China - Regional Cement Industry Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18129 IMPLEMENTATION COMPLETION REPORT CHINA REGIONAL CEM[ENT INDUSTRY PROJECT (LOAN 3443-CHA) June 29,1998 Private Sector Development Unit 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 Unit =Yuan (Y) 1989 $1 = Y 3.76 1990 $1 = Y 4.78 1991 $1 = Y 5.32 1992 $1 = Y 5.42 1993 $1 = Y 5.73 1994 $1 = Y 8.50 1995 $1 = Y 8.31 1996 $1 = Y 8.30 1997 $1 = Y 8.30 1998 $1 = Y 8.30 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ATCC - Anhui Tongling Cement Company CBMA - China Building Materials Academy ERR - Economic Rate of Return FRR - Financial Rate of Return GOC - Government of China HCIDI - Hefei Cement Industry Design Institute ICB International Competitive Bidding ICR - Implementation Completion Report IDC - Interest During Construction MIS - Management Information System NCC - Ningbo Cement Company NSPCLC - Ningbo Star Port Cement Limited Company NCIDI - Nanjing Cement Industry Design Institute PCG - Project Coordination Group RCIP - Regional Cement Industry Project SABMI - State Administration for Building Material Industry SAR - Staff Appraisal Report SOE - State-Owned Enterprise TCCCL - Tongling Conch Cement Company Limited TCIDI - Tianjin Cement Industry Design Institute tpy - Tons per year ZCC - Zhongguo Cement Company Vice President Jean-Michel Severino, EAP Country Director Yukon Huang, EACCF Sector Manager Hoon Mok Chung, EASPS Task Manager Amanda S. Carlier, Private Sector Development Specialist, EASPS  FOR OFFICIAL USE ONLY CONTENTS PREFACE ...................................................... ii EVALUATION SUMMARY .......................................................v PART I: PROJECT IMPLEMENTATION ASSESSMENT ......................................1 A. Project Background ..........................1 B. Project Objectives And Description .................... .............................2 C. Achievement of Project Objectives .................... .............................3 D. Implementation Record and Major Factors Affecting the Project ........... ..........6 E. Project Sustainability .................................................. 1 F. Bank Performance ................................................. 12 G. Borrower Performance ................................................. 13 H. Assessment of Outcome ....................... 13 I. Future Operation ....................... 14 J. Key Lessons Learned ....................... 15 PART II: STATISTICAL TABLES ............................. 17 Table 1: Summary of Assessments ............................. 17 Table 2: Related Bank Loans/Credits ....................... ........................... 18 Table 3: Project Timetable .................................................. 20 Table 4: Loan/Credit Disbursement: Cumulative Estimate and Actual ................. 20 Table 5: Key Indicators for Projecit Implementation ......................................,.21 Table 6: Key Indicators For Project Operations .................................... 22 Table 7: Studies Included in Project .................................... 22 Table 8A-1: TCCCL: Project Costs ..................................... 23 Table 8A-2: TCCCL: Project Financing .................................... 23 Table 8B-1: NSPCLC: Project Costs .................................... 24 Table 8B-2: NSPCLC: Project Financing .................................... 24 Table 8C-1: ZCC: Project Costs .................................... 25 Table 8C-2: ZCC: Project Financing .................................... 25 Table 9: Economic Costs and Benefits .................................... 26 Table 10: Status of Legal Covenants .................................... 27 Table 11: Compliance with Operaltional Manual Statements ............................... 29 Table 12: Bank Resources: Staff Inputs .................................... 29 Table 13: Bank Resources: Missions .................................... 29 ANNEX A: ICR MISSION'S AIDE M]EMOIRE . .................................... 30 ANNEX B: BORROWER'S CONTRI13UTION TO THIE ICR ................................ 42 ANNEX C: BORROWER'S COMMENTS ON ICR ..................................... 45 ANNEX D: PROJECTED FINANCIAIL STATEMENTS .................................... 47 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 111 - IMPLEMENTATIONI COMPLETION REPORT CHINA REGIONAL CEMENT INDUSTRY PROJECT (LOAN; 3443-CHA) P'REFACE This is the Implementation Completion Report (ICR) for the Regional Cement Industry Project (RCIP) in China, for which Loan 3443-CHA in the amount of $82.7 million equivalent was approved on March 17, 1992, and made effective on January 5, 1993. The loan was closed on December 31, 1997, compared with the original closing date of June 30, 1996. Final disbursement took place on December 31, 1997 at which time a balance of $0.35 million was canceled. The loan supported the construction of new cement production and distribution facilities and the rehabilitation of an existing medium- size cement plant. The project also had a technical assistance loan of $3.6 million to strengthen the capabilities of four cement research and design institutes and to undertake a study on small-scale cement plants. The ICR was prepared by Amanda S. Carlier (Task Manager) in the Private Sector Development Unit (EASPS) of the East Asia and Pacific Region, and S.A.B.R. Thalakada, (Consultant/Industry and Finance). Rui Ma, Operations Assistant in the Resident Mission of China, participated in the ICR mission and contributed to the mission's work. Hoon Mok Chung, Manager, EASPS and Yukon Huang, Director, Resident Mission China reviewed the ICR. The borrower provided comments that are included Appendix B to the ICR. Preparation of this ICR began during the Bank's ICR mission in May 1998. It is based on the material gathered by the mission in the field and those in the project file. The borrower contributed to preparation of the ICR by preparing relevant data and information, contributing views expressed in the mission's aide memoire, preparing its own evaluation of the project's execution and initial preparation, and commenting on the draft ICR.   v - CHINA REGIONAL CEMENT INDUSTRY PROJECT (LOAJN 3443-CHA) EVALUATION SUMMARY Introduction 1. The Bank's first operation in the industrial sector was a loan for the Fertilizer Rehabilitation and Energy Saving Project in 1985. It was followed by loans for the Shanghai Machine Tools (1987), Gansu Provincial Development Project (with an industry component) (1987), Fertilizer Rationalization (1987), Pharmaceuticals (1988), Tianjin Light Industry Project (1989), Rural Industrial Technology (1990), Shenyang Industrial Reform Project (1994), and Chongqing [ndustrial Reform Project (1996). In addition, the Bank has provided five credit lines to ithe China Investment Bank (CIB) (1983-89) for onlending to small- and medium-size projects in the industrial sector. The Regional Cement Industry Project (RCIP) was one of the earlier projects undertaken at regional level to implement the overall developrnent program and strategy for specific industrial subsectors. 2. The RCIP ($82.7 million) focused on the installation of a modem high-grade cement manufacturing plant with a capacity of 1.2 million tons per year (tpy) of clinker at Tongling in Anhui Province; construction of a 600,00 tpy clinker grinding capacity at Ningbo in Zhejiang Province to process clinker to be shipped from Tongling and supported by a river and coastal bulk transportation system; replacement of a wet-process cement production unit (with a 150,000 tpy capacity) by a 640,000 tpy dry-process cement unit at Zhongguo, Nanjing Municipality (the physical construction/rehabilitation of cement plants and distribution facilities accounted for 96 percent of the loan proceeds); and a technical assistance component (loan of $3.6 million) to upgrade equipment and skills of four cement industry research and design institutes and to undertake a study on small-scale cement plants. 3. The main objective of the project was to help China implement its strategy for modernization of the cement industry, and specifically to (a) expand cement production capacities based on economically viable technologies and scales; (b) improve product quality and production efficiency of existing cement plants in accordance with the country's increasing demand for high grade cement;' (c) strengthen local capabilities for research, technology development, and the design of plant and equipment at four of the country's cement industry research ancl design institutes; and (d) address the issue of economic efficiency and pollution relating to the majority of the country's small cement By normal international convention, high-grade cement refers to cement having an average 28-day compressive strength of 525 kg/cm2 and ateve, and suitable for structural construction uses.  - vi - plants. A related goal under the Project was to help China to introduce the "joint-stock" ownership concept for major government-sponsored large investments. Implementation Experience and Results 4. Most of the objectives have been met but the desired results have not yet been achieved. The three cement plants have been established and commenced commercial production successfully in January 1997. They incorporate all the modernization features as planned in terms of capacity size, rotary kiln-based technology used, high quality of cement produced (525), relatively small and well-trained manpower of about 1,300 persons, energy efficiency, pollution control, and safety standards. A bulk transportation system has been established to facilitate pooling of segmented cement markets for more optimal operations and for marketing of products on an interprovincial basis at market prices. The plant using the polluting and energy-wasting wet processes has been rehabilitated into a more efficient dry-process plant. Two of the companies have introduced new shareholders and professional management. 5. The technical assistance has been implemented. It has helped the four research and design institutes to upgrade their equipment and technical skills and expand their services to the cement industry. The study on small-scale cement plants has also been completed. It has made some important recommendations to rationalize and upgrade the small-scale cement plant industry, although the delay in finalizing the study has undermined its contribution to the timely enforcement of an appropriate policy and regulatory regime for the cement industry and in addressing the problem of the small scale cement plants. 6. The implementation of both project and technical assistance components were delayed by about two years, one year caused by the delay in loan effectiveness and other constraints, and the other year due to delays in project implementation, problems with machinery and shortage of counterpart funds. The completion of the study on small-scale cement plants took a much longer time: it was completed in April 1998 as against the original date of December 1993. Consequently, the RCIP was closed on the extended date of December 31, 1997. The original closing date was June 30, 1996. Of the total loan of $82.7 million, disbursements have been made up to $82.35 :million and $0.35 million canceled. 7. The delay in project implementation was due to a number of reasons. These are: (a) unfamiliarity with international competitive bidding (ICB) procedures (83 percent of the Bank loan); (b) inexperience in designing, coordinating and matching equipment to be supplied locally with that of equipment to be imported; (c) operational problems with the foreign-supplied equipment (it is unclear whether this was due to the equipment itself, or the installation and use thereof); (d) the long time taken to obtain additional funds to finance the cost increases resulting from these delays; (e) the need to extend the closing date to allow payments to be made to equipment suppliers upon the completion of performance warranties, which could take place only after the equipment had begun trouble-free operations; and (f) overall inexperience in the management of large-size technology projects by the subborrowers and related agencies.  - Vii - 8. Due to these delays, the project came to be implemented during a regime of high inflation. These price increases, in turn, led to price increases in building material and in labor costs, causing the project costs to increase in respect of civil work, local equipment and imported machinery. The project cost increases ranged from 61 percent in Anhui Tongling Cement Company (ATCC) to 95 percent in Zhongguo Cement Company (ZCC) and 300 percent in Ningbo Cement Company (NCC). Moreover, the project cost increases were financed mainly by additional borrowings, increasing the debt components of project financing by 48 percent (ATCC), 171 percent (NCC) and 194 percent (ZCC). The interest rates also went up during this period. The increased project costs and borrowings caused the production costs of cement of the three companies to increase considerably by way of higher depreciation and interest costs. Accordingly, the three cement companies are finding it difficult to market their cement at the relatively lower selling prices, in a market as determined by companies that do nolt have such high production cost structures. As a consequence, the three companies are expected to incur losses, albeit at declining levels, for a long time to come: ATCC for seven years (1997-2003), NCC for five years (1997- 2001) and ZCC for the next 10 years and beyond. These losses are being financed mainly by short-term borrowings and creditors., which would further increase the interest costs, thus further eroding their competitiveness in the market. In this increased project cost and loss-making situation, the economic rate of return (ERR) and financial rate of return (FRR) of the three companies are low compared to appraisal estimates. Specifically, the updated ERRs are 9 percent for ATCC and NCC compared to 18.6 percent at appraisal and 2 percent compared to 16.8 percent at appraisal for ZCC. The updated FRR are 4 percent for ATCC, 0 percent for NCC: and 0 percent for ZCC compared to appraisal estimates of 12.4, 16.3 and 11.9 percent, respectively. 9. Because of this poor financial position, unless corrective measures are taken, the three companies would not be able to comply with two of the three financial covenants agreed to with the Bank. Current projections indicate that the companies would be in compliance in respect to the debt to equity ratios, but not with the covenants on the current ratio and debt service coverage ratios. These adverse current ratios show that the current assets of the cement companies are not sufficient to discharge current liabilities. The adverse debt service coverage ratios show that they would not be able to repay debt through internally generated cash. 10. While the project's physical objectives of constructing, equipping and producing high-quality cement at the three cement production facilities have been fulfilled, the poor financial situation of these cement companies raises questions as to the long-term sustainability of the operations. At present, the cement plants are being kept in operation by infusions of short-term credit and postponement of bills payable. If the banks stop financing these companies during this loss-making period, in the absence financial restructuring, these companies would not be able to sustain themselves. The situation for ZCC is the most serious, with projections indicating that it would be incurring losses for more than 10 years. Given the trend of financial intermediaries in China to increasingly make lending decisions strictly on the basis of financial returns, there is a risk that the banks would not be willing to continue to finance ZCC losses with additional credit. At that point, unless corrective measures have been taken, ZCC may be forced to close down.  - viii - 11. The factors that have affected the achievement of the desired results of the project include project design, government policy and project management. In regards to project design, with the benefit of hindsight, there are two key areas in which the project was flawed. Firstly, given the dynamic competitive nature of the cement market, the investment plan should have been structured to support a much shorter gestation from construction to the commercial operation of the cement plants. The second design flaw concerns the component for the rehabilitation of the old state-owned enterprise (SOE) ZCC: this subproject involved the upgrading of the plant through the installation of a modem dry- processing cement line with a capacity of 640,000 tpy. Based on industry standards in the early 1990s, a design capacity of 640,000 tpy was already below what was considered to be an economically viable technology and scale at that time. Moreover, the subcomponent needed to support a much more comprehensive enterprise reform effort for ZCC. This component focused too heavily on the upgrading of its physical technology, without the accompanying efforts needed to fundamentally change the organizational philosophy and move the SOE from a production-oriented to a market-oriented enterprise. 12. On the policy side, a more favorable policy environment for the financial and industrial sectors could have led to improved subproject implementation and performance. In particular, financial policies that promoted rather than constrained the growth of capital markets could have enabled the three cement plants to raise additional equity and reduce their heavy debt burdens. Similarly, on the industrial policy side, a regulation to encourage the use of a higher quality of cement (equivalent to the international standard) would have provided a more favorable environment for the cement plants. 13. At the project management level, greater efforts should have been made to contain cost overruns, especially in view of the high inflation during the project implementation period. This is particularly relevant for the additional costs associated with implementation delays that could have been avoided. A clear example here is the 36 months to process an ICB package for ATCC to the contract signing stage, compared to the few months that it should have taken. In general, it appears that the project managers were more technical and production-oriented than financially prudent. Therefore, the need to cut costs, improve competitiveness, and promote marketing of products appears to have received less than the desired attention. 14. The Bank played an active role in project preparation assistance, appraisal and in supervision of project implementation. In retrospect, closer attention to project costing and financing during an inflationary period, and greater assistance for project designing, matching of local equipment with that of imported ones, and application of ICB procedures would have been helpful. The Bank's overall performance has been rated as deficient for project preparation and marginally satisfactory for supervision. 