Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: PAD2772
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN
IN THE AMOUNT OF EURO 160.5 MILLION
Public Disclosure Authorized (US$ 180 MILLION EQUIVALENT)
TO THE
PEOPLE'S REPUBLIC OF CHINA
FOR A
GANSU REVITALIZATION AND INNOVATION PROJECT
May 13, 2019 Public Disclosure Authorized
Social, Urban, Rural And Resilience Global Practice East Asia And Pacific Region
Public Disclosure Authorized 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.
The World Bank
CURRENCY EQUIVALENTS
(Exchange Rate Effective January 28, 2019)
Currency Unit = Renminbi (RMB)
US$1.00 = RMB 6.871
US$1.00 = EURO 0.892
FISCAL YEAR January 1–December 31
Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager: Abhas K. Jha Task Team Leader: Ahmed A. R. Eiweida
The World Bank
ABBREVIATIONS AND ACRONYMS
BCR Benefit-Cost Ratio BoG Bank of Gansu CFPA MF China Foundation for Poverty Alleviation – Microfinance Management Co., Ltd CNTA China National Tourism Agency CPS Country Partnership Strategy CQS Consultant’s Qualifications DA Designated Account DFIL Disbursement and Financial Information Letter EA Environmental Assessment EAP East Asia and Pacific ECA Europe and Central Asia ECOP Environmental Code of Practices EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EMDF Ethnic Minority Development Framework EMDP Ethnic Minority Development Plan EMP Environmental Management Plan EOI Expression of Interest ESMF Environment and Social Management Framework FCI Global Practice of Finance, Competitiveness, and Innovation FI Financial Intermediary FIRR Financial Internal Rate of Return FM Financial Management FMM Financial Management Manual FSR Feasibility Study Report GCTD Gansu Cultural and Tourism Department GDP Gross Domestic Product GFGG Gansu Finance Guarantee Group GFHG Gansu Finance Holding Group GPAO Gansu Provincial Audit Office GRM Grievance Redress Mechanism GRS Grievance Redress Service IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IFC International Finance Corporation IFR Interim Financial Report IRR Internal Rate of Return LAC Latin America and the Caribbean LoC Line of Credit M&E Monitoring and Evaluation MCC Microcredit Company MENA Middle East and North Africa MFD Maximizing Financing for Development The World Bank
MSEs Micro- and Small Enterprises MOF Ministry of Finance MVSEs Micro- and Very Small Enterprises NCB National Competitive Bidding NDRC National Development and Reform Commission NPV Net Present Value O&M Operation and Maintenance OP Operational Policy PAP Project-Affected Person PCR Physical Cultural Resource PDO Project Development Objective PFD Provincial Finance Department (Gansu) PFI Participating Financial Institution PIP Project Implementation Plan PIU Project Implementation Unit PLG Project Leading Group PMC Project Management Company PMO Project Management Office PP Procurement Plan PPMO Provincial Project Management Office PPP Public-Private Partnership PPSD Project Procurement Strategy for Development PSC Provincial Steering Committee RAP Resettlement Action Plan RF Results Framework RPF Resettlement Policy Framework SA Social Assessment SIA Social Impact Assessment SMEs Small and Medium Enterprises SOE State-Owned Enterprise SORT System Operations Risk-Rating Tool STEP Systematic Tracking of Exchanges in Procurement SURR Global Practice of Social, Urban, Rural, and Resilience TA Technical Assistance TORs Terms of Reference UCCN UNESCO Creative Cities Network UNESCO United Nations Educational, Scientific and Cultural Organization UNWTO World Tourism Organization WB World Bank WBG World Bank Group WTA World Tourism Alliance (China-based organization) WTP Willingness to Pay The World Bank Gansu Revitalization and Innovation Project (GRIP) (P158215)
TABLE OF CONTENTS
DATASHEET ...... 1 1. STRATEGIC CONTEXT ...... 9 A. Country Context...... 9 B. Sectoral and Institutional Context ...... 9 C. Relevance to Higher-Level Objectives ...... 11 2. PROJECT DESCRIPTION ...... 13 A. Project Development Objective ...... 14 B. Project Components ...... 14 C. Project Beneficiaries ...... 17 D. Results Chain ...... 18 E. Rationale for Bank Involvement and Role of Partners ...... 18 F. Lessons Learned and Reflected in the Project Design ...... 19 3. IMPLEMENTATION ARRANGEMENTS ...... 21 A. Institutional and Implementation Arrangements ...... 21 B. Results Monitoring and Evaluation Arrangements...... 21 C. Sustainability ...... 22 4. PROJECT APPRAISAL SUMMARY ...... 22 A. Technical, Economic, and Financial Analysis ...... 22 B. Fiduciary ...... 24 C. Safeguards ...... 29 D. Readiness for Implementation ...... 31 5. KEY RISKS ...... 32 ANNEX 1: Implementation Arrangements and Support Plan ...... 48 ANNEX 2: Project Design Analysis ...... 57 ANNEX 3: Economic and Financing Analysis ...... 86 ANNEX 4: Map ...... 91
