45.0 80.0 82.9 2317 92 PRC Infectious and Endemic Disease Cont 129.6 107.4 3433 92 PRC Yanahi Thermal Power 180.0 77.8 2336 92 PRC Rural Water Supply and Sanitation 110.0 71.5 2339 92 PRC Educ. Development In Poor Prove. 130.0 83.3 3443 92 PRC Regional Cement Industry 82.7 70.9 3462 92 PRC Zouxion Thermal Power 310.0 269.6 3471 92 PRC ZheJlfng Provincial HfghKdy 220.0 152.5 2387 92 PRC Tianjin Urban Devt. & Envir. 100.0 83.9 2391 92 PRC Ship Waste Disposal 15.0 15.9 2411 93 PRC Sichuan Agricultural Devt. 147.0 106.8 3515 93 PRC ShuIkou Hydroelectric 11 100.0 - 72.4 2423 93 PRC Financial Sector TA 60.0 56.6 3530 93 PRC Guangdong Provincial Transport 240.0 198.6 3531 93 PRC Henan Provincial Transport 120.0 88.8 2447 93 PRC Ref. Instl and Preinvest. - 50.0 46.4 3552 93 PRC Shanghai Port Rest. and Devt. 150.0 143.9 2457 93 PRC Changchun Water Supply & Enw. 120.0 0 118.0 2462 93 PRC AgricuLture Support Services 115.0 102.9 3560/2463 93 PRC Talhu Basin Flood Control 100.0 100.0 145.7 2471 93 PRC Effective Teaching Services 100.0 98.0 3572 93 PRC Tfanjln Industry 11 (c) 150.0 - 150.0 3582 93 PRC South Jiangsu Envir. Prot. 250.0 250.0 2475 93 PRC ZheJiang MuLticities Devt. 110.0 105.1 3581 93 PRC Raltway VI 420.0 389.6 3606 93 PRC Tianhuangping Hydroelectric 300.0 - 279.5 3624/2518 93 PRC Grain Distribution 325.0 165.0 475.9 2522 93 PRC Environmental Tech. Assist. 50.0 45.9 2539 94 PRC Rural Health Workers Devt. 110.0 108.4 3652 94 PRC Shanghai Metro Transport 11 150.0 101.8 3681 94 PRC Fujian Provincial Highways Sc) 140.0 - 140.0 3687 94 PRC Telecommunications Cc) 250.0 250.0 2563 94 PRC Second Red SolLs Area Devt. 150.0 156.8 2571 94 PRC Songliao Plain i'jric. Devt. 205.0 214.8 3711 94 PRC Shanghai Enviroermnt (c) 160.0 160.0 3716 94 PRC Sichuan Gas Devt & Conservatn.(c) 255.0 255.0 3718 94 PRC Tangzhou Thermal Power (c) 350.0 350.0 3727 94 PRC Xiaolangdi Multipurpose (c) 460.0 460.0 2605 94 PRC Xlaolangdi Resettlement (c) 110.0 115.6 2616 94 PRC Loess Plateau Watershed Devt. (c) * 150.0 153.6 2623 94 PRC Forest Resource Devt. * Prot. (c) 200.0 205.0 3748 94 PRC National Highway (c) 380.0 380.0 ............................. Total 11,575.6 7,787.8 8,956.0 of iihich has ben rpaid 920.0 9.3 Total now held by Bank and IDA 10,655.7 7,778.5 Amont sold: Of which repld Total Undisburned 5,973.7 2,982.3 6,956.0 (a) As credits are denominated In SIRa Csince IDA Replenishment VI), undisbursad SDR credit balances are converted to dollars at the current exchange rate betwen the dollar and the SDR. In some cases, therefore, the utdisbursed balance indicates e dollar moont greater then the original principaL credit amount expressed In dollars. (b) Credit fully disbursed. Cc) Not yet effective.  Schedule D Page 3 of 3 B. STATEMENT OF IFC INVESTMENTS (As of June 30, 1994) Invest- Type of Loan Equity Total ment No. FY Borrower Business ---- C- (USS Million) ....... 813/2178 85/86/Guangzhou and Peugeot Automobile 15.0 4.5 19.5 91 974 87/88 China Investment Co. Investment 3.0 3.0 1020 88/92/Shenzhen China Bicycle 17.5 3.4 20.9 94 Bicycles Co. Ltd. Manufacture 1066 89 Crown Electronics Electronics 15.0 15.0 1119 89/93 Shenzhen Chronar Solar Solar (a) 2.0 1.0 3.0 Energy Energy 3423 93 Shenzhen PCCP Manufacturing 4.0 1.0 5.0 3150 93 Yantal Cement Cement 28.7 2.0 30.7 3881 94 China Walden Mgt. Capital Mkts. 7.5 7.5 Total Gross Commitments 85.2 19.4 104.6 Less cancellations, terminations 23.0 23.0 repayment and sales Total Comitments now Held by IFC 62.2 19.4 81.6 Total Undisbursed 28.7 5.0 33.7 (a) Loan subsequently cancelled. r7/01/94 kA2DR  MAP SECTION  CHINA To Horb,. den,o-ahonundarses olof, other informtn hw SHENYANG INDUSTRIAL REFORM PROJECT j othr nrmoti dot ot imply. on the Pao of Thr. World Ban,k Group. L: SMTCL (Shenyong Machine Tool Company Limited) \Jy dqnnent on the legr1 status of any terrrtor)c Tentotive Sub-projects or -ny e,ndorsemnt A Participating Finonciol instiuions / o acceptancedor suc - Roadsbonres ' ' Railroads | | District Boundaries ( i - | * _ ~~~~~~City Bundoriaes ~ S) 11 be bng rg7 To Beijing ~ ~ ~ ~ ~ ~ ~ ~ Bing~ q~~~~- - Cty BoUndarILOETES S o.."N,. Hr' 1 ' I< e C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~fN -r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~xl Hall__ _ _ __ _ _ __ _ C  CHINA ~ ~ ~ ~ ~ ~ Gage ~ ~ ~~ ToHarb,Zhin ------- The boundla-s, cotors. CHINA V:2Tillahgne To72 hHobtin f- ... de ar71l7tedo<;7 -oto,5. . .. . ... ' "N ther,frr-o,r show- SHENYANG INDUSTRIAL REFORM PROJECT thr-ror d o-t HAZARDOUS WASTE TREATMENT FACILITIES The Wo Elad ,o,k Goupo AND WASTE WATER MONITORING NETWORK \ !t ..u.-t ofa terrItgr71 oray -,dor-ene-t U Hozordous Waste Treatment Facilities / t / or acceptac,, of s-uh 0 Waste Water Treatment Plont O Waste Water Monitorng Center Roads I I Rr ilroo7ds -e g r ^ _| |8el1g&f\(/// - Distridi Boundaries \ ;z| --CityEBoundaries 01 023 J 3 7, 7- 7- 'a io ~ ~ ~ ~ ~ a a 0,.n D.. L::~~~~~~~~~~~~~~ 5t CtX-onIl Cog \ t / / 1 ,,i 1 *''"/' ,- =,7~~~~~~~~~~~~~~~~~~~~~~~~~~I \ q<4 X o ; .7 _ 4 j: r t to w >7 To D I n s7LoRs B o H a i ,4 a71jon 5 t 7 - 7~~  NEI MONGOL JIIN C H I N A PROVINCE PROVINCE SHENYANG INDUSTRIAL REFORM PROJECT F 7' t Hazardous Waste Treatment Facilit-es Layout 7_________ ROADS X - FENCES 8 sv 7 ! > o ~~~~~DEMOCRATIC HERE! ~~~~~~D-d PEOPLE'S PRO OF KOREA x x~~~~~~~~~~~~~~~~~~~~~~~~~~ /ETERS /W CELL x L '75 x x X x x 0 25 50 75 100~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U METERS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 x x x~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.