15. The State Administration for Building Materials Industry (SABMI) gave full commitment to the project. It formed a Project Coordination Group (PCG) to review progress on project implementation, the budget, and procurement on a regular basis and coordinate efforts to resolve any problems as well as to report regularly to the Bank on project progress. Ideally SABMI would have moved faster in securing additional  - ix - counterpart funding. Of key importance, however, was the instrumental role SABMI played in attracting a strategic investor for two of the three cement companies. SABMI efforts in relation to the technical assistance components are satisfactory, although it could have been more active in ensuring the timely delivery of the small-scale cement plant study. Overall, the performance of the borrower has been rated as marginally satisfactory for preparation, implementation, and deficient for covenant compliance and operation. Summary of Findings, Future Operations, and Key Lessons Learned 16. The project and technical assistance components have been implemented despite delays and cost overruns. Under the current circumstances, the three cement plants would not be profitable for many years to come and would not be able to discharge current liabilities from current assets and service their debt from internally generated cash. Moreover, the Bank's covenants in respect of the current and debt service coverage ratios would not be complied with for a long; time. The poor financial situation of the three cement plants raises questions concerning their long-term sustainability, given the risk that the banks may not continue to finance the companies' losses over the next few years. Also, the desired impact of the study on small-scale cement plants has not been achieved due to delay in its completion. On the other hand, the technical assistance has helped to upgrade the equipment and skills of the four research and design institutes, which will continue to provide a useful service to the development and modernization of the cement industry. Under the circumstances, the outcome of the project is considered unsatisfactory at present. 17. The project provided an opportunity for officials associated with the project; i.e., from SABMI, three cement companies, four research and design institutes, and financial intermediaries involved, to learn new skills and methods in project preparation, appraisal, financing, implementation and application of ICB procedures. This expertise and experience, particularly in handling large-size industrial projects, would become useful in their future project activities. 18. There are four main lessons to be learned from this operation: Projects to support subborrowers operating in highly competitive and dynamic markets need to be designed, appraised and managed to minimize potential risks and to reduce the project implementation period. This is to reduce the likelihood of ilwo risks that often undermine the subprojects' eventual viability, namely, missed market opportunity and significant cost overruns. This RCIP is an example of a long-gestation industrial project designed for a market environment that inevitably had changed dramatically by the time the subprojects came into operation. The practical implications are that the subprojects' investment plans should allow for rapid implementation, and be sufficiently flexible to quickly draw in additional resources, if needed and justified, with limited delay.  - x - * Projects need to include specific measures to deal with potential sources of project implementation delays. For example, where locally fabricated equipment is to be used in conjunction with imported machinery, some form of technical assistance should be given to match and assemble them. * If the Bank is to be involved in SOE reform at the individual enterprise level, the sponsored activities need to go well beyond upgrading the physical equipment and technology. In the case of China, SOE reform needs to decisively deal with existing social and financial liabilities and help introduce a new management philosophy to move the SOE from production orientation to market orientation. Without such a fundamental shift in organizational philosophy, the impact of expensive investments in modern technology is greatly compromised, as is illustrated by ZCC in this project. * An appropriate sectoral and regulatory policy environment is a prerequisite for investment projects. In this case the three cement plants have been forced to compete in a market dominated by inexpensive low-grade cement, where little price distinction is made for cement quality due to the lack of government regulation enforcing the use of high- grade cement and discouraging polluting cement plants.  CHINA REGIONAL CEMENT INDUSTRY PROJECT (LOAN 3443-CHA) PART I: PROJECT IMILEMENTATION ASSESSMENT A. PROJEICT BACKGROUND 1. China is the largest producer and consumer of cement in the world. Cement is the single most important product in the building materials industry in China. In 1989, it generated 28 percent of the value of all building materials produced in China and employed 1 million workers. At that time, the cement industry consisted of about 6,600 plants with a total production capacity of 210 million tons per year (tpy). The consumption and production were projected to increase to 320 million and 300 million tpy by 2000. Despite the availability of large quantities of good-quality raw materials such as limestone and coal, China was expected to remain a net importer of cement in the 1990s. 2. In response to a request from the Government of the People's Republic of China (GOC), the Bank carried out a study on China's cement industry in 1985. The study showed a cement sector characterized by low-quality products, low production efficiency, suboptimal production facilities, high pollution and high energy wastage. This situation had arisen mainly because of two reasons: Firstly, the use of outdated technologies based on wet-process rotary kilns or shaft kilns; and secondly, as much as 82 percent of the cement plants comprised small plants with shaft kilns and producing less than 200,000 tpy per plant of mostly lower-grade cement (325). The proliferation and dispersion of the small plants resulted from transport constraints, segmented markets, and the lack of investment coordination across local jurisdictions. 3. The Government, realizing these weaknesses, designed a strategy for the cement industry. Its main objectives were to: establish an efficient cement industry based on the country's rich limestone and coal resources and low labor costs; and meet the growth in demand in the next two decades without resorting to imports. In accordance with these objectives, the Government's strategy for sector development during the Eighth Five-Year Plan (1991-95) envisaged: (a) expanding the production capacities for high-grade and special cement using up-to-date technology; (b) modernizing and rehabilitating medium- size plants to use the dry process; (c) gradually upgrading the technology of selected small plants; (d) phasing out most of the miniplants with capacities below 20,000 tpy; and (v) improving capabilities for research, dlesign and manufacturing of cement-related equipment, processes and facilities. Further, the shaft kiln-based cement plants' share of total production was expected to be reduced from the present 82 percent to 75 percent by 2000.  - 2 - B. PROJECT OBJECTIVES AND DESCRIPTION 4. The Bank considered the broad outline of the Government's strategy for the cement sector as essentially sound. Therefore, based on the findings of its study, the Bank proceeded to formulate the Regional Cement Industry Project (RCIP) aimed at helping China implement its strategy for modernization of the cement industry. Accordingly, the key objectives of the RCIP were to (a) expand cement production capacities based on economically viable technologies and scales; (b) improve product quality and production efficiency of existing cement plants in accordance with the country's increasing demand for high-grade cement;2 (c) strengthen local capabilities for research, technology development, and the design of plant and equipment at four of country's cement industry research and design institutes; (d) address the issue of economic inefficiency and pollution relating to the majority of the country's small cement plants. A related goal under the project was to help China to introduce the "joint-stock" ownership concept for major governmnent-sponsored large investments. 5. In pursuit of these objectives, the Bank's RCIP supported three components: (a) the Tongling cement production and distribution component ($53.9 million), comprising (i) a loan of $45.9 million to the Anhui Tongling Cement Company (ATCC) to establish a modem and integrated cement plant with 1.2 million tpy of clinker capacity, a cement- grinding line that could process 690,000 tpy of high-strength cement, and a clinker and bulk cement loading terminal at Tongling in Anhui Province to facilitate interprovincial marketing in Jiangsu and Zhejiang Provinces; and (ii) a loan of $8.0 million to the Ningbo Cement Company (NCC) to establish a cement-grinding plant to process 600,000 tpy of clinker, equipped with a clinker receiving terminal at Ningbo; (b) the Zhongguo Plant rehabilitation component involving a loan of $25.2 million to Zhongguo Cement Company to convert a medium-size cement plant with a production capacity of 480,000 tpy cement to a modem dry-process technology to improve production efficiency, product quality, and emission control and to replace two of the five wet-process production lines, equivalent to a capacity of 150,000 tpy of cement by a 640,000 tpy modem dry-process line; and (c) a technical assistance component of a loan of $3.6 million to strengthen local capabilities for research, technology development, and the design of plant and equipment at four of the country's cement industry research and design institutese and to undertake a study of measures to improve production efficiency, product quality and pollution emissions in small-scale cement plants. The RCIP was appraised in October 1989, reappraised in February and October 1991 and approved by the Board in March 1992. 6. The original project objectives are considered to be both clear and straightforward, but they also imply a magnitude of project impact well beyond that that could reasonably 2 By normal international convention, high-grade cement refers to cement having an average 28- day compressive strength of 525 kg/cm2 and above, and suitable for structural construction uses. 3 The four institutes are the Tianjin Cement Industry Design Institute (TCIDI), China Building Materials Academy (CBMA), Nanjing Cement Industry Design Institute (NCIDI), and Hefei Cement [ndustry Design Institute (HCIDI).  - 3 - have been expected under the actual project design. For example, the objective of expanding cement production needs to be put in perspective: the project design allowed for an increase of cement production capacity of less than 2 million tpy, which is the equivalent of less than 1 percent of the country's production in the year of Board approval (1992) or about 0.5 percent in the year that the commercial production financed under the project actually started. Similarly, in regard to the second project objective of improving product quality and production efficiency of existing cement plants, the project design only allowed for direct assistance to one of 56 existing medium-size plants at the time (although indirect benefits to other plants were realized through strengthening the design institutes). If the project was expected to serve as an "experiment" or model that could have been subsequently replicated in other cement plants, then this approach should have been built in to the project design from the outset. The most overstated or "unrealistic" objective relates to the fourth key objective of addressing the issue of the economic inefficiency and pollution relating to a majority of the country's small cement plants. At the time of the Staff Appraisal Report (SAR) more than 82 percent of China's total cement production came from about 6,500 small-size plants. To "address" this issue implies a major undertaking and substaritially more than the use of $150,000 of loan proceeds toward a study. To make this objective more realistic, the project design needed to go much beyond just an initial study. 7. The objectives of the RCIP were clearly important for China's cement industry strategy. They were also generally useful for the country's industry strategy as a whole, and the Bank's Country Assistance Strategy, especially in the sense that the objectives included the introduction of the "joint-stock" ownership concept for major government- sponsored large investments, and touched on SOE reform. 8. From the point of view of the main implementing agency, the State Administration for Building Material Industry (SABMI), which carried the primary responsibility for monitoring project implementation and overall coordination, the realization of these objectives was highly demanding. The implementation arrangements required SAMBI, a central government ministry for the building materials industry, to perform the very time- consuming and challenging task of working across many provincial and municipal jurisdictions and coordinate the efforts of a multiplicity of parties, including banks, to address difficult eventualities such as raising substantial amounts of additional counterpart funds. Hence, in a sense, the design of the project to encourage interprovincial cooperation in cement production was also the source of its greatest risk, given the inherent delays involved in reaching wide cooperation across regions by a central agency with limited capacity, in terms of funding and human resources. C. ACHIEVEMENT OF PROJECT OBJECTIVES 9. Three Cement Plants. All of the three cement companies supported by the project, together with their related transportation systems, have now been established. The three plants completed trial production by the end of 1996, commenced commercial production successfully in January 1997 and are expected to attain full capacity utilization in the case of ATCC by the second year ('1998) onward, NCC by the third year (1999)  - 4 - onward and ZCC by the fourth year (2000) onward. The three plants incorporate the features as planned in terms of capacity size, rotary kiln-based technology used, high quality of cement produced (525), relatively small and well-trained manpower of about 1,300 persons, energy efficiency, pollution control, and safety standards. The project has thus contributed to the realization of the first two key project objectives: the expansion of cement production in China through its financing the two greenfield cement production facilities and the rehabilitation of an existing cement plant; and the improvement of product quality and production efficiency of existing cement plants in accordance with the country's increasing demand for high-grade cement. However, given the poor financial situations now facing the cement companies supported by the project, and especially their massive debt burdens (particularly in the case of the Zhongguo plant), it is uncertain whether this increased cement production capacity will prove ito be economically viable over time (this is discussed in further detail later). 10. A related aim of the project included greater regional coordination, which has been accomplished through the establishment by ATCC of a bulk transportation system to facilitate pooling of currently segmented cement markets for more optimal operations and for marketing of products on an interprovincial basis at market prices. Similarly, the NCC project is a good example of encouraging interprovincial cooperation to establish economically viable cement plants and discouraging excessive preoccupation with self- sufficiency on a provincial basis. It has been designed to transport clinker made in a raw material resource-rich (limestone and coal) area (by ATCC in Tongling) to be ground into cement and sold in a cement demand-rich area (by NCC in Ningbo). Further, ZCC provides a useful example for rehabilitation of old plants and their conversion from the polluting and energy-wasting wet processes into more efficient dry-process plants. 11. Another explicit project objective was to help China develop and experiment with the "joint-stock" ownership system. This has been accomplished through the experience of coverting two of the cement facilities supported with loan proceeds (ATCC and NCC) into joint-stock companies under the Company Law 1994, following a delay of about two years. ATCC and NCC have brought in new shareholders and professional management, which are serving as models for institutional development and public sector management. They are now called Tongling Conch Cement Company Limited (TCCCL) and Ningbo Stair Port Cement Limited Company (NSPCLC), respectively. Their corporatization is serving as useful experiences for corporatizing other government industrial operations. 12. Technical Assistance. The technical assistance has been implemented successfully. It has helped the four research and design institutes to upgrade their equipment and technical skills. This has enabled them to expand their research work on more efficient use of raw material such as limestone and coal and their design work to produce more efficient cement manufacturing machinery. Their strengthened operations have also enabled them to increase their services to the cement industry in general in terms of research and analytical work, on a fee basis, to improve cement manufacturing processes and raw material usage as well as to operate on a commercial basis.  - 5 - 13. Small-Scale Cement Plants StiLidy. The study has also been completed. The report on the study has come up with sorne important recommendations to rationalize and upgrade the small-scale cement plant industry. These recommendations could be used to help the Govemment in its ongoing plans to discourage inefficient, highly polluting and energy-wasting cement plants and to formalize a policy framework to guide the development of a more efficient and viable cement industry for the country. A significant outcome of the study is expected to be a policy pronouncement by the government to establish a higher quality standard for the: cement to be used in the country against which small, medium and large cement plants could compete for market share on the basis of quality of cement. 14. However, the delay in completing the study has undermined its contribution to the timely enforcement of an appropriate policy and regulatory regime for the cement industry. The study was originally expected to be completed by end-1993, but in practice was finalized by mid-1998. By the end of 1997 the production of cement in China had increased to about 510 million tpy, compared with about 360 million tpy in 1993. Significantly, the quantity of cement produced by small-scale cement plants had increased by about 106 million tpy over this period, meaning that the proportion of cement produced from the small-scale and frequently inefficient and polluting plants had only declined marginally. If the study had been completed on the time schedule planned, the Government could have used its findings not only to address the issue of the small-scale productive capacity existing at that time, but also to have ensured that the subsequent new investment made in small-scale cement plants over this period meet desired efficiency and environmental standards. The study's delay, apparently for the want of a relatively small amount of counterpart funding, meant that its contribution to improving the structure of the cement industry, during the period of the greatest increase of cement production capacity, has undermined its potential contribution. This also implies that one of the key project objectives of addressing the issue of economic inefficiency and pollution relating to a majority of the country's small cement pilants has not yet been realized. Moreover, while the enforcement of the study's findings should be worthwhile in the future, it seems that the greatest opportunity to ensure high standards through regulation at entry of new small- scale cement production may have been mnissed, with industry projections now indicating that the increase in China's cement production capacity is leveling off. 15. Based on above, the RCIP, albeit wvith a considerable delay in implementation, may be said to have contributed to the realization of four of the five project objectives, and with the expectation that the fifth object:ive, relating to the issue of small-scale cement plants, should be achieved in the future. It should be stressed, however, that if appropriate measures are not taken in the near future to resolve the financial problems currently threatening the longer-term sustainability of the cement facilities financed under the project, the long-term achievement of one, if not two, of the development objectives of increasing cement production capacity and improving efficiency of the existing plant could be compromised (see sections D and E below).  - 6 - 1). IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 16. Loan Effectiveness and Implementation Schedule. The Board approved the loan on March 17, 1992. It was expected to become effective on June 17, 1992 and to close on June 30, 1996. The effectiveness was delayed by 7 months to January 5, 1993 and the closing by 18 months to December 31, 1997. The main reason for the delay in loan effectiveness was due to the longer-than-expected time taken to finalize the six subsidiary loan agreements (three between GOC and the three provincial/municipal governments involved and the other three between the three provincial/municipal governments involved and the three companies (ATCC, NCC and ZCC). 17. On the other hand, loan closing was delayed due to a number of reasons. These are: (a) the major portion of the Bank loan (83 percent) required international competitive bidding (ICB) procedures and this took a considerably longer time than expected for finalization (for example, ATCC took 36 months between advertising for ICB packages and signing of supply contracts as against 8 months estimated at appraisal) because of the inexperience of the subborrowers, financial intermediaries and importing corporation in ICB procedures; (b) time taken due to inexperience in designing, coordinating and synchronizing equipment to be supplied locally with that of equipment to be imported; (c) problems with foreign-supplied equipment (although it is unclear whether the problems resulted purely from the equipment, or from the installation and use thereof), which took considerable time for resolution; (d) the cost increases caused by delays in project implementation required increased funding, which took time to be obtained from provincial/municipal governments and financial intermediaries; (e) the need to extend the closing date to allow payments to be made to equipment suppliers upon the completion of performance warranties, which could take place only after the equipment had begun trouble-free operations; and (f) overall inexperience in the management of large-size industrial projects by the subborrowers and related agencies. 18. Subproject Implementation and Performance. The implementation of all three project components (greenfield cement facilities, rehabilitation of ZCC and technical assistance) was considerably delayed. The seven-month delay in the loan becoming effective, combined with other initial constraints, caused a delay of about a year in the startup of project implementation. Thereafter, with respect to the cement production facilities, a further delay of another year took place due to the time taken to order the equipment, resolution of problems associated with the delivery/operation of foreign- supplied equipment and the need to look for additional funding sources to finance the cost increases caused by these delays. Consequently, the commencement date of trial production was revised twice, once from the original date of the third quarter of 1994 to the beginning of 1996, and again thereafter to the third quarter of 1996. The technical assistance (TA) component, originally scheduled to be completed by the end of 1994, was finally completed in June 1997 (delay of two and one-half years) because of the long time taken to shop around for the required equipment. The study on small-scale cement plants tookc the longest time to complete, from the original completion date in December 1993 to April 1998 (delay of over four years) due to constraints such as counterpart funding  - 7 - sources and the long time taken to resolve differing views with the foreign consultant on findings and recommendations of the study. 19. The delays in project implementation have undoubtedly affected subproject performance, and more generally, realization of the project objectives. With respect to the three cement production facilities, these delays led to massive increases in project costs, which in turn were financed mainly by additional borrowings, which together have further undermined the plants' competitive position. The two key and interrelated factors that have affected the performance of the cement companies subprojects are (a) increase in project costs and borrowings and (b) the competitive cement market. * Increased Project Costs and Borrowings. Due to the delays in getting the plants started, the three plants came to be implemented during a regime of high inflation (1992-96). The rise in prices increased the cost of building material and labor costs almost tripled. Also, the Yuan 'was devalued from Y 5.36 at appraisal in 1991 to Y 8.30 to the US dollar in 1997. These price increases caused the project costs to increase with respect of civil works, local equipment and imported machinery. The increased project costs were financed mainly by increased borrowing-to a lesser extent by TCCCL and NSPCLC. The interest rates also went up during this period (the assumed interest rate at appraisal for most domestic loans was about 8.3 percent and a small portion of loans to ZCC at 14.4 percent, which increased to a high of 15.0 percent beginning in 1995). The recurrent losses are also being financed by additional borrowings. As a consequence of the increased project costs and borrowings, the production costs of cement being produced by the three cement plants have increased considerably by way of higher depreciation and loan interest costs and thereby eroding their competitiveness in the market. At these high production cost structures, the three. cement plants are finding it difficult to compete with the market prices as determined by producers without such high cost structures. * Cement Pricing in the Market. The cement market and especially the pricing of cement has changed dramatically since project effectiveness. At the beginning of the 1990s, when the project was designed, about 22 percent of the total cement consumption and about 74 percent of the high-grade cement was sold at controlled prices under the state and provincial allocation plans. Since that time, the cement market has been steadily liberalized with the removal of price controls. There has consequently been a massive supply response to the strong demand for cement as one of the "building blocks" for C:hina's rapid growth, with the increase in China's production capacity growing at a rate much greater than anticipated at project conception. As a result, the industry is now highly competitive and continues to be dominated by small-scale cement plants, which require limited investment and produce relatively low-cost cement (and often of a lesser quality). The three cement plants financed under this project are finding it hard to compete in this market. The cost of production of the three plants is reportedly about equal to the selling price of the small-scale producers [i.e., about. Y 280 ($33.75/ton)], albeit for a higher quality of cement. It appears that the market makes little price distinction between low-grade cement and high-quality cement of the type produced by the project's subborrowers.  - 8 - While the low price of cement and lack of price distinction for quality appears to be largely a result of competitive market forces, anticipated government policy to encourage the use of better-quality cement in the country (through establishing an upgraded standard for cement equivalent to the international standard) and discourage polluters may drive up the market price of cement. On one hand, such policies would increase the production costs of the many small-scale plants (as they upgrade to meet pollution standards) and, on the other hand, strengthen the demand for higher-quality ciement. At the end of 1997 only about 19 percent of cement consumption in China was high-grade cement (albeit up from about 12 percent in 1990). If the demand for high-grade cement is increased through the anticipated government regulation, this could drive up the cement price and place the cement plants financed under the project in a better competitive position. Such a regulation would create a level playing field for cement plants of all sizes to compete equally in the market on the basis of quality of cement. 20. As a result of these two above-mentioned key factors, all three of the cement plants are currently recording losses and, based on their recent projections, would continue to have losses for several years into the future. In this loss-making situation, if corrective measures are not taken in the near future, the three companies would find it difficult to comply with most of the financial covenants as required by the Bank. In accordance with the project documents, the three companies were to maintain the following financial ratios: (a) a long-term debt to equity ratio of 75:25 or better; (b) a current ratio of 1.2 or better; and (c) a debt service ratio of at least 1.2 times. The financial position as well as the covenants' compliance status of the three companies are as follows: TCCCL (formerly ATCC). The delays in project implementation caused the project cost to increase from Y 920.7 million at appraisal in 1991 to Y 1,480.3 million in 1998, an increase of about 61 percent. The increased project cost was financed by a debt of Y 920.3 million (compared to a debt of Y 620.7 million at appraisal) and equity of Y 560 million, giving a debt/equity ratio of 62:38 compared to 68:32 estimated at appraisal. This has been made possible by the new equity provided by the Conch Group. The increased project cost and borrowings have, in turn, increased the cost of production of clinker/cement by way of higher depreciation and interest costs. .The interest cost per ton has increased further owing to the additional short-term borrowings made to finance the recurring losses. Based on the new financial projections, TCCCL would be making losses in the first seven years (1997 to 2003) of operation. Due to this financial position, TCCCL would not meet the covenants on the current and debt service coverage ratios. The current ratio covenant would not be complied with until 2009 due to the large short-term borrowings to finance the recurrent losses and to repay long-term debt. The debt service coverage ratio covenant would also not be complied with until 2003 due to the servicing burden of these large borrowings. TCCCL's current assets would not be sufficient to discharge its current liabilities and it would also not be able to meet its debt service obligations through internally generated funds as indicated by the adverse current and debt service coverage ratios. The debt/equity ratio is being kept within the covenanted limit by repaying long-term debt through short-term borrowings.  - 9 - NSPCLC (formerly NCC). The delays in project implementation caused the project cost to increase from Y 140.4 million at appraisal to Y 421.8 million in 1998, an increase of 300 percent. The increased project cost was financed by debt of Y 271.8 million (compared to a debt of Y 100.4 million at appraisal) and equity of Y 150 million (compared to Y 40.0 million at appraisal). The additional equity came mainly from the Conch Group, as in the case of TCCCL. Thus, the present debt/equity ratio is about 64:36 as against 68:32 at appraisal. The increased project cost and borrowings have, in turn, increased the production cost of cement by way of higher depreciation and interest costs. The interest cost component of the production cost of cement has increased further as a result oiF the additional borrowings needed to finance the recurrent losses. According to the new financial projections, NSPCLC would be making losses for five years (1997-2001). Due to this financial position, unless corrective measures are taken, NSPCLC would not comply with the covenants on the current and debt service coverage ratios. The current ratio covenant would not be complied with during the foreseeable future; i.e., up to 2007 and beyond. It is in an adverse position as a result of the large short-term borrowings to finance the recurrent losses and to repay long-term debt. Due to the heavy debt service burden, the debt service coverage ratio covenant would not be met in the foreseeable future; i.e., up to 2007 and beyond. NSPCLC's current assets are insufficient to discharge its current liabilities and it would also not be able to meet its debt service obligations through internally generated funds as indicated by the adverse current and debt service coverage ratios. The debt/equity ratio is being kept within the covenanted limit by repaying long-term debt through short-term borrowings. * ZCC. The delays in project implementation caused the project cost to increase from Y 420.7 million at appraisal to Y 821.6 in 1998, an increase of 95 percent. The increased project cost was financed by a debt of Y 664 million (compared to a debt of Y 226.6 million at appraisal) and equity of Y 157.6 million. The increased project costs and borrowings have, in turn, caused the production cost of cement to increase considerably by way of higher depreciation and loan interest costs. The production cost of cement increases further clue to the additional interest costs resulting from the further short-term borrowings being made to finance the recurrent losses. According to the new financial projections, ZCC would make losses for the next 10 years and beyond. Due to this poor financial position, the current ratio covenant would not be complied with up to 2007 and beyond. The debt service coverage ratio covenant would not be complied with as it continues to be negative up to 2007 and beyond. Short-term borrowings and postponement of bills payable are enabling ZCC to finance its losses and repay long-term debt. Thus, the long-term debt to equity ratio remains within the Bank covenanted limit. The adverse current ratios indicate that ZCC's current assets are not sufficient to discharge its current liabilities. On the other hand, the negative debt service coverage ratio shows that it would also not be able to repay debt (interest and principal on both Bank and domestic debt) through internally generated cash. ZCC has had the additional burden of carrying with it an old cement plant with encumbrances in terms of redundant labor (about 2,000 whereas the new plant requires only about 410 persons), attendant social welfare payments and high  - 10- energy costs. Two of the five wet processes of this old plant were to have been phased out but only one has been phased out, so far. ZCC is also yet to put in place a managemen information system (MIS) as agreed with the Bank. 21. Major Factors Affecting the Project. The factors that have affected the achievement of the desired results of the project include original project design, government policy and project management: While some of these factors were subject to the control of the implementing agent, many were beyond its direct influence. Project Design. In regard to project design, with the benefit of hindsight, there are two key areas in which the project was flawed. First, the whole investment plan of the project was based on limited and single-scenario market analysis for the cement industry. Fundamental assumptions were made about the rate of growth of domestic cement production capacity and the structure of the industry that, with the passage of time, have proven to be erroneous. For example, the total cement production in China was projected to be 300 million tpy by 2000: whereas in reality total production exceeded 500 million tpy by 1997. While it is not reasonable to expect project designers to be able to see into the future, the fundamental project analysis should have been built on more solid market analysis that covered a number of scenarios of different market prices and competitive situations. This would have highlighted the need for a much shorter project implementation period for constructing and operating the cement plants, in recognition that they were to operate in a dynamic competitive environment. The project investment plan, in turn, should have been designed to ensure that the plants could be in operation in the minimum time possible, with more upfront investment. Moreover, concrete steps should have been taken to address possible sources of project implementation delays, given the financial consequences associated with delays in project implementation (for example, the provision of technical assistance to prepare procurement documentation prior to project approval would have an easy way of avoiding several months of delay). Unfortunately, this cement project is another example of a long-gestation industrial project designed for a market environment that inevitably had changed dramatically by the time the subproject came into operation. The second design flaw related to this project concerns the component for the rehabilitation of the old SOE ZCC. There are two major considerations here: (a) the component involved the upgrading of the plant through the installation of a modern dry-processing line cement line with a capacity of 640,000 tpy. However, even based on industry standards in the early 1990s, a design capacity of 640,000 tpy was below that considered to be an economically viable technology and scale (international cement industry standards in the early 1990s indicated that viable capacities for cement plants was at least I to 1.5 million tpy). The other consideration with respect to ZCC relates that the broader issue of SOE reform in China: the approach taken in this component was basically to incorporate a new higher-technology subproject (in this case, a $25 million rotary kiln) into an existing SOE already burdened with high labor and social costs, outdated and inefficient technology and traditional SOE management and operating philosophy.  