The World Bank Gansu Revitalization and Innovation Project (GRIP) (P158215)
DATASHEET
BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name
China Gansu Revitalization and Innovation Project
Project ID Financing Instrument Environmental Assessment Category
Investment Project P158215 A-Full Assessment Financing
Financing & Implementation Modalities
[ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC)
[ ] Series of Projects (SOP) [ ] Fragile State(s)
[ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s)
[✓] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster
[ ] Alternate Procurement Arrangements (APA)
Expected Approval Date Expected Closing Date
04-Jun-2019 30-Jun-2025
Bank/IFC Collaboration Joint Level
Yes Complementary or Interdependent project requiring active coordination
Proposed Development Objective(s)
The project development objectives are to increase income-generating opportunities, improve access to infrastructure and services, and strengthen institutional capacity of participating entities.
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Components
Component Name Cost (US$, millions)
Component 1: Increased Access to Financial Services for MSEs 50.00
Component 2: Urban-Rural Regeneration 114.00
Component 3: Institutional Strengthening and Global Knowledge Transfer 16.00
Organizations
Borrower: People's Republic of China Implementing Agency: Gansu Provincial Department of Culture and Tourism Gansu Financing Holding Group
PROJECT FINANCING DATA (US$, Millions)
SUMMARY-NewFin1
Total Project Cost 312.63
Total Financing 312.63
of which IBRD/IDA 180.00
Financing Gap 0.00
DETAILS-NewFinEnh1
World Bank Group Financing
International Bank for Reconstruction and Development (IBRD) 180.00
Non-World Bank Group Financing
Counterpart Funding 132.63
Borrowing Country's Fin. Intermediary/ies 100.00
Municipalities of Borrowing Country 32.63
Expected Disbursements (in US$, Millions)
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WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025
Annual 0.94 16.40 26.44 36.15 36.11 33.15 30.82
Cumulative 0.94 17.34 43.78 79.92 116.03 149.18 180.00
INSTITUTIONAL DATA
Practice Area (Lead) Contributing Practice Areas Social, Urban, Rural and Resilience Global Environment & Natural Resources, Finance, Competitiveness Practice and Innovation
Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks
Gender Tag
Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or Yes men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes
SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)
Risk Category Rating
1. Political and Governance Low
2. Macroeconomic Moderate
3. Sector Strategies and Policies Moderate
4. Technical Design of Project or Program Moderate
5. Institutional Capacity for Implementation and Sustainability Substantial
6. Fiduciary Substantial
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7. Environment and Social Substantial
8. Stakeholders Substantial
9. Other Low
10. Overall Substantial
COMPLIANCE
Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No
Does the project require any waivers of Bank policies? [ ] Yes [✓] No
Safeguard Policies Triggered by the Project Yes No
Environmental Assessment OP/BP 4.01 ✔
Performance Standards for Private Sector Activities OP/BP 4.03 ✔
Natural Habitats OP/BP 4.04 ✔
Forests OP/BP 4.36 ✔
Pest Management OP 4.09 ✔
Physical Cultural Resources OP/BP 4.11 ✔
Indigenous Peoples OP/BP 4.10 ✔
Involuntary Resettlement OP/BP 4.12 ✔
Safety of Dams OP/BP 4.37 ✔
Projects on International Waterways OP/BP 7.50 ✔
Projects in Disputed Areas OP/BP 7.60 ✔
Legal Covenants
Sections and Description Institutional Arrangements (Provincial level) Project Agreement, Schedule, Section I.A.1 (a): For the purpose of carrying out the project, the Project
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Implementing Entity shall maintain, and cause to be maintained throughout the implementation of the Project, the following entities with composition, powers, functions, terms of reference, staffing, facilities and other resources acceptable to the Bank. At the provincial level: (i) The Project Leading Agency, chaired by the Project Implementing Entity’s Executive Vice Governor, to be responsible for ensuring leadership of the Project, providing overall policy, financial, institutional and strategic guidance on Project implementation and facilitating coordination among different implementing agencies within its jurisdiction; (ii) the Provincial Department of Culture and Tourism of the Project Implementing Entity is