China - Regional Cement Industry Project

 ICRR 10218 Report Number : ICRR10218 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: L3443 Project ID : P003577 Project Name : Regional Cement Industry Project Country : China Sector : Other Industry L/C Number : L3443 Partners involved : none Prepared by : David Greene (consultant), OEDCR Reviewed by : Roger Robinson Group Manager : Ruben Lamdany Date Posted : 08/18/1998 2. Project Objectives, Financing, Costs and Components : China is the world's largest producer and consumer of cement . However, its cement plants are widely dispersed, and many small plants are technologically and economically inefficient and produce poor quality cement . The Regional Cement Project, approved in 1992, was designed to promote construction of optimal size plants and related marketing arrangements, in part by encouraging adoption of policies reducing barriers to cross -provincial trade, liberalizing prices and regulating the use of low quality cement . The project provided US$ 82.7 million for three components. The Tongling component would help introduce a regional cement production and distribution scheme based on large-scale production and inter-provincial bulk transport. The Zongguo component provided financial and technical support to expand production and improve efficiency of a medium -size plant. A technical assistance component funded strengthening of four cement industry research and design institutes and investigation of means of increasing efficiency and reducing pollution emissions of small plants . 3. Achievement of Relevant Objectives : The physical objectives of the project were accomplished . Work on the three cement plants was completed and they began production. They have all the planned attributes in terms of size, technology, energy efficiency, and pollution control and safety standards . The equipment and technical skills of the four research and design institutes were upgraded as planned. 4. Significant Achievements : Other than completion of the physical works, there appear to have been no significant accomplishments . 5. Significant Shortcomings : The project experienced substantial delays that adversely affected its financial and economic rates of return . Effectiveness was delayed because it took longer than expected to complete six subsidiary loan agreements . Implementation of the project was further delayed due to inexperience of the borrower and unfamiliarity with ICB, equipment problems and shortage of counterpart funds . Because the project was implemented in a period of rapid inflation, not compensated by adequate exchange rate movements, the delays resulted in escalation of costs ranging from 61 to 300%. As a result, ERRs and FRRS were much lower than appraisal estimates . The companies are in poor financial shape and are being kept in operation by short -term borrowing and a build up of arrears . Unless measures are taken to resolve the financial problems of the firms, their long -term sustainability is uncertain. The study on small-scale plants has been completed . However, because of failure to provide a small amount of counterpart funding and disagreements with consultants on conclusions and recommendations, it completion was delayed by over four years . This delay undermined its usefulness in promoting changes in policy and the regulatory regime. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Partial Modest  Sustainability : Uncertain Uncertain Bank Performance : Satisfactory Unsatisfactory There were flaws in the design of the project, and the sensitivity analysis in the SAR on financial rates of return was deficient. Too little attention was directed toward an institutional analysis of the capacities of the targeted State Owned Enterprises. Finally, the long delay in effectiveness, together with subsequent implementation problems, suggests that during appraisal full participation by all the stakeholders was deficient . Borrower Perf .: Satisfactory Unsatisfactory There were serious deficiencies in covenant compliance and overly burdensome administrative requirements . Commitment to the project objectives was not as strong as it should be . Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : This project focused excessively on increases in technical efficiency . It demonstrates the risks associated with not having an appropriate sectoral policy in place before specific projects are financed . In addition, if the Bank decides that SOEs be included in projects, it needs to take into account their social and financial liabilities and the fact that the orientation of their management needs to be broadened to take into account market and financial issues, as well as production. The project demonstrates that investment operations must consider macroeconomic issues . It is difficult to protect even a good project from a poor macroeconomic environment . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is satisfactory.