In other words, the new facility was to subsidize the operations and burdens of the existing SOE. While the project design did touch on the need to reduce the burdens associated with the old operation (for example, by stating that two of the five wet-processing cement lines should be closed down), it did not go nearly far enough in advocating fundamental enterprise reform. For example, the design should have allowed the imnmediate separation of the social liabilities such as schools and medical facilities linked with ZCC. But perhaps of greater significance, the project design should have recognized the major efforts needed to bring in new management philosophy to move the thinking from a production- oriented enterprise to a market-oriented one (requiring more than limited management training). As is now evident in other attempts of SOE reform, without such a fundamental shift in organizational philosophy, the impact of expensive investments in moclern technology is greatly compromised. * On the policy side, a more favorable policy environment for the financial and industrial sectors could have led to improved subproject implementation and performance. In particular, financial policies that promoted rather than constrained the growth of capital markets could have enabled the three cement plants to raise additional equity and reduce their heavy debt burdens. Similarly, on the industrial policy side, a regulation to encourage the use of a higher quality of cement (equivalent to the international standard) would have provided a more favorable environment for the cement plants. * At the project management level, greater efforts should have been made to contain cost overruns, especially in view of the high inflation during the project implementation period. This is particular relevant for the additional costs associated with implementation delays that could have been avoided. A clear example here is the 36 months to process an ICB package for ATCC to the contract signing stage: the whole bid evaluation process is usually completed in a few months. In general, it appears that the project managers were more technical and production-oriented than financially prudent. Therefore, the need to cut costs, improve competitiveness, and promote marketing of products appears to have received less than the desired attention. Further, the delay in the availability of additional funds required to finance the increased project costs compounded the problem of overcapitalization. E. PROJECT SUSTAINABILITY 22. The major issue relates to the sustainability of the three cement plants. They are faced with problems of heavy debt burdens, cost and price structure and, in the case of ZCC, with added burdens of redundant labor and excessive social costs. As a result, they are expected to make losses for a long time. This is because of their relatively high production costs and the consequent inability to compete with the relatively low market prices as determined by producers without such high production costs. Infusions of short- term credit and postponement of bills payable to finance losses and repay long-term debt are keeping the three of them in operations, more so in the case of ZCC. There is the risk that the banks and creditors may close the tap on the further flow of credit during these  - 12 - loss-making years. If corrective measures are not taken in the meantime, these cement companies would not be able to sustain themselves. Consequently, the overall sustainability of the three cement plants and their expected contributions to increasing cement production is uncertain. On the other hand, the technical assistance has helped to upgrade the equipment and skills of the four research and design institutes. The upgraded institutional structure has enabled them to expand their research work on more efficient use of raw materials and undertake design work to produce more efficient cement manufacturing machinery and processes. They have also been successful in expanding their services to the cement industry on a fee basis and thereby becoming self-reliant for their operations. These institutes will continue to provide a useful service to the industry. F. BANK PERFORMANCE 23. The Bank has been actively involved in all phases of the project cycle. The Bank's role has been to help GOC identify the key problem areas and develop operational and policy prescriptions to resolve them. To this end, the Bank prepared a Regional Cement Sector Study and a Cement Machinery Manufacturing Sector Study in 1984/85. These studies have provided the basis for dialogue with the Government on sector strategy, policies, and priorities, as well as for identification of this project. The project was the first Bank operation in the Chinese cement sector. The Bank was actively involved in the preparation assistance, appraisal and supervision of project implementation. In order to facilitate ICB, the Bank ensured that the bidding documents for the major packages were prepared with technical input from international consultants. Thereafter, the Bank followed up implementation through regular field visits and providing comments on progress reports submitted by the Government. Of special significance is Bank efforts to help subborrowers raise additional counterpart funds to finance project cost increases. 24. In retrospect, there were some core flaws in the design of the project that should have been picked up by the Bank at the appraisal stage. The Bank staff should have also taken steps to minimize the three risks that caused the most problems for the project. First, the Bank, prior to Board submission of the project, could have been more active in ensuring that an appropriate sectoral policy regime was in place. Second, the investment plan should have accommodated much faster project implementation, and included a higher price contingency, knowing that the project was going to be implemented in a high- inflation environment. Third, in the case of ZCC, the new cement line should not have been merged with the old one, knowing that it was difficult to reduce redundant labor and social benefits in China's context. Their merging placed ZCC in a disadvantaged position right from the start. Although the Bank gave assistance for ICB, it appears that that was not sufficient. Perhaps, further assistance in ICB and in plant design for equipment to be fabricated locally might have reduced implementation delays to some extent. The Bank's overall performance has been rated as satisfactory for project identification and preparation, deficient for project appraisal and marginally satisfactory for supervision.  - 13 - G. BORROWER PERFORMANCE 25. SABMI gave full commitment to the project. It took primary responsibility for monitoring project implementation and for overall coordination of the construction work. A Project Coordination Group (PCG) was set up within SAMBI to review progress on project implementation, the budget, and procurement on a regular basis and coordinate efforts to resolve any problems. In addition, the three companies formed Project Management Teams with responsibilities for planning and finance, machinery and equipment, materials supply, civil construction, and administration. SABMI's PCG coordinated implementation of the technical assistance in collaboration with the project managers of the four design institutes. These groups/teams worked closely with Bank staff. SABMI's assistance in raising additional counterpart funds to meet cost increases and in resolving disputes with foreign machinery suppliers were noteworthy. 26. Ideally, SABMI would have (a) moved more quickly to raise the additional funds required to finance the cost increases in order to reduce the delays in project implementation, and (b) obtained much more additional counterpart funds over and above what was raised, particularly in the form of equity and long-term funds, in order to enhance the cement plants' prospects for viable operations and to enable them to comply with the Bank's covenants on current and debt service coverage ratios. However, the difficulty of the task facing SABMI has to be taken into account. In order to raise substantial additional resources SABMI needed to reach a consensus across provincial and municipal borders and with a multiplicity of concerned parties, including financial institutions. Moreover, SABMI's instrumental role (together with the provincial government) in bringing in a strategic investor with its own management team to the Tongling and Ningbo facilities-the Conch Group Company, an SOE with successful experience in cement production and marketing-has proven critical in addressing the technical and financial problems facing the plants in the mid-1990s. 27. One area that SABMI coulcl have played a more active role, especially in the preparation phase, was ensuring that the three cement companies had closer involvement with the designing of their respective projects. Such an arrangement would have led to a better understanding and feedback on the designing of their respective projects, which would have helped to reduce the implementation delays. It appears that the design institutes responsible for their designing more or less worked in a vacuum. SABMI's role with respect to the technical assistance components was satisfactory, although SABMI should have provided greater support to promoting the study on small-scale cement plants and thus avoided the several years' delay on this component. Overall, the performance of the borrower has been rated as marginally satisfactory for preparation and implementation, and deficient for covenant compliance and operation. H. ASSESSMENT OF OUTCOME 28. The three components of the project have been implemented despite delays and cost overruns. The implementation of the project is considered satisfactory as it has created a useful example for the modernization of China's cement industry in terms of  - 14- optimal capacity size, technology (for TCCCL), cement quality, relatively low labor content, environmental standards, and facilitation of interprovincial cooperation in cement production and marketing. The four research and design institutes have been strengthened by way of equipment and skills, which will enable them to increase their services to the cement industry. However, for reasons discussed in detail above, the sustainability of the three cement plants is uncertain. Also the desired impact of the study on small-scale cement plants could not be achieved due to delay in its completion. Under the circumstances, the outcome of the project is considered unsatisfactory at present. I. FUTURE OPERATION 29. The project has provided an opportunity for officials of SABMI, the three cement companies, the four research and design institutes and the related financial intermediaries to learn new skills and methods of project design, preparation, appraisal, implementation, overall management and in application of ICB procedures. This expertise and experience will be useful for application in their future activities. The services of the four research and design institutes will continue to be useful to facilitate the establishment of a modern and efficient cement industry in the country. 30. The Cement Companies. The major concern is the unprofitable operations of the three cement plants, which are being sustained by additional financing. If these financing sources dry up before the plants operations have reached the break-even point, still several years away, they would not be able to sustain themselves. To avoid this scenario and to ensure compliance with the Bank's financial covenants, actions to return the plants to profitable operations as soon as possible need to be taken by the concerned parties (namely, SABMI, the three cement plants and the related financial intermediaries). Various work-out options that would improve the operational efficiency and relieve the debt servicing burden faced by the cement companies, particularly ZCC, should be considered. Infusion of new equity capital or the conversion of debt into equity could be important elements in a financial restructuring, but these actions should be pegged to strict performance benchmarks that the companies are required to meet in order to "qualify" for ongoing support. The need for strictly enforcing performance goals, or other conditionality should also apply to proposals to reschedule debt to assist the companies, such as placing much of the short-term debt and other creditors' debt on a long-term basis (while keeping the debt/equity ratio within the Bank-covenanted limit) in order to bring the curTent ratio within the Bank-covenanted limit. Such arrangements would enable TCCCL, NSPCLC and ZCC to discharge their current liabilities from current assets and service their debt from internally generated funds. SABMI and the management of each of the plants are very aware of the financial difficulties facing the plants, the urgent need to find solutions thereto. Each plant is actively investigating options to address these problems, such as ZCC's efforts to establish a joint venture with an investor from Hong Kong. 31. On a more general level, the three cement plants need to take steps to improve their overall competitiveness through reducing costs, strengthening their marketing and sales activities and improving efficiency. In particular, it was agreed that the three cement  - 15 - plants, i.e., ZCC, TCCCL and NSPCLC, would work toward qualifying for ISO 9002 by December 31, 2000. This would ensure that they continue to produce a good-quality clinker/cement and maintain the highest standards of efficiency in terms of operations and management. TCCCL could also work toward being included in the East Asia cement grid operating throughout the region. 32. The Four Research and Dlesign Institutes. With respect to the four cement research and design institutes, it was agreed that they would achieve the following performance indicators by December 31, 2000: * The Tianjin Cement Industry Design Institute's (TCIDI) income from their services of raw material analysis and improving designs of cement plants for greater efficiency in energy consumption, pollution control and manufacture of more efficient cement plants are expected to double from Y 60 million in 1997 to about Y 120 million in 2000. * The China Building Materials Academy (CBMA) indicated that, in the year 2000, at least 10 to 15 percent of bulk cernent transport would be using their low-cost version of the mobile load scale for transporting bulk cement. * The Nanjing Cement Industry Design Institute (NCIDI) would complete the research work and begin commercial marketing of the use of the lower grade of coal as fuel for cement plants by the year 2000. * By year 2000, the Hefei Cement Industry Design Institute (HCIDI) would commercialize the use of coal in powder form as fuel for cement plants, which will reduce the amount of coal used by about 15 to 20 percent. 33. Small-Scale Cement Plants 'itudy. SABMI would implement as soon as possible the appropriate recommendations of the study, particularly one relating to the need to establish a regulation for builders to use a higher quality of cement equivalent to the international standard. J. KEY LESSONS LEARNED 34. There are four main lessons to be learned from this operation: * Projects to support subborrowers operating in highly competitive and dynamic markets need to be designed, appraised and managed to minimize potential risks and to reduce the project implementafion period This is to reduce the likelihood of two risks that often undermine the subprojects' eventual viability. The first risk relates to the subborrower missing the market opportunity for which it was designed and being forced to subsequently compete in a market environment very different to the one expected at the project's conception. This cement project is an example of a long-gestation industrial project designed for a  - 16 - market environment that inevitably had changed dramatically by the time the subproject came into operation. The second risk relates to the increased risk of cost overruns in long-gestation projects. The practical implications are that the subprojects investment plans should allow for rapid implementation, and be sufficiently flexible to quickly draw in additional resources, if needed and justified, with limited delay. Consideration should be given at the project design phase of alternative/additional financing sources that could be tapped if need be. Clear analysis at the project preparation stage of trigger points at which cost overruns are likely to make the subprojects nonviable and further investment unjustifiable should also be explicit in project documentation. Moreover, under an environment of high inflation, the price contingency provided should be much higher. * Related to the above point, another lesson is that more measures to address potential sources of project implementation delays (and hence subsequent cost overruns) need to be included in the project design and early supervision phases. Specific opportunities for improvement in the case of this project include (a) the cement plant operators should have been more closely involved with the designing of their respective projects. Such an arrangement would have encouraged better understanding of their projects from the beginning, as well as provided opportunities for feedback, which would have facilitated project implementation; (b) where locally fabricated equipment was to be used in conjunction with imported machinery, some form of technical assistance should be given to match and assemble them. -If the Bank is to be involved in SOE reform at the individual enterprise level, the sponsored activities need to go well beyond upgrading the physical equipment and technology. In ithe case of China, SOE reform needs to decisively deal with existing social and financial liabilities and help introduce a new management philosophy to move the SOE from that of a production oriented enterprise to a market oriented one. Without such a fundamental shift in organization philosophy, the impact of expensive investments in modern technology is greatly compromised, as is illustrated by ZCC in this project. * An appropriate sectoral and regulatory policy environment is a prerequisite for investment projects. In this case, the three cement plants have been forced to compete in a market dominated by inexpensive low-grade cement, where little price distinction is made for cement quality due to the lack of government regulation enforcing the use of high- grade cement and discouraging polluting cement plants.  - 17- PART I:: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues X Other social objectives X Environmental objectives X Public sector management X Private sector development X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X D. Borrower Performance Highly Satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance X Operation (if applicable) X E. Assessment of Outcome Highly Satisfictory Satisfactory Unsatisfactory Highly Unsatisfactory x  - 18 - TABLE 2: RELATED BANK LOANS/CREDITS Year of Loan/Credit Title Purpose Approval Status Ln. 2226-CHA/ To assist the China Investment Bank (CIB) in meeting the 1983 Completed Cr. 1313-CHA need for foreign exchange for industrial financing, improv- First Industrial ing investment efficiency, and organizing and improving Credit Project CIB's capacity for project design, selection, appraisal and ($71.5 million) technology transfer. Ln 2434-CHA/ To continue the institutional building efforts of the first 1984 Completed Cr. 1491-CHA project, including expanding branches, assist in appraisal of Second Industrial larger projects and meet CIB's resource requirement Credit Project ($183.2 million) Ln 2658-CHA/ To assist CIB in financing productive facilities and resources 1986 Completed Cr. 1663-CHA in China to contribute to the country's economic and social Third Industrial development; to provide CIB with funds needed to develop Credit Project its operations and carry out its Charter and Statement of ($103.6 million) Policy Strategy. Ln 2783-CHA/ To assist the Government in promoting and implementing 1987 Completed Cr 1763-CHA technology upgrading and modemization in industry, to Fourth Industrial build up sound institutions and procedures for project Credit Project appraisal and investment financing and to improve interme- ($300 million) diation practices; especifically to continue institutional assistance to CIB and provide a general line of credit for industry. Ln. 2784-CHA To assist the Shanghai Municipality to achieve product 1987 Completed Shanghai Machine rationalization and product upgrading, modernization and Tool Project rehabilitation of manufacturing facilities; expansion of the ($100 million) design and engineering capabilities; and improvements in management systems for the machine tool sector within Shanghai. Ln. 2838-CHA To improve the production efficiency of existing medium- 1987 Completed Fertilizer Rationali- size plants through plant renovations and upgrading tech- zation Project nologies; expand phosphate production to help achieve a ($97.4 million) more balanced nutrient input; and improve institutional capacity through the introduction of more modern systems and techniques in financial and operational management. Ln. 2943-CHA To assist the Government to expand pharmaceutical pro- 1988 Completed Pharmaceutical duction by using modern technology; improve the quality of Project the products and introduce Good Manufacturing Practices ($127 million) (GMP) in selected enterprise and training programs; and improve the quality, maintenance, marketing and man- agement in the pharmaceutical industry.  - 19 - Year of Loan/Credit Tile Purpose Approval Status Ln. 3075-CHA Continuation of activities under the Fourth Industrial Credit 1989 Completed Fifth Industrial Project Credit Project ($300 million) Ln3274/ Cr2186/ To assist the Chinese Govemment's ongoing Spark Program, 1990 Completed JGF27230-CHA which seeks to upgrade standards of technology and Rural Industrial management of China's rapidly growing runal township and Technology (Spark) village enterprises. In tOree representative areas, the project Project supports demonstration enterprise modernization subprojects ($114.3 million) in rural industries, upgrades the "Spark training program"' for rural enterprise staif and helps an existing technology information system reorient its focus to small enterprises. Ln. 3582-CHA To assist the local authorities in Southern Jiangsu to 1993 to be completed Southern Jiangsu strengthen their environmental planning and management 6/30/2001 Environmental capabilities and to cariy out priority initiatives in the regional Protection Project environmental strategy and action plans in an efficient and ($250 million) effective manner. Ln. 3788-CHA Support Shenyang Municipal Government's reform program 1994 to be completed Shenyang Industrial through the joint SMG/Bank monitoring of implementation 06/30/2001 Project of a Reform Action Program and the provision of technical ($175 million) assistance and training to underpin key aspects of SMG's reorganization. The prDject also supports two investment components: industrial iestructuring and corporatization, and environmental protectio;n. Ln. 4045-CHA To assist Chongqing Municipality to: (a) achieve a signifi- 1996 to be completed Chongqing Indus- cant reduction in pollution and restructure productive facili- 12/31/2002 trial Reform Project ties from its most polliuting industries, iron and steel; (b) ($170 million) establish a strategy and prepare a long-term plan to achieve a major reduction in pollution for the whole sector, and (c) initiate a pilot effort to assist industrial enterprises in other industrial sectors to restructure their productive facilities, control pollution and transform themselves into modem corporations.  - 20 - TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual Identification 1985 1985 Appraisal October 1989 October 1989 Post-appraisal(s) February 1991 February 1991 and October 1991 Negotiations January 27, 1992 Janualy 27, 1992 Board presentation March 17, 1992 March 17, 1992 Signing April 7, 1992 July 9, 1992 Effectiveness June 17, 1992 January 5, 1993 Project completion December 31, 1995 October 31, 1996 Loan closing June 30, 1996 December 31, 1997 TABLE 4: LOAN/CREDIT DISBURSEMENT: CUMULATIVE ESTIMATE AND ACTUAL ($million) FY92 FY93 FY94 FY95 FY96 FY97 FY98 Appraisal estimate 0.50 11.30 58.20 77.70 82.70 - Actual 0.00 1.14 11.79 61.51 69.89 82.39 82.50 Actual as % of appraisal estimate n.a. 10.00 20.00 79.00 85.00 n.a n.a. Date of final disbursement December 10, 1997  - 21 - TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Key implementation indicators in SAR Target Date Actual Date A. Tongling Component 1. TCCCL Advertisement of major ICB packages April 30, 1991 February 15, 1990 Completion of site preparation July31, 1992 October31, 1992 Signing of supply contract for major equipment packages December 31, 1991 June 30, 1993 Completion of civil works June 30, 1994 May 31, 1996 Start of equipment erection January 1, 1993 October31, 1994 Completion of equipment erection September 31, 1994 July 15, 1996 Commissioning November 30, 1994 October 3 1, 1996 Start of commercial production January 1, 1995 January 1, 1997 2. NSPCLC Advertisement of major ICB packages May 30, 1992 January 15, 1992 Completion of site preparation October 30, 1993 December 31, 1993 Signing of supply contract for majorequipment packages March 31, 1991 March 31, 1994 Completion of civil works July 31, 1994 July31, 1996 Start of equipment erection February 15, 1993 July 15, 1995 Completion of equipment erection November 30, 1994 March 31, 1996 Commissioning October 1, 1994 October 15, 1996 Start of commercial production January 1, 1995 January 1, 1997 B. Zhongguo Component (ZCC) Advertisement of mnajor ICB packages April 30, 1992 February 24, 1992 Completion of site preparation September 30, 1992 September 30, 1992 Signing of supply contract for major equipment packages March 15, 1992 September 30, 1993 Completion of civil works June 30, 1994 December 31, 1996 Start of equipment erection April 1, 1993 June 1, 1995 Completion of equipment erection September 31, 1994 May 15, 1996 Commissioning November30, 1994 October 31, 1996 Start of commercial production January 1, 1995 January 1, 1997 C. Technical Assistance Component Commencement of training/invitation of foreign experts January 1, 1992 June 1, 1994 Commencement of the study September 1, 1992 October 1, 1994 Completion of the study December 1993 April 30, 1998  - 22 - TABLE 6: KEY INDICATORS FOR PROJECT OPERATIONS Capacity Utilization Production I. Key operating indicators in the Estimated ACTUAL Estimated ACTuAL SARlPresident's Report 1. TCCCL First Year 60 50 720 600 Second Year 75 108/a 900 1,300 Third Year 90 125/a 1,080 1,500 Fourth Year onward 100 125/a 1,200 1,500 2. NSPCLC First Year 60 26 414 180 Second Year 75 85 518 587 Third Year 90 100 621 690 Fourth Year onward 100 100 690 690 3. ZCC First Year 60 30 582 300 Second Year 60 75 582 727 Third Year 80 90 776 875 Fourth Year onward 100 100 970 970 Production ('000 tons cement/year) /a With adjustments to the equipment, TCCCL expects to produce more than the present capacity in the second year and thereafter. TABLE 7: STUDIES INCLUDED IN PROJECT Study Purpose as defined at Appraisal Status Impact of Study Efficiency and Environ- Improve production efficiency and Completed The recommendations of the mental Assessment of control pollution emissions of small with delay study are likely to influence Small Cement Plants cement plants Government's ongoing efforts to develop a policy/ regulatory framework to rationalize and upgrade the cement industry.  - 23 - TABLE 8A- 1: TCCCL: PROJECT COSTS (US$ million) Appraisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total Land 2.0 2.0 9.1 9.1 Civil works 52.8 52.8 56.2 56.2 Machinery/equipment 23.0 31.2 54.2 36.7 39.5 76.2/a Engineering/management training 11.0 3.1 14.1 Base Cost Estimate 88.8 34.3 123.1 102.0 39.5 141.5 Physical contingency 8.9 3.4 12.3 Price contingency 7.3 3.5 10.8 Installed Costs 1O5.0 41.2 146.2 102.0 39.5 141.5 Working capital 3.3 3.3 1.9 1.9 Interestduringconstruction 7.8 4.1 11.9 25.9 8.2 34.1 Commitment fee 0.6 0.6 0.8 0.8 Total Cost 116.1 45.9 162.0/b 129.8 48.5 178.3/b /a Includes cost of engineering/management training. /b The Yl$ exchange rates used were 5.3 and 8.3 for 1991 and 1998, respectively. TABLE 8A-2: 1TCCCL: PROJECT FINANCING (US$ million) Appraisal estimate Actual/atest estimate Source ;Local Foreign Total Local Foreign Total Equity: 52.8 52.8 67.5 67.5 IBRD Loans: 45.9 45.9 0 45.9 45.9 Domestic Loans 63.3 63.3 62.3 2.6 64.9 Total Financing 116.1 45.9 162.0/a 129.8 48.5 178.3/a /a The Y/$ exchange rates used were 5.3 arid 8.3 for 1991 and 1998, respectively.  - 24 - TABLE 8B-1: NSPCLC: PROJECT COSTS (US$ million) Appraisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total Land 0.6 0.6 1.6 1.6 Civil works 3.8 2.4 6.2 18.4 18.4 Machinery/equipment 5.3 3.2 8.5 11.8 7.1 18.9/a Engineering/management training 1.4 0.4 1.8 Base Cost estimate 11.1 6.0 17.1 31.8 7.1 38.9 Physical contingency 1.1 0.6 1.7 Price contingency 1.1 0.5 1.6 Installed Costs 13.3 7.1 20.4 31.8 7.1 38.9 Working capital 2.7 2.7 2.2 2.2 Interest during construction 0.9 0.8 1.7 8.9 0.8 9.7 Commitment fee 0.1 0.1 0.1 0.1 Total Cost 16.9 8.0 24.9/b 42.9 8.0 50.9/b /a Includes cost of engineering/management training. /b The Y/$ exchange rate used were 5.3 and 8.3 for 1991 and 1998, respectively. TABLE 8B-2: NSPCLC: PROJECT FINANCING (US$ million) Appraisal estimate Actual/latest estimate Source Local Foreign Total Local Foreign Total Equity: 7.0 7.0 18.1 18.1 IBRD Loans: 8.0 8.0 8.0 8.0 Domestic Loans 9.9 9.9 24.8 24.8 Total Financing 16.9 8.0 24.9/a 42.9 8.0 50.9/a /a The Y/$ exchange rate used were 5.3 and 8.3 for 1991 and 1998, respectively.  - 25 - TABLE 8C-1: ZCC: PROJECT COSTS (US$ million) Lpj)raisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total Land 2.4 2,4 3.3 3.3 Civil works 15.8 15.8 29.4 29.4 Machinery/equipment 10.6 15.5 26.1 25.3 21.7 47.0/a Engineering/management training 8.9 2.3 11.2 Base Cost Estimate 37.7 17.8 55.5 58.0 21.7 79.7 Physical contingency 3.1 1.8 4.9 Price contingency 3.7 2.5 6.2 Installed Costs 44.5 22.1 66.6 58.0 21.7 79.7 Working capital 1.2 1.2 7.5 7.5 Interest during construction 2.8 2.6 5.4 8.6 3.0 11.6 Commitment fee 0.5 0.5 0.1 0.1 Total Cost 48,5 25.2 73.7/b 74.1 24.8 98.9/b /a Includes cost of engineering/management training. /b The Y/$ exchange rate used were 5.3 and 8.3 for 1991 and 1998, respectively. TABLE 8C-2: ZCC: PROJECT FINANCING (US$ million) Appmisal estimate Actual/latest estimate Source Local Foreign Total Local Foreign Total Equity: 33.4 33.4 18.9 18.9 IBRD Loans: 25.2 25.2 24.8 24.8 DomesticLoans 15.1 15.1 55.2 55.2 Total Financing 48.5 25.2 73.7/ 74.1 24.8 98.9/a /a The Y/$ exchange rate used were 5.3 and 8.3 for 1991 and 1998, respectively.  - 26 - TABLE 9: ECONOMIC COSTS AND BENEFITS ATCC NCC ZCC FRR (SAR) % 12.4 16.3 11.9 FRR (Updated) % 4.00 0.0 0.0 ATCC & NCC (combined) ZCC ERR (SAR) % 18.6 16.8 ERR (Updated) % /a 9.0 2.0 /a Separate updated ERRs for ATCC and NCC are 10 and 6 percent, respectively.  - 27 - TABLE 10: STATUS OF LEGAL COVENANTS LOan Covenant Presert Agreementle Sedion tye Status Description of covenant Comments Borrower shall cany out tedcnical assistance LA 3.01(a) 04 C through SABML and provide fiunds, facilities, senicEs_ and otesources required as needer 3.01(c) 12 C Borrower shall allow the NBCC and ATCC to inplemnent the mrheolding sestem as provided in the Ningbo Charter and Tangling Charter. 3.02(a) 03 C The boNower shall relendthe proceeds ofthe loan o1(1) $S8,000,000 to NBCC through Ningb) Municipality 3.02(d) 03 C The bclower shall mnake $3,600,000 out of the proceeds ofthe Loan available to the Project Institute through SABMI on terms and condiions satisfacto,y to the Bank. 4.01(b) 01 C The borrower shall have project records and accounts, including those for the Special Accounits, for each fiscal year audited. Furnish to the E3ank not later than six months alter the end of the fiscal year, the audited reporL 3.03 05 C The borrowershall maintain the Project Coordnation Group established within SABMI to coordinate the imfplementation of the projedL 2.02 10 C Procunrment of goods and consultant's services shalt be in accordance with principles and procedures saisfactoiy to the Bank. 2.05 10 C Each comnpany shall exchange views with the Bank regards to the progress of the project and pronsiy infonrn the Bank of any condition which ilterferes with the progess ofthe project. 3.04 12 C NBCC and ATCC shall inforn the Bank promptly of any changes in the Ningbo Charter orthe Tongling Charter, thejoint venture agreent or their respective nanagement structur. 4.01 02 C Companies shal have records, accounts, and financial statements for each fiscal year audited Funnish audit report together with audited fGancial statements to the Bank not later than six mnnths aflter the end of each fiscal year. 4.02(i) 02 NC Companies shall not incur additional debt TCCCL will not comply with this ratio unlil unless reaonable forecast shows net revenues year 2003 (it ranges between 0.63 and 0.64 would provide a debt service coverage ratio of fino 1997 to 2003) and meets the covenat in not less ihan 1.2 times. 2004 and thereater, NSPCLC will not comply with this covenarA in the foreseeable future (it ranges between 0.2 and 0.4 during 1998 to 2007); and ZCC will not comnply with this covenant in the foreseeable future. This ratio remains negative. The Bank has requested the thee companies and SABMI to increase their equity to lessen the debt sevice burden 4.02(ii) 02 C Maintain a debt equity ration of no more than  - 28 - Loan Covenant Present Agreement Section type Status Description ofcovenant Comments 75/25. 4.02(iii) 02 NC Companies shal maintain curent ratio of no TCCCL will not comply with this ratio until less than 1.2 2009 (it ranges between 1.02 and 0.09 from 1997 to 2008) and becomes 1.4 in 2009 and improves further thereafter); NSPCLC will not comply with this ratio (it worsens from 0.75 in 1998 to 0.50 in 2007), and ZCC will not comply with this covenant in the foreseeable futuret (iwots fmom 0.65 in 1998 to 0.1S in 2007). The Bank has requested the three companies and SABMIto increase their equity to repay current liabilities and place as much of the eurret liabilities on long-term debt basis to improve the cunfent ratio. 4.03 02 C Each company shall prepare and review with the Bank, by Odober 31 each year between 1992 to 1997, its five-year plans, including production, marketing and investment plans. Covenant Class: Status: I = Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay generation from beneficiaries 10 = Project implementation not CP = complied with partially 3 = Flow and utilization of project covered by categories 1-9 funds 11 = Sectoral or cross-sectoral 4 = Counterpart funding budgetary or other resources 5 = Management aspects of the allocation project or executing agency 12 = Sectoral or cross-sectoral policy/ 6 = Environmental covenants regulatory/institutional action 7 = Involuntary resettlement 13 = Other  - 29 - TABLE 11: COMPLIANCE WITII OPERATIONAL MANUAL STATEMENTS There was no lack of compliance with an applicable Bank Operational Manual Statement (OD or OP/BP). TABLE 12: BANK RESOURCES: STAFF INPUTS FY 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Preappraisal 54.0 1.1 55.1 Appraisal 12.9 43.2 56.1 Negotiations 7.1 7.6 19.7 34.4 Supervision 21.8 21.0 24.6 11.2 2.9 6.9 6.8 95.2 Completion 13.2/a 13.2/a Total 254.0/a /aEstimated. TABLE 13: BANK RESOURCES: MISSIONS Performance rating /b Imple- Devel- Stage of project cycle Month/ Number of Days Specialized staff mentation opment Type of year persons in field skills represented /a status objectives problems Preidentification 10/84 5 21 Identification/Preparation 6/85 4 14 dentification/Preparation 5/86 5 30 Identification/Preparation 5/87 3 16 Identification/Preparation 10/87 5 19 Identification/Preparation 7/88 4 22 Preappraisal 1/89 7 23 Appraisal 6/89 5 7 Negotiation 1/92 Postappraisal 1/91 1 6 Postappraisal 10/91 2 4 Board approval 3/92 Signing 7/92 Effective 1/93 Supervision 1 11/92 2 EN 2 2 Delays w/procurement Supervision 2 8/93 3 EN, 00 2 1 Delays w/procurement Supervision 3 4/94 2 EN, 00 2 1 Counterpart Funding Supervision 4 7/95 4 EN, 00, FA 2 2 Counterpart Funding Supervision 5 5/96 2 EN, 00 2 2 Equipment Problems Supervision 6 5/97 2 10 EN, 00 2 2 Equipment Problems Completion 5/98 3 13 EN, FA, 00 2 3 La DO: Disbursement Officer, EC: Economist; EN: Engineer, FA: Financial Analyst; LC: Legal Counsel; 00: Operation Officer, RA Research Analyst; RS: Resettlement Specialist; TE: Transport Economist; TS: Transport Specialist /b 1: Highly satisfactory; 2: Satisfactory-, 3: Unsatisfactory.  - 30 - ANNEX A ANNEX A: ICR MISSION'S AIDE MEMOIRE (May 5-18, 1998) Introduction 1. Mr. S.A.B.R. Thalakada (Industry Consultant) and Ms. R. Ma (Operations Assistant), gathered the information and data required to prepare the Implementation Completion Report (ICR) on the Regional Cement Industry Project (RCIP) during May 5- 18, 1998. In Beijing, the mission held discussions with the Senior officials of the State Administration for Building Materials Industry (SABMI) and the representatives of the China Building Materials Academy (CBMA), Tianjin Cement Industry Design Institute (TCIDI), and officials of the Hefei Cement Industry Research Institute (HCIRI) responsible for the Small Cement Plants (SCPs) Study. Accompanied by the representatives of SABMI, the mission visited: Zhongguo Cement Company (ZCC) and the Nanjing Cement Industry Research Institute (NCIDI) in Nanjing; the Hefei Cement Industry Research Institute (HCIRI) in Hefei; Tongling Conch Cement Company Limited (TCCCL) in Tongling; and Ningbo Star Port Cement Limited Company (NSPCLC) in Ningbo. Arrangements for visits to the companies and institutes involved in the project were efficiently made by SABMI. The list of the key people met is given in Annex 1. The mission wishes to express its appreciation for the excellent cooperation and warm hospitality extended to it by the officials of SABMI, the cement companies and the design institutes. 2. Based on the visits made and discussions held, this aide memoire summarizes the mission's finding on the various components of RCIP. In a wrap-up session held on May 18, 1998, in Beijing, these findings were presented to the representatives of SABMI. Summary of Findings and Agreements 3. Cement Industry. Production and consumption of cement in China have kept their accelerated growth rate during the 1990s. China's consumption of cement increased from 204 million tons in 1990 to 500 million tons in 1997, with production increasing from 210 million tons to 510 million tons between 1990 and 1997, respectively. These achievements far exceeded the projections made for 2000 at the time of RCIP appraisal, namely, 320 million tons of consumption and 300 million tons of production. Cement production is expected to reach 550 million tons by year 2000. Clinker and market forces now determine cement prices and interprovincial trading in cement is also taking place. It is Government policy that by year 2000, 25 percent of China's total cement requirement will be produced by medium and large manufacturers using modern and rotary-kiln based plants producing high quality cement meeting international standards and 75 percent of cement requirement to be produced by the small cement plants which are considered less efficient in terms of technology, energy consumption, pollution control and quality of  -31- ANNEX A cement produced. Despite the Government's efforts to increase the medium and large- scale rotary-kiln based cement plants share of total production, the structure of production in 1997 was virtually the same as in 1990 when the shaft-kiln based cement plants accounted for about 82 percent of the total production. 4. With the dominant position hield by the small cement plants, they appear to be able to deternine the selling price of cement in the market. Their present selling price is about Y 280 per ton ($33.75/ton) but their quality is said to be lower than the international standard. Because of the large investment required and associated financing costs and depreciation of large cement plants, the cost of production of a large and modern cement plant comes to about the same as the selling price of a small cement plant i.e. about Y 280 ($33.75/ton) but for a better quality cement. Thus, the larger cement plants are finding it difficult to compete in this market after adding a profit margin to that cost of production, despite their better quality. On the other hand, due to the recent Asian financial crisis, some Asia-Pacific countries are said to be having cement for export at about $25-30/ton FOB. At project appraisal, the FOB price of cement was about $47-51/ton of bagged cement from South Korea. China, with the present high cost structures of the more efficient large cement plants, will firLd it difficult to compete with these export prices, at least in the short term. The SCPs Study undertaken under the RCIP has come up with a number of recommendations (see below) to phase out the uneconomic small cement plants and restructure the cement industry to produce a higher quality cement while consuming less energy and causing less pollution. 5. RCIP. The project has supported the establishment of modern clinker/cement producing facilities in Nanjing, Tongling and Ningbo, and has provided technical assistance for further development of the cement research/design institutes in Beijing, Tianjin, Nanjing and Hefei and for preparation of a Small-scale Cement Plants Study by the Hefei Cement Design and Research Institute. The three cement plants were projected to start commissioning in the third quarter of 1994 and begin commercial production in 1995. The technical assistance component was scheduled to be completed by the end of 1994. The Bank appraisal was carried out in 1991 and the closing date for the Bank loan of $82.7 million was set at the end of'June 1996. 6. Although the Bank approved the project on March 17, 1992, the Bank loan did not become effective until January 5, 1993. This delay combined with other initial constraints caused a delay of about one year in the startup of project implementation. Thereafter, a further delay of about another one year took place due to shortage of counterpart funds, need for reorientation of budgets and delivery of faulty equipment by machinery suppliers. Due to these delays, the revised schedule which set the start of cement plants' commercial production at the beginning of 1996 was revised again and a new schedule for the start of trial commercial production (the third quarter of 1996) was agreed upon and the closing date was extended to December 31, 1997, by the Bank. Accordingly, the Bank closed the loan on December 31, 1997. 7. All three plants completed trial production by the end of 1996 and commenced commercial production successfully in January 1997. The teething problems have now  -32 - ANNEX A been resolved. Accordingly, from a technical standpoint, the RCIP may be considered as successful as all three plants serve as models in terms of technology used, high quality of cement produced (425 and 525 OPC), well trained manpower of about 1300 persons (combined), energy efficiency, pollution control, safety standards and marketing of products on an interprovincial basis at market prices. 8. However, all three cement plants are faced with common financial problems and therefore their sustainability have become suspect. These problems are discussed as follows: (a) Increased Project Costs and Borrowings. Due to the delays in getting the plants started, the three plants came to be implemented during a regime of high inflation (1992-96). The rise in prices increased the cost of building material (mainly steel and cement) and labor costs almost tripled. Also, the Yuan was devalued from Y 5.36 at project appraisal in 1991 to Y 8.70 to a US dollar in 1994. These price increases caused the project costs to increase in respect of civil works, local equipment and imported machinery. The increased project costs were financed mainly by increased borrowings and to a lesser extent by TCCCL and NSPCLC. The interest rates also went up during this period (the assumed interest rate at appraisal for most domestic loans was about 8.3 percent and a small portion of loans to ZCC at 14.4 percent which increased to a high of 15.0 percent beginning 1995). As a consequence of the increased project costs and borrowings, the production costs of cement being produced by the three cement plants increased considerably by way of higher depreciation and loan interests costs; (b) Cement Pricing in the Market. The three cement plants with their high production cost structures (and producing a higher quality cement), are finding it difficult to compete with the market prices dictated by the small plants. These small plants do not have such high depreciation and loan interest costs and produce a lower quality cement. As pointed out earlier, the production cost of the three plants financed under RCIP is about equal to the selling price of the small plants. As a consequence, the three plants are finding it difficult to operate on a profitable basis. The Government is aware of this problem and is looking into ways and means of establishing an upgraded standard for cement, equivalent to the international standard, in the country. The mission supports this policy direction as the creation of a level playing field that would allow both small and large plants to compete in the market on the basis of quality of cement; (c) Continuous Losses And Need For Further Funding. As a consequence of high production cost structures and difficulties of competing in the market, the three plants are finding it difficult to operate on a profitable basis. Based on the projections provided to the mission, all three cement companies would be making losses for a long time: NSPCLC for 5 years from 1997 up to year 2001, TCCCL for 7 years from 1997 up to year 2003 and ZCC for the next 10 years and beyond. Because of these losses, the three plants would incur difficulties in repay their loans. Moreover, if these projected losses are financed by further borrowings, this would further increase the production cost and make them less competitive. At present, further short-term borrowings and postponement of bills payable are meeting some of the losses but this cannot go on for long. In order to overcome this  - 33 - ANNEX A situation, there is a need for further infusions of equity capital over and above that required to reduce the present debt burdens arisen from the increased project costs. In these circumstances, the three companies would not be able to comply with the financial ratios set by the Bank and outlined in the Projects' Legal Documents. The three companies were to maintain the following financial ratios: (i) a long-term debt to equity ratio of 75:25 or better; (ii) a current ratio of 1.2 or better; and (iii) a debt service coverage r atio of at least 1.2 times. 9. The succeeding sections of thle aide memoire provide further details on each of the four project components. ZCC Component (IBRD Loan of $25.2 million) 10. ZCC commenced commercial operations in January 1997 with a designed capacity of 600,000 tons of clinker/700,000 tons of cement per year. However, its operations have become unprofitable and therefore sustainability in the future has become suspect. In these circumstances, it would find it difficult to meet its debt-service obligations including the Bank loan through internally generated funds. This situation has arisen due to various reasons as explained below. 11. Firstly, the delay in the implementation of ZCC caused a substantial increase in the capital cost and a highly leveraged financial structure. The capital cost increased by about 95 percent from Y 420.7 million at Blank appraisal in November, 1991 to Y 821.6 million in May, 1998. On the other hand, the cost increase was largely financed through increased borrowings and thereby increasing the debt-equity ratio from 46:54 at Bank appraisal in 1991 to 85:15 in May, 1998. The previously expected equity participation from the China Petrochemical Corp. and Nanjing Municipal Government as well as the joint-venture proposal with a Hong Kong company has not materialized, so far. On the basis of 95 percent capacity utilization, the new project cost structure increases the depreciation cost of cement by Y 52 per ton of cement while, the new debt structure increases the interest cost of cement by a further Y 108 per ton. 12. Secondly, the operations of the new plant have been merged with that of the old one making the new one inherit some of the problems of the old one. Although, at Bank appraisal it was expected that two of the five old wet-process cement lines would be phased out, this has not happened, so far. Four old lines continue to operate. While, the new plant is energy efficient and pollution free, the old ones continue their high-energy consumption and pollution damage. The other major problem is that about 2000 workers continue to be employed for the old plant while only 405 are employed for the new plant with both plants having about similar capacities. This staffing imbalance together with their social benefits (housing, medical and education of children), are imposing a very  - 34 - ANNEX A heavy burden on the operating costs and management time. Efforts are being made to reduce social benefits and redundant labor but these would need to be expedited. 13. Thirdly, ZCC, like all other new cement plants in the country, is faced with a major marketing problem as discussed earlier. 14. At project appraisal stage, the Bank estimated its production to be at 60 percent of capacity in the first year, 80 percent in second year and 100 percent in third year onward. However, its actual production is well below that capability. The production in 1997 was only 50 percent of capacity (300,000 tons). Based on the actual production in the first four months of 1998 (143,700 tons), they expect to operate at 75 percent of capacity in the second year (1998), 90 percent in the third year (1999) and at 100 percent in the fourth year (2000) onward. According to the financial projections prepared on this basis and selling cement at the present market price of Y 280 per ton, ZCC would be a loss making entit,y, even before depreciation and financing costs are taken into consideration. Losses of Y 61 million in 1998 would continue, on a decreasing trend, to Y 20 million in 2007 and beyond. These losses would be even much greater if the depreciation and interest costs are added as indicated above. 15. The continuing losses would virtually wipe out its entire equity by year 2007. Short-term borrowings and postponement of bills payable are enabling ZCC to finance its losses and repay long-term debt. Therefore, whilst the long-term debt to equity ratio remains within the Bank covenanted limit, the current and debt service coverage ratios are not in compliance. The current ratio worsens from 0.65 to 0.18 in 2007, which indicates that ZCC's current assets are not sufficient to discharge its current liabilities. Its debt service coverage is negative and would continue to be negative in the foreseeable future. This shows that it would not be able to repay debt through internally generated cash. 16. There is no easy solution to resurrect ZCC from this dismal financial situation. ZCCs longer-term potential competitiveness would be improved when the government fully implements its plan to establish an upgraded national quality standard equivalent to the international standard for cement to which cement plants of all sizes would need to conform. Then the market price could be expected to increase for better quality cement at which price ZCC would have better prospects for more viable operations. However, if ZCC is to be a viable operator in the long term a number of drastic actions need to be taken in the immediate/short-term future, including, inter alia, the following mentioned actions. ZCC should begin immediately to phase out the fourth old cement line as envisaged earlier as well as reduce redundant labor and social benefits. ZCC should introduce an attractive early retirement scheme to reduce redundant labor, the cost of which could be easily recovered through more productive operations in the future. At the same time, ZCC should also begin to reduce the social costs associated with housing, education and health. Of key importance, ZCC needs to begin immediately to reduce its heavy debt burden. A moratorium on loan repayment would not help, as that would only postpone the need for a major financial restructuring of the company. The options that could be considered to reduce the present debt burden and the additional debt burden arising from the recurrent losses include converting debt into equity and/or increase equity  - 35 - ANNEX A through the present shareholders or new shareholders. In our view, the option of full divestiture should also be considered. If a work-out option is pursued that includes financial restructuring, this should be pegged to strict performance benchmarks, which are reviewed on a quarterly basis. Financial restructuring should not be pursued in isolation, but rather as part of a package of comprehensive reform, and the strengthening of managerial skills. Specifically, ZCC needs to strengthen its financial management and put in place, as soon as possible, a managernent information system (MIS), as the bases for informed evaluation of work-out options. 17. ZCC has set up a good cement plant from a technical standpoint and it has also access to two of the most important resources, namely, limestone and coal and therefore attraction of new shareholders, given the right price, should not be too difficult. However, if no decisive measures are taken in the near future, in the view of the mission, ZCC would become unsustainable and would cause a drain on public resources. If market forces were allowed to play their role, ZCC would become bankrupt with the resultant unemployment. TCCCL Component (IBRD Loan of $45.9 Million) 18. TCCCL successfully commenced commercial operations in January 1997 with a designed capacity of 1.2 million tons of clinker per year. The participation of the Conch Group as the major shareholder (holding about 60 percent of equity) in 1996 has infused TCCCL with professional management. This has enabled TCCCL to set up a model cement plant in terms of technology, energy efficiency, pollution control and technical quality of staff. In 1997, 600,000 tons of clinker was sold at Y 220 per ton of clinker (525 OPC). The plant is now being upgraded with assistance of the machinery supplier to increase the designed capacity to 1.5 million tons of clinker per year. Since TCCCL started as a greenfield project, it did not inherit any encumbrances of an old plant which has enabled it to begin operations on a rnore commercial basis in terms of a younger and relatively smaller labor force of only abcut 690 persons (compared to 1,200 projected at appraisal), and without having to incur any additional operational costs in terms of welfare benefits to staff such as housing, education, medical and retiree compensation. 19. However, as in the case of ZCC, the delays in project implementation caused the project cost to increase from Y 920.7 million at project appraisal to Y 1,480.3 million in May 1998, i.e. an increase of about 61 percent. Debt of Y 920.3 million and equity of Y 560 million giving a debt/equity ratio of 62:38 as against a debt/equity ratio of 68:32 estimated at project appraisal have financed this new project cost. Given the project cost increase by 61 percent, an improved debt/equity ratio as compared to that estimated at project appraisal could be considered as creditable and sound financial judgment. This has been made possible due to the additional equity provided by the Conch Group. The new project cost and financial structure have brought the depreciation cost component of cement to Y 60 per ton and interest cost component of cement to Y 67 per ton. The interest cost per ton will go up further ovwing to the additional borrowings that would need to be made to finance the recurring losses (see below).  - 36 - ANNEX A 20. Based on the actual production of clinker in the first four months of 1998 (120,000 tons), TCCCL has projected its sales at 1.3 million tons (clinker and cement) in 1998, increasing to 1.5 million tons (clinker and cement) in 1999 and remaining at that level thereafter. The financial projections prepared on this basis and including the costs of depreciation and interest on loans as indicated earlier, TCCCL would not be profitable in the first seven years ( 1997 to 2003) of operations. Losses of Y 82 million in 1998 would continue on a decreasing trend to a loss of Y 7.9 million in 2003. Thereafter, it would become profitable with profits of Y 3.3 million in 2003 and increasing to a profit of Y 15.5 million in 2010 and thereafter. 21. TCCCL would meet the debt to equity ratio but not the current and debt service coverage ratios. The current ratio would not be complied with until 2009 (it worsens from 1.02 in 1997 to 0.01 in 2003, picks up slightly to 0.09 in 2008 and improves thereafter to 1.4 in 2009 and 2.1 in 2010). Due to the large short-term borrowings to finance the recurrent losses and to repay long-term debt, and the debt service coverage ratio would not be complied with until 2003 due to the servicing burden of these borrowings (it ranges between 0.63 and 0.64 from 1997 to 2003 and improves thereafter to 1.76 in 2004 and improves further thereafter). TCCCL's current assets would not be sufficient to discharge its current liabilities and it would also not be able to meet its debt service obligations through internally generated funds as indicated by the adverse current and debt service coverage ratios. 22. Two factors could help TCCCL to get an earlier stream of profits. These are: firstly, a further portion of long-term debt as well as the additional borrowings necessary to finance losses are converted into equity and/or obtain further equity contributions from the present shareholders and/or from new shareholders to reduce the interest cost burden; and secondly, if high quality cement is able to attract a higher price in the market, TCCCL could cover all its actual costs as well as yield an adequate profit margin for more profitable operations in the future. 23. TCCCL has started to put in place a MIS. Its full establishment needs to be expedited, particularly to get quickly the data necessary for product costing and marketing as well as financial information. In the absence of one, the mission found it difficult to obtain the necessary information for a detailed analysis of its financial position. NSPCLC Component (IBRD Loan of $8.0 Million) 24. NSPCLC completed trial production in October 1996 and commenced commercial operations in January 1997 with a designed capacity to produce 700,000 tons of cement per year. Since it is a new plant, its labor force is only 190 (compared to 330 projected at appraisal) and it has no social obligations to meet. However, as in the case of the other two lplants, it also encountered delays in project implementation. A part of the delay was caused by the need to provide a new wharf, as the one belonging to the Ports Authority could not meet their requirement contrary to what was originally expected. Due to these reasons, the project cost increased from Y 140.4 million at Bank appraisal to Y 421.8 million (including Y 90 million for the new wharf) in May 1998. However, the increased  - 37 - ANNEX A project cost was financed mainly by additional equity (increased from Y 40 million expected at appraisal to Y 150 million in May 1998). The additional equity came mainly from the Anhui Conch Co. Thus, the present debt/equity ratio is about 64:36 as against 67:33 estimated at appraisal. The increased project cost brings the depreciation cost of cement to Y 27/ton, lower than the other two as NSPCLC is only a clinker grinding station and therefore did not have to incur high capital costs like the other two. The loan interest cost comes to Y 44/ton of cement. 25. In 1997, NSPCLC produced 180,000 tons of cement (26 percent of capacity). Based on actual production during the first 4 months of 1998 (110,000 tons), they expect to produce 600,000 tons (85 percent of capacity) in 1998 and increasing to 700,000 tons (100 percent capacity) in 1999 and thereafter. 26. According to the financial projections prepared based on the above capacity utilization, NSPCLC would be making losses of Y 40.28 million in 1997 and gradually decreasing to a loss of Y 5.47 million in year 2001. Thereafter, it would make a profit of Y .06 million in year 2002 and increasing to a profit of Y 3.58 million in year 2007 and thereafter. The financial projections take into account the increased cost of production of cement resulting from the increased project cost. Like the other two plants, NSPCLC is also facing the similar problem of having to compete with the selling price of Y 280 set by the small cement plants. In 1997, NSPC]LC's manufacturing cost came to Y 317 per ton (including a clinker price of Y 256 per ton) to which the other costs in relation to management, finance, sales, depreciation and tax need to be added and the resulting total cost is much above the current market price of Y 280 per ton of cement as determined by the small plants. One of the major reasons for NSPCLC high manufacturing cost is the arrangement it has to buy clinker at a predetermined and relatively high price from TCCCL. The mission discussed this arrangement with NSPCLC who explained that even if they were contractually free to buy clinker on the open market at a lower price, this would not be a feasible option at the moment as they lack the necessary liquidity to pay cash. TCCCL who also has ownership links with NSPCLC, currently provides them with supplier credit for this clinker, the price of which is expected to drop to Y 222 per ton in 1998. The situation in 1998 and thereafter should be slightly better with greater capacity utilization and the reduced clinker price. 27. NSPCLC would meet the debt to equity ratio but not the current and debt service coverage ratios. The current ratio would not be complied with during the foreseeable future. It worsens from 0.75 in 1998 to 0.16 in 2004 and improves slightly to 0.50 in 2007. The adverse current-ratio is as a result of the large short-term borrowings to finance the recurrent losses and to repay long-term debt. Due to the heavy debt service burden, the debt service coverage ratio would not be met in the foreseeable future. It would range between 0.2 and 0.4 during 1998 to 2007. NSPCLC's current assets are insufficient to discharge its current liabilities and it would also not be able to meet its debt service obligations, including on the Bank loans, through internally generated funds as indicated by the adverse current and debt service coverage ratios.  -38 - ANNEX A 28. In order to improve the financial position, NSPCLC would also need to convert the existing debt and the additional debt arising from the need to finance the losses into equity and/or obtain additional equity contributions from the present shareholders and/or new shareholders. NSPCLC also needs to put in place, as soon as possible, a management infornation system (MIS). This will facilitate the collection of data required to intensify its sales and marketing efforts as well as financial information required for its capital restructuring efforts. The mission's work was handicapped in its absence. Technical Assistance Component (IBRD Loan of $3.6 Million) 29. As per the Memorandum of Understanding signed between SABMI and the Bank mission on May 8, 1996, all agreed goods and service have been procured and the Bank's objectives in assisting them with their finance have been fully met. The details are outlined below: (a) TCIDI has fully utilized the Bank loan of $1,246,000 for import of equipment ($1,236,000), staff training ($6,800), and foreign experts visiting China ($3,200). Two technical staff were trained at ABB, Switzerland. The computer and network systems financed by the loan have been useful to expand the development work and services to the cement industry. The development work done so far relates to creation of software for flood control in cement plants and use of the imported x-ray fluorescence apparatus for manufacture of color cement. Both these items are now being used by the cement industry. Further work underway in developing a MIS and an engineering database is expected to be completed in the course of 1998. The equipment financed by the Bank loan has also helped them to increase the services being provided to the cement industry by way of raw material analysis (quality of coal and limestone) and improving designs of cement plants for greater efficiency in energy consumption, pollution control and manufacture of more efficient cement plants (100,000 tpy and above). The impact of a greater usage of their services would lead to the establishment of a more efficient and viable cement industry in the country. (b) CBMA has fully utilized the Bank loan of $402,080 for import of equipment ($182,851), research and service ($180,091) and staff training ($39,138). It started commercial manufacturing of the mobile load scale developed under the project. These conform to international standards and are now being used by about 30 users in 15 provinces. In order to further promote their usage, CBMA is now developing a low cost and more affordable version of it for the Chinese market. CBMA agreed with the mission to finalize testing of this low cost version by the end of 1999 and begin marketing of it on a commercial basis by year 2000. The impact of a greater spread of bulk cement transport would be a reduction in the use of paper bags for cement transport as well as a reduction in pollution caused by their disposal. (c) NCIDI has fully utilized the Bank loan of $910,000 for import of equipment ($863,000), foreign training of staff in Switzerland and Sweden ($43,500) and foreign personnel visiting China ($3,500). The equipment is now in full operation and has greatly enhanced NCIDrs  -39- ANNEX A capability for research, analysis, design and provision of technical services. At present, about 10 cement plants are using its technical services. As to the future, it has initiated research for developing two important projects: (i) using a lower grade of coal as fuel for cement plants, for the first time in China, which will save fuel costs by about 40 percent and enable the use of the vast quantities of the lower grade coal available in the south and east parts of China as fuel for cement plants in these parts of the country (currently, coal for these cement plants are being transported from a distance of about 2,000 km); and (ii) improving the operation of shaft-kiln-based plants by designing a new machine for raw material processing which will increase production capacity and product quality and decrease fuel consumption and pollution of these plants. (d) HCIDI has fully utilized the Bank loan of $718,780 for import of equipment ($677,950), training of staff in the USA, Hong Kong and Japan ($37,320) and foreign experts visiting China ($3,510). This project has greatly enhanced its research and design capability as well as the technical skills of staff. The imported equipment has assisted HCIDI to undertake research to improve the performance of vertical and roller mills and to produce high quality casting material for rotary kilns. About 200 customers are now using its analysis, research and design services. It expects to increase its services to about 300 customers in the near future. 30. Small Cement Plants (SCPs) Study. This study was undertaken by HCIDI to address the issue of economic efficiency and pollution relating to a majority of the country's SCPs. After a long delay, the study has now been completed and a copy of the draft report was given to the mission in the field. The final report will be given to the Bank by 15 June 1998 after finalizing the comrments of Austro Plan, the consultants, on the recommendations being made in the draft report. It appears that the delay was largely due to a shortage of counterpart funding with ]HCIDI, which prevented them from working on the study on a full-time basis. The recommendations of the draft report relate, inter alia to: (a) shut down, before the year 2000, the very small SCPs (those below 2.0 meters in diameter) which cannot be renovated; (b) allow elimination through market forces of those SCPs less than 2.5 meters in diameter which produce poor quality cement and cannot attract customers; (c) renovate, on a selective basis, those SCPs which are comparatively larger in size and in better condition; (d) shut down shaft kilns and convert them into grinding stations to whom clinker can be given from other factories for grinding purposes;  -40 - ANNEX A (e) restructure the cement industry (large shaft kilns in good condition should be renovated; limit set up of new shaft kilns and limit their expansion; shut down those enterprises without business licenses; and small rotary kilns be made to produce special cements like white cement); (f) government to introduce regulations to force enterprises to produce cement meeting international standards; and (g) government to make institutional arrangements to facilitate implementation of these recommendations. 31. The mission is aware that the government is currently engaged in formulating a policy/regulatory framework for the cement industry. The recommendations being made in the SCP Study would be helpful in this regard. In particular, the early establishment of a higher quality standard for cement equivalent to the international standard will be helpful to encourage all cement producers (small, medium and large and both shaft and rotary kilns) to produce good quality cement in the country. Such a higher standard will create a level playing field for all cement producers to compete equally for market share based on quality of cement. Operational Plan and Performance Targets 32. The operational plan of the project needs to focus on work-out options which would improve the operational efficiency and relieve the debt servicing burden faced by the cement companies, particularly ZCC. Infusion of new equity capital or the conversion of debt into equity could be important elements in a financial restructuring, but these actions should be pegged to strict performance benchmarks that the companies are required to meet in order to "qualify" for ongoing support. The need for strictly enforcing performance goals, or other conditionally should also apply to proposals to reschedule debt to assist the companies, such as placing much of the short-term debt and other creditors debt, on a long-term basis (while keeping the debt/equity ratio within the Bank covenanted limit) in order to bring the current ratio within the Bank covenanted limit. Such arrangements would enable TCCCL, NSPCLC and ZCC to discharge their current liabilities from current assets and service their debt from internally generated funds. 33. The financial difficulties facing the plants, and the need for restructuring, were discussed in detail with the management of each of the plants and with SABMI, who are all very aware of the problems and the urgent need to find solutions thereto. Each plant is actively investigating options to address these problems, such as ZCC efforts to establish a joint venture with an investor from Hong Kong. However, because of the complexity of the issues that need to be considered, and the large number of parties that would need to be involved in any proposed restructuring (including the local governments in the different municipalities and provinces) it was not practical for the mission to reach a specific action plan with SABMI at this stage. It was however agreed that SABMI and the cement plants will continue to actively pursue the various options for financial restructuring and work  -41- ANNEX A towards the implementation of a workable solution. Significant developments in this regard will be reported to the World Bank. 34. On a more general level, the three cement plants need to take steps to improve their overall competitiveness through reducing costs, strengthening their marketing and sales activities and improving efficiency. In particular, it was agreed that the three cement plants i.e. ZCC, TCCCL and NSPCLC will work towards qualifying for ISO 9002 by December 31, 2000. This would ensure that they continue to produce a good quality clinker/cement and maintain the highest standards of efficiency in terms of operations and management. 35. In respect to the four cement research and design institutes it was agreed that they would achieve the following performance indicators by December 31, 2000; 36. TCIDI income from their services of raw material analysis and improving designs of cement plants for greater efficiency in energy consumption, pollution control and manufacture of more efficient cement plants are expected to double from Yuan 60 million in 1997 to about Yuan 120 million in year 2000. 37. CBMA indicated that, in year 2000, at least 10 percent to 15 percent of bulk cement transport will be using their low cost version of the mobile load scale for transporting bulk cement. 38. NCIDI will complete the research work and begin commercial marketing of the use of the lower grade of coal as fuel for cement plants by year 2000. 39. By year 2000, HCIDI will commercialize the use of coal in powder form as fuel for cement plants which will save the amount of coal usage by about 15-20 percent. 40. It was also agreed that the final report of the study on small cement plants conducted by HCIDI would be submitted to the Bank latest by June 15, 1998. Otherwise, it will be considered by the Bank as noncompliance of one of the key components of the Bank loan.  -42- ANNEX B ANNEX B: BORROWER'S CONTRIBUTION TO THE ICR A. Introduction China Regional Cement Project (CRCP) aiming at upgrading the overall quality of China's cement industry, adjusting and improving its structure as a whole utilizes proceedings of the World Bank loan. Since the beginning of project implementation until to date, China's cement industry has achieved remarkable progresses and project implementation has also made good results. Today, when we review every stage of implementation, we found out that a lot of useful results and experiences are worthwhile being summed up. We believe that the experiences gained through project implementation can be beneficial not only to ongoing development of China's cement industry, but for the Bank's future financing operations as well. B. Evaluation of Implementation Results of CREP Through efforts of all entities of subprojects and thanks to the organization and coordination made by the World Bank Project Management Office (PMO) of State Administration of Building Materials Industry (SABMI), performances of all subprojects are generally good. The subprojets include construction of a preheater/precalciner cement production line with 2000 T/D daily clinker capacity in Zhongguo Cement Plant (ZCP), building up a preheater/precalciner cement production line with 400 T/D daily clinker capacity in Tongling Conch Cement Co. and a cement grinding station with 600,000 T/Y annual clinker grinding capacity in Ningbo, procurement of instrumentation, equipment and technologies aiming at upgrading existing research and design institutes, submission of small scale cement plants study report in which evaluation on both economic viability of and environment impacts by China's small scale cement plants has been made. With finalization of all subprojets, the total volume of high grade cement has increased which leads to higher proportion of cement produced by large and medium scale cement plants, less environmental pollution and energy consumption and more employment opportunities as well. One significant feature is that technical levels of some cement plants have been upgraded to reach international standards of early 1990's. During project implementation, Ningbo Cement Plant (NCP) had been merged into Anhui Conch Group, and the Conch has also made another acquisition of subproject Tongling Cement Plant (TCP). The company restructuring realizes not only a rational allocation of resources which can not be come into true under the planning economy, but in conform to the Bank's original concept when it firstly designed the project as well. Besides instrumentation and equipment through procurement made by the Bank's loan have enabled existing basic lab facilities well equipped and facilitated cement research and design institutes to do engineering from experience-oriented to lab experiment-oriented which in turn have promoted research and development on new production process and equipment for the cement industry. Through a comprehensive survey and analyses on  - 43 - ANNEX B current situations, detailed measures on small-scale cement plants restructuring have been put forward which will be taken as references for relevant Chinese authorities when they make decisions on development and restructuring of the cement industry. C. Evaluation on Experiences As borrower, in order to well implement the China Regional Cement Project, SABMI set up a special World Bank Project Management Office (PMO) which was responsible for project monitoring, supervision and overall coordination. Each subproject entities also set up special units headed by leaders in charge. In addition to quarterly reporting to SABMI's PMO, the subproject entities were also sought guidance from PMO whenever they encountered specific issues and problems. Therefore, smoothly completion of the project was achieved. Advanced cement production equipment and technologies have introduced under the Bank's financing. Gradually developing and partial application of Management & Information System (MIS) which is suggested by the Bank have let cement plants be fully aware of how important MIS means to their management and survival which is helpful to realize standardized management and production efficiency improvement. It is very important to carry out in-depth market study and survey for analyzing both hardware parts and software parts of proposed equipment and technologies you are going to purchase and ensuring that you get the best price vs. performances ratio as long as you are ready to make procurement. Before you make final selections among different offers the advancement of equipment is not the only thing you have to consider, after-sales services of equipment suppliers are also priority. Meanwhile due attention on staff training must be made. With importation of advanced equipment and technologies, employees' quality has been improved greatly and overall technical levels of institutes and plants have also been upgraded. Since the key equipment from foreign equipment suppliers were mainly procured by the Bank's loan, while the Bank needed longer time to evaluate and approve, the longer evaluation period affected the delivery of domestic final drawings for project construction which further caused delays for the whole project. Since Bank's timetable had to be kept, we had to adopt the way of making final drawings while the construction was under way. In case of major design changes, it would be a big trouble for on-site construction management. Due to prolonged project preparation and construction, the project, in most cases, missed booming market and encountered troubles such as high inflation, overrun of capital investment costs, and increase of production costs which led to making losses after the project was put into production. Due to complicated formalities and procedures for project documents submission, project approval, the Bank's loan disbursement and taxation, it takes much time particularly for overseas training.  -44 - ANNEXB D. Evaluation on the Role of the Bank The Bank has taken an active role in promotion of China's cement industry development and improvement of its technical levels in the aspects of scientific research, design and production process through loan financing. The objectives and designs of the World Bank project are suitable and practical to the development of China's cement industry. From the point of view of the final result of the project implementation, the objectives and designs of the project are successful. From the project appraisal until implementation, the bank has been very helpful and given many good suggestions. Enthusiasm and conscientiousness shown by individual Bank officials and consultants have left us deep impressions. During the project implementation, site inspections on progresses made by all subprojects twice a year adopted by the Bank is very effective. During the inspections, overall project progresses were reviewed and good suggestions on project implementation were also given by the Bank. Generally speaking, the Bank's primary roles of project monitoring, inspections and end-user friendly services are doing well.  - 45 - ANNEX C ANNEX C: BORROWER'S COMMENTS ON ICR MSINISTRY OF FINANCE San Li He Lu, Beijing 100820 Peoples Republic of China Tel: 6855-1551 Fax: 6851-6072 Date: June 25, 1998 To: Mr. Hoon Mok Chung, Sector Manager, Private Sector Development Unit, East Asia and Pacific Region Fax: 001-202-522-3454 CC: Mr. Yukon Huang, Director, China Cotmtiy Unit, RMC Fax: 6554-1686 Ms. Amanda S. Carlier, Task Manager. Fax: 001-202-522-3454 Ms. Shenhua Wang, Acting Sector Coordinator. RMC Fax: 6554-1686 From: Liang Ziqian, Chief, Energy, Transport and Industry Division. World Bank Department, MOF Fax: 6851-6072 Subject: ICR of China Regional Cement Industrv Project (Loan-3443-CHA) Dear Mr. Chung, We have reviewed the draft ICR of the captioned project prepared by the Bank. We would like to give you the following comments: 1. We agree to the basic project implementation assessments shown in Paragraph 14, 15 and 16 of the Evaluation Summary, and Summary of Assessments in Table I of the Part II. 2. With regard to the lessons to be learned from this project given in Paragraph 18 of the Evaluation Sumnuary, we suggest the following lesson be included in: For those industrial projects vulnerable to the market, potential risk factors should be taken into full account by the Bank at the appraisal stage. In this case, increased project cost and borrowing and the competitive cement market are major risk factors affecting the performance of the project. These risk factors should have been picked up and appropriate measures should have been taken during appraisal period. 3. In Paragraph 24 of the Part I, the last sentence "The Bank's overall performance, has been deficient for project appraisal and satisfactory for supervision." is inconsistent with the description in Paragraph 14 of the Evaluation Summary. It should be corrected in accordance with the Paragraph 14. With best regards, Yours Sincerely, L . o,z cia. =n=,y, Transpor, and tndustry Div. ':o!d' Bairc Do-: ._ MO F  -46- ANNEX C Comments on Implementation Completion Report (ICR) (China: Regional Cement Industry Project, Loan 3443-CIIA) The World Bank Resident Mission: We have received and reviewed the draft ICR of the captioned project prepared by the Bank. We would like to present you our comments as follows: 1. There was no pre-consultation before the written Aide Memoire of the Bank mission was delivered to the Planning and Development Department of the State Administration of Building Materials Industry. 2. The delay of the Small Scale Cement Plants Study mentioned in the report can not be attributed to the State Administration of Building Materials Industry. In fact, the Adlministration had been actively pushing the conclusion of the report, though we encountered practical difficulties which had invited negative influence. 3. In the ICR, it indicated that "Due to the uncertain situation facing to the implementing of the recommendations of the Small Scale Cement Plants Study... This task is considered unsatisfactory". SAMBI, in years, has always dedicated itself to readjustment of the cement production structure. One of its targets is to increase the share of cement produced by rotary kilns. We have promoted the policy of "encouraging the big and restructuring the small". As a matter of fact, in recent years, we have gained significant achievements in the cement production mix thanks to the impact of the Small Scale Cement Plants Study. Planning and Development Department State Administration of Building Materials Industry (Official Seal) Date: June 25, 1998 Sent out after approval of Mr. Zhang, Director of Planning and Development Department, SAMBI -- Ming Xiaodong.  47 - ANNEX D ANNEX D: PROJECTED FINANCIAL STATEMENTS This annex presents summary financial statements for ATCC, NCC, and ZCC for the period 1998 through 2007. The three companies completed trial production by the end of 1996 and commenced commercial production in January 1997. Full capacity utilization is expected by the years 1998 for ATCC, 1999 for NCC, and 2000 for ZCC. Er post facto evaluation of the project shows that the companies' financial management practices are still evolving. At the time of ICR preparation, the companies possessed limited financial management and reporting systems for commercial operation. The financial statements below present projections prepared by the Borrower during the ICR process. The statements reflect existing financial management practices which are expected to improve substantially during the operating period.  -48 - ANNEX D TABLE 1: PROJECTED FINANCIAL STATEMENTS FOR ATCC /a (in constant Yuan million) 1998 1999 2000 2001 2002 2003 2004 205 2006 2007 Profit and Loss Statenent lb Gross Sales 280.34 317.95 317.95 317.95 317.95 317.95 317.95 317.95 317.95 317.95 Sale; Taxes 3.22 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 Variable Costs 145.90 164.90 164.90 164.90 164.90 164.90 164.90 164.90 164.90 164.90 Management Expenses 21.09 21.09 21.09 21.09 21.09 21.09 21.09 21.09 21.09 21.09 Selling Costs 27.64 27.64 27.64 27.64 27.64 27.64 27.64 27.64 27.64 27.64 Financial Expenses 86.87 83.25 72.48 60.61 47.72 31.11 18.26 15.27 12.20 9.13 Fixed Cost (Depreciation) 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 Total Profits -81.86 -60.07 -49.30 -37.43 -24.54 -7.93 4.92 7.91 10.98 14.05 Incorne Tax - -- - - - - 1.62 2.61 3.62 4.64 Net Profit -81.86 -60.07 -49.30 -37.43 -24.54 -7.93 3.30 5.30 7.36 9.41 Balance Sheet /b Assf Cash 6.56 62.73 42.88 14.13 9.04 0.79 0.71 7.64 6.30 9f80 Receivables 37.45 37.45 37.45 37.45 4.81 17.45 3.00 7.45 17.45 22.90 Inventories 51.84 51.84 51.84 51.84 51.84 14.68 27.30 17.30 27.30 51.84 Other Cunrent Assets 20.72 20.72 20.72 20.72 20.72 1.00 0.00 0.00 10.00 20.72 Total Current Assets 116.57 172.74 152.89 124.14 86.41 33.92 31.01 32.39 61.05 105.26 GrossFixedAssets 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 1,148.12 Less Depreciation 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 77.48 NetFixedAssets 1,403.64 1,326.16 1,248.68 1,171.20 1,093.72 1,016.24 938.76 861.28 783.80 706.32 rotal Assets 1,520.21 1,498.90 1,401.57 1,295.34 1,180.13 1,050.16 969.77 893.67 844.85 811.58 Uiablites and Equity Accounts Payable 24.08 24.08 24.08 24.08 24.08 44.08 74.08 34.08 24.08 24.08 Short Term Loan 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 Other Liabilties 24.95 24.95 24.95 24.95 24.95 24.95 24.95 24.95 24.95 24.95 Current PortionofLong-term Debt 43.10 148.10 118.10 128.10 161.18 127.02 38.10 38.10 38.10 38.10 TotalCurrentLiabilities 162.13 227.13 237.13 247.13 280.21 260.65 207.13 167.13 157.13 157.13 World Bank Loan 398.98 360.88 322.78 284.68 246.58 208.48 170.38 132.28 91.40 56.08 Domestic Credits 452.00 382.00 302.00 212.00 88.92 0n00 0.00 0.00 0.00 o.o Other Long-term Debt 23.96 23.96 23.96 23.96 23.96 23.96 23.96 23.96 23.96 23.96 Total Long-term Debt 874.94 766.84 648.74 520.64 359.46 232.44 194.34 156.24 115.36 80.04 Total Share Caphal 565.00 565.00 565.00 565.00 565.00 565.00 565.00 565.00 565.00 565.00 Retained Eamings -81.86 -60.07 -49.30 -37.43 -24.54 -7.93 3.30 5.30 7.36 941 Total Equity 483.14 504.93 515.70 527.57 540.46 557.07 568.30 570.30 572.33 574.41 rotal Uabilities and Equity 1,520.21 1,498.90 1,401.57 1,295.34 1,180.13 1,050.16 969.77 893.67 844.85 811.58 RatIos Capacity Utilization (%) Ic 108 125 125 125 125 125 125 125 125 125 NetPrordtMargin(%) -29.2 -18.9 -15.5 -11.8 -7.7 -2.5 1.0 1.6 2.3 2.9 Debt Sevice Cover 0.63 0.52 0.53 0.53 0.48 0.64 1.76 1.84 1.93 2.03 Cuffent Ratio 0.07 0.06 0.06 005 0.03 0.01 0.01 0.02 0.04' 0.07 Lon-term Debt/Equity 64:36 60:40 56:44 50:50 40:60 :29:71. 25:75 21:79 17:83 12:88 ow0: Borrwower estimates. hWtes: jL Reflects revised projections prepared during the ICR process. j2 Production began in 1997; full operation is assumed from January 1998. Financial projections were prepared by the Bonower and reflect local accounting practices. h With adjustments to machinery, ATCC expects to attain more than 100% capacity.  -49- ANNEX D TABLE 2: PROJECTED FINANCIAL STATEMENTS FOR NCC /a (in constant Yuan million) 1998 1999 2000 2001 2002 2003 2004 2008 2006 2007 Profit and Loss Statement lb Production Capacity (thousand tons) 600 700 700 700 700 700 700 700 700 700 Prce per ton (excl. tax) 280 295 300 300 300 300 300 300 300 300 Gross Sales 168.00 206.50 210.00 210.00 210.00 210.00 210.00 210.00 210.00 210.00 Variable Cost 152.80 177.96 177.96 177.96 177.96 177.96 177.96 177.96 177.96 177.96 Gross Profit 15.46 28.54 32.04 32.04 32.04 32.04 32.04 32.04 32.04 32.04 Financial Expense (Local) 17.40 16.97 15.53 10.55 5.71 2.85 2.50 2.50 2.50 2.50 Financial Expense (Foreign) 3.93 3.50 3.06 262.00 2.10 1.75 1.31 0.87 0.44 0.06 Management Expenses 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 Selling Costs 1.80 1.50 1.20 1.20 1.00 1.00 1.00 1.00 1.00 1.00 Depreciation 9.57 19.13 19.13 19.13 19.13 19.13 19.13 19.13 19.13 19.13 Income Tax - -- - 0.03 1.09 1.35 1.50 1.65 1.76 Net Profit -21.23 -16.36 -10.88 -5.47 0.63 2.22 2.75 3.04 3.35 3.58 Balance Sheet /b Assets Cash 11.00 5.80 5.60 5.00 5.00 2.00 5.00 8.00 15.00 30.00 Receivables 11.00 8.00 7.00 5.00 5.00 5.00 6.00 6.00 8.00 10.00 Inventories 32.00 30.00 25.00 14.00 18.00 11.00 12.50 25.00 32.00 32.00 OtherCurrentAssets 2.61 0.57 0.38 1.02 0.62 0.40 0.19 0.60 0.58 3.11 Total Current Assets 56.61 44.37 37.98 25.02 28.62 18.40 23.69 39.60 55.58 75.11 Gross Fixed Assets 378.03 378.03 378.03 378.03 378.03 378.03 378.03 378.03 378.03 378.03 Less Depreciation 9.57 19.13 19.13 19.13 19.13 19.13 19.13 19.13 19.13 19.13 Net Fixed Assets 368.46 349.32 330.20 311.07 281.94 262.80 243.67 224.54 205.41 186.28 Total Assets 425.07 393.68 368.18 336.09 310.56 281.21 267.37 264.14 260.99 261.39 Liabilities and Equity Accounts Payable 82.00 93.60 93.60 93.60 93.60 93.60 93.60 93.60 93.60 93.60 Short Term Loan --- -- - 20.00 40.00 60.00 50.00 50.00 50.00 50.00 Other Liabilities 3.00 3.00 5.00 5.00 5.03 6.09 6.13 6.49 6.63 6.76 Long-term Debt --- --- -- -- --- -- --- -- - - Total Current Liabilities 85.00 96.60 98.60 118.60 138.63 159.69 149.73 150.09 150.23 150.36 World Bank Loan 56.30 49.68 43.06 36.43 29.81 23.18 16.56 9.94 3.31 - Domestic Credds 155.00 135.00 125.00 85.00 46.00 -- -- -- - - Other Long-term Debt - -- --- --- - - --- - - - Total Long-term Debt 211.30 184.68 168.06 121.43 75.81 23.18 16.56 9.94 3.31 - Share Capital 150.00 150.00 150.00 150.00 150.00 150.00 150.00 150.00 150.00 150.00 Retained Eamings -21.23 -37.59 -48.47 -53.94 -53.88 -51.67 -48.92 -45.88 -42.56 -38.97 Total Equity 128.77 112.41 1D1.53 96.06 96.12 98.33 101.08 104.12 107.44 111.03 Total Liabilities and Equity 425.07 393.68 358.18 336.09 310.56 281.21 267.37 264.14 260.99 261.39 Ratios CapacityUtilization(%) 85 100 100 100 100 100 100 100 100 100 Net Profit Margin (%) 9.2 13.8 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3 Debt Service Cover 0.28 0.29 0.30 0.45 0.38 0.28 0.36 0.43 0.43 0.45 Current Ratio 0.75 0.46 0.39 0.21 0.21 0.12 0.16 0.26 0.37 0.50 Long-term Debt/Equity 62:38 62:38 52:38 56:44 44:56 19:81 14:86 8:92 3:97 Source: Borrower estimates. Notes: /a Reflects actual results for 1997 and revised projections for future years, prepared during the ICR process. /b Production began in 1997; full operation is assumed from January 1998. Financial projections were prepared by the Borrower and reflect local accounting practices.  - 50- ANNEX D TABLE 3: PROJECTED FINANCIAL STATEMENTS FOR ZCC ia (in constant Yuan million) 1998 1999 2000 2001 2002 2003 2004 2006 2006 2007 Profit and Loss Staternent lb Gross Sales 196.00 222.00 244.00 244.00 244.00 244.00 244.00 244.00 244.00 244.W0 Sales Tax 1.76 2.00 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 Vanable Costs 142.00 162.00 178.00 178.00 178.00 178.00 178.00 178.00 178.00 178.00 FixedCosts 115.00 115.00 115.00 115.00 115.00 115.00 115.00 115.00 115.00 115.00 Net Non-Operating Expenses - --- - - - --- --- - - - Nlet Incorne -62.00 -57.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 Funds Flow Staterment /b Sources Retained Eamings -62.00 -57.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 -51.00 Depreciation 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 World 3ank Loan Domestic Credits Total Sources of Funds 23.00 28.00 34.00 34.00 34.00 34.00 34.00 34.00 34.00 34.00 Uses Project Working Capital Loan World Bank Loan Repayment 21.00 21.00 21.00 21.00 21.00 21.00 21.00 21.00 21.00 2.00 Other Loan Repayment 85.00 60.00 55.00 65.00 55.00 70.00 35.00 60.00 1.30 Total Uses of Funds 106.00 81.00 76.00 86.00 76.00 91.00 56.00 81.00 22.30 2.00 Net Cash Flow -83.00 -53.00 -42.00 -52.00 -42.10 -57.00 -22.00 -47.00 12.00 32.00 Ending Cash -83.00 -136.00 -178.00 -230.00 -272.00 -329.00 -351.00 -398.00 -386.00 -354.00 Balance Sheet j Assets Cash on Hand 4.32 4.32 4.32 4.32 4.32 4.32 4.32 4.32 4.32 4.32 Receivables 56.75 56.75 56.75 56.75 56.75 56.75 56.75 56.75 56.75 56.75 Total Inventories 30.70 30.70 30.70 30.70 30.70 30.70 30.70 30.70 30.70 30.70 OtherCurrentAssets 26.16 26.16 26.16 26.16 26.16 26.16 26.16 26.16 26.16 26.16 Total Current Assets 117.93 117.93 117.93 117.93 117.93 117.93 117.93 117.93 117.93 117.93 Gross Fixed Assets 514.43 514.43 514.43 514.43 514.43 514.43 514.43 514.43 514.43 514.43 Less Depreciation 92.20 92.20 92.20 92.20 92.20 92.20 92.20 92.20 92.20 92.20 Net Fixed Assets 422.23 422.23 422.23 422.23 422.23 422.23 422.23 422.23 422.23 422.23 2000/D Enginering Project 735.80 735.80 735.80 735.80 735.80 735.80 735.80 735.80 735.80 735.80 Total Assets 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 Liabilfties and Equity Accounts Payable 28.07 28.07 28.07 28.07 28.07 28.07 28.07 28.07 28.07 28.07 Short-term Loans 106.55 163.55 214.55 265.55 316.55 367.55 418.55 469.55 520.55 571.65 Other Liabilities 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 Current Portion of Long-term Debt Total Cuffent Liabilities 181.19 238.19 289.19 340.19 391.19 442.19 493.19 544.19 595.19 646.19 World Bank Long-term Debt 182.20 182.20 182.20 182.20 182.20 182.20 182.20 182.20 182.20 182.20 Domestic Credits 486.30 486.30 486.30 486.30 486.30 486.30 486.30 486.30 486.30 486.30 Total Liabilites 849.69 906.69 957.69 1,008.69 1,059.69 1,110.69 1,161.69 1,212.69 1,263.69 1,314.69 Total Equity 426.27 .- 369.27 318.27 267.27 216.27 165.27 114.27 63.27 12.27 -38.73 Total Liabilffles and Equity 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 1,275.96 Ratios CapacRlyUtilization(%) 75 90 100 100 100 100 100 100 100 100 Net Profit Margin (%) -31.6 -25.7 -20.9 -20.9 -20.9 -20.9 -20.9 -20.9 -20.9 -20.9 Debt Service Cover Negative Negative Negative Negative Negative Negative Negative Negative Negative Negative Currerrt Ratio 0.65 0.50 0.41 0.35 0.30 0.27 0.24 0.22 0.20 0.18 Long-Term Debt/Equity 57:43 57:43 56:44 55:45 53:47 48:52 46:54 21:79 14:86 - Source. Borrower estimates. Notes: /a Reflects revised projections prepared during the ICR process. tb Production began in 1997; full operation is assumed from January 1998. Financial projections were prepared by the Borrower and reflect local accounting practices.