designated as the Provincial Project Management Office (“Culture and Tourism PPMO”). The Culture and Tourism PPMO shall be responsible for the implementation, coordination, reporting, management and monitoring and evaluation of the activities under Parts 2 and 3 of the Project, as well as the preparation of the consolidated Annual Work Plans and Budgets and Project Reports with inputs provided by GFHG with respect to Part 1 of the Project; (iii) Gansu Financial Holding Group Company Limited (GFHG) is designated as: (A) the Provincial Project Management Office (“Line of Credit PPMO”) responsible for the implementation, coordination, reporting, management and monitoring and evaluation of the activities under Part 1 of the Project, including the provision of the inputs related to Part 1 of the project to the Culture and Tourism PPMO for the preparation by the Culture and Tourism PPMO of the consolidated Annual Work Plans and Budgets and Project Reports; (B) on-lend the funds allocated from time to time to Category (1) to the Participating Financial Institutions (“PFIs”); and (C) bears the foreign exchange risk for the use of the funds allocated from time to time to Category (1).
Institutional Arrangements (Local level): Project Agreement, Schedule, Section I.A.1 (b): For the purpose of carrying out the project, the Project Implementing Entity shall maintain, and cause to be maintained throughout the implementation of the Project, the following entities with composition, powers, functions, terms of reference, staffing, facilities and other resources acceptable to the Bank. At the local level: (i) Local level leading groups (each a “Local Leading Group”), which have been designated in each prefecture or municipality within which Project activities will be implemented, in each case, chaired by the Executive Vice Mayor, to ensure effective implementation of Project activities within their respective jurisdiction; and (ii) Eight Project Implementation Units (each a “PIU”), which have been designated in each city, county or district within which Project activities will be implemented (Qin’an county, Maiji district, and Wushan county in Tianshui municipality, Lintao and Tongwei counties in Dingxi municipality, Ganzhou district in Zhangye municipality, Dunhuang city and Jiuquan city). Each PIU shall be responsible for the implementation of such Project activities, including carrying out procurement, coordinating with other entities in the implementation arrangement, preparing annual work plans and budgets, as well as progress and financial reports related to the Project activities within its respective jurisdiction, for submission to the Culture and Tourism PPMO for consolidation and onward submission to the Borrower and the Bank.
Sections and Description Contractual Arrangements (On-lending Agreement) Project Agreement, Schedule, Section I.B.1(a): (i) For the purposes of carrying out Part 1 of the project, the Project Implementing Entity shall make the proceeds of Loan A available to GFHG as a loan (the “On-Lending Loan A”) under an agreement between the Project Implementing Entity and GFHG (the “On-Lending Agreement”), under terms and conditions approved by the Bank. (ii) The Project Implementing Entity shall exercise its rights under the On-Lending Agreement in such manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of Loan A. Except as the Bank shall otherwise agree, the Project Implementing Entity shall not assign, amend, abrogate or waive the On-Lending Agreement or any of its provisions.
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Contractual Arrangements (Subsidiary Agreement) Project Agreement, Schedule, Section I.B.1(b): (i) For the purposes of carrying out Part 1 of the project, the Project Implementing Entity shall cause GFHG to make the proceeds of the On-Lending Loan A available to the PFIs, as a loan (each a "Subsidiary Loan") under an agreement between GFHG and the PFIs (each a "Subsidiary Agreement"). (ii) The Project Implementing Entity shall cause GFHG to exercise its rights under the Subsidiary Agreement in such manner as to protect the interests of the Project Implementing Entity and the Bank and to accomplish the purposes of Loan A. Except as the Bank shall otherwise agree, the Project Implementing Entity shall ensure that GFHG shall not assign, amend, abrogate or waive the Subsidiary Agreement or any of its provisions. (iii) For the purposes of carrying out Part 1 of the Project, the Project Implementing Entity shall cause GFHG to cause the PFIs to allocate from their own resources an amount agreed with the Project Implementing Entity and the Bank to the co-financing of Sub-loans (the "Co-financing").
Sections and Description Contractual Arrangements (Sub-loan Agreements) Project Agreement, Schedule, Section I.B.1(c): (i) For the purposes of carrying out Part 1 of the project, the Project Implementing Entity shall cause GFHG to cause the PFIs to use the proceeds of the Subsidiary Loan, as well as the Co-financing, to extend Sub-loans to Eligible Beneficiaries in accordance with eligibility criteria and procedures acceptable to the Bank and specified further in the Loan A – Operations Manual. (ii) The Project Implementing Entity shall cause GFHG to cause the PFIs to make each Sub-loan under an agreement (each a "Sub–loan Agreement") with the respective Eligible Beneficiary, in each case on terms and conditions approved by the Bank, which shall include the terms and conditions listed in Attachment 1 to the Schedule to the Project Agreement. (iii) The Project Implementing Entity shall cause GFHG to cause the PFIs to exercise its rights under each Sub-loan Agreement in such manner as to protect the interests of the Project Implementing Entity and the Bank and to accomplish the purposes of Loan A. The PFIs shall not assign, amend, abrogate or waive any Sub-loan Agreement or any of its provisions, which, in the opinion of the Bank, will adversely affect the implementation of the Sub-project and the achievement of the objectives thereof. (iv) The Project Implementing Entity shall ensure, and shall cause GFHG to ensure, that any repayment of the Sub-loans received by the PFIs after the Closing Date (if any) shall be used by the PFIs exclusively to support the access of MSEs in the culture, tourism and creative industry in the Gansu Province to the credit market.
Sections and Description Annual Work Plans and Budgets Project Agreement, Schedule, Section I.D.1: With inputs from the PIUs, the PFIs and the PPMOs, the Project Implementing Entity shall: (a) prepare and furnish to the Bank by November 1 in each year, beginning in 2019, a draft Annual Work Plan and Budget for review and comment, summarizing the implementation progress of the project for the said year and the Project activities to be undertaken in the following calendar year (together with documentary evidence that the safeguard obligations related to such upcoming project activities shall be fully complied with in a timely fashion in accordance with the Safeguard Instruments), including the proposed annual budget and sources of financing for the project; (b) taking into account the Bank's comments, finalize and furnish to the Bank no later than December 1 in each year, beginning in 2019, the Annual Work Plan and Budget, acceptable to the Bank; and (c) thereafter ensure the implementation of the Project during the following calendar year in accordance with the Annual Work Plan and Budget agreed with the Bank and in a manner acceptable to the Bank. The Project Implementing Entity shall not amend, suspend, abrogate, or waive said Annual Work Plans and Budgets or any provision thereof without the prior written agreement of the Bank.
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Sections and Description Contractual Arrangements (Procurement Agency) Project Agreement, Schedule, Section I.2 (c) (i): The Project Implementing Entity shall recruit, no later than August 30, 2019, and thereafter maintain throughout the implementation of the project, one (1) procurement agency, on the basis of terms of reference, qualifications and experience satisfactory to the Bank.
Contractual Arrangements (Project Management Consulting Firm) Project Agreement, Schedule, Section I.2 (c) (ii): The Project Implementing Entity shall recruit, no later than December 31, 2019, and thereafter maintain throughout the implementation of the Project, a project management consulting firm, on the basis of terms of reference, qualifications and experience satisfactory to the Bank; and
Contractual Arrangements (Design Institutes) Project Agreement, Schedule, Section I.2 (c) (iii): The Project Implementing Entity shall recruit, no later than December 31, 2019, and thereafter maintain throughout the implementation of the project, one (1) or more design institutes, as needed, each to act as architectural and engineering design firm, on the basis of terms of reference, qualifications and experience satisfactory to the Bank.
Contractual Arrangements (Consulting team for safeguards management) Project Agreement, Schedule, Section I.2 (d): The Project Implementing Entity shall recruit, no later than December 31, 2019, and thereafter maintain as needed, throughout the implementation of the project, one (1) consulting team to provide support in safeguard management, on the basis of terms of reference, qualifications and experience satisfactory to the Bank.
Sections and Description Safeguards Project Agreement, Schedule, Section I.C: The Project Implementing Entity shall cause the PIUs, and shall cause GFHG to cause the PFIs, to: (i) implement, the Project in accordance with the Safeguards Instruments, in a manner and substance acceptable to the Bank; and (ii) ensure that (1) all the bidding documents and contracts include the obligation of the relevant contractors and subcontractors to: (a) adopt and implement measures to assess and manage the risks and impacts of labor influx; and (b) adopt and enforce codes of conduct that should be provided to and signed by all workers; as applicable to such civil works commissioned or carried out pursuant to said contracts; (2) each contract for works under the project includes the obligations of the contractors and any sub- contractor to comply with the relevant provisions of the Safeguards Instruments, as the case may be; (3) all studies and technical assistance to be supported under the project are carried out under terms of reference acceptable to the Bank, and that such terms of reference are consistent with, and pay due attention to, the Bank's Safeguards Policies; (4) maintain policies and procedures adequate to enable them to monitor and evaluate, in accordance with guidelines acceptable to the Bank, the implementation of the Safeguards Instruments; and (5) take all measures necessary on their part to regularly collect, compile and submit to the Bank, as part of the Project Reports, and promptly in a separate report whenever the circumstances warrant or the Bank requests, information on the status of compliance with the Safeguards Instruments.
Sections and Description Loan B - Project Implementation Plan Project Agreement, Schedule, Section I.B.2: Throughout the implementation of the project, the Project Implementing Entity shall, and shall cause the PPMOs, the PIUs and the PFIs to, apply the Loan B - Project
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Implementation Plan in a timely and efficient manner acceptable to the Bank. The Project Implementing Entity shall, and shall cause the PPMOs, the PIUs and the PFIs to, not amend, suspend, or waive said Loan B - Project Implementation Plan or any provision or schedule thereof, without the prior written agreement of the Bank. In the event of any inconsistency between the provisions of the Loan B - Project Implementation Plan and those of the Loan Agreement or this Agreement, the provisions of the Loan Agreement and this Agreement shall prevail, in that order of priority.
Sections and Description Mid-term Review Project Agreement, Schedule, Section II.2: The Project Implementing Entity shall prepare, under terms of reference acceptable to the Bank, and furnish to the Bank, no later than December 31, 2021, a consolidated mid-term review report for the project, summarizing the results of the monitoring and evaluation activities carried out from the inception of the project, and setting out the measures recommended to ensure the efficient completion of the project and to further the objectives thereof.
Sections and Description Other Undertakings Project Agreement, Schedule, Section III: The Project Implementing Entity shall ensure that GFHG shall, no later than June 30, 2020, make a new equity investment in GFGC, using its own resources, in an amount equivalent to not less than fifty million Dollars (US$50,000,000) as paid-in capital allowing GFGC to extend guarantees of the risk of payment default by enterprises engaged in culture, tourism and creative industries in Gansu in favor of financing institutions lending to such enterprises.
Conditions
Type Description Disbursement Conditions (disbursement) Loan Agreement, Schedule 2, Section III.B.1(b): No withdrawal shall be made under Category (1) until the On-lending Agreement has been entered into between the Project Implementing Entity and GFHG in accordance with the provisions of Section I.B.1(a) of the Schedule to the Project Agreement and a Subsidiary Agreement has been entered into between GFHG and at least one PFI in accordance with Section I.B.1(b) of the Schedule to the Project Agreement.
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1. STRATEGIC CONTEXT
A. Country Context
1. China’s historic rapid growth over the past forty years has resulted in a poverty decline unprecedented in its speed and scale. Rapid growth was made possible by a wide range of reforms, which transformed a state-dominated, planned, rural, and closed economy to a more market-based, urbanized, and open one. Real per capita income increased sixteen times between 1978 and 2017. More than 850 million people lifted themselves out of poverty.
2. China has now entered a new stage of its development, a needed transition to a more balanced and sustainable growth. China’s old growth model, based on resource-intensive manufacturing, exports, and cheap labor, has largely reached its limits and has led to economic, social, and environmental imbalances. China is now undergoing a major economic transformation, shifting to a new growth model that is slower but more balanced and based on services, consumption, innovation, and private sector participation. The shift toward a more sustainable economic structure is already underway; services now likely account for most employment in China, given their high share in informal jobs.
3. Despite China’s economic and social gains, inequality and disparities remain a challenge. As of 2015, about 10 million Chinese still lived below the international poverty line of US$1.90 a day. With reference to higher international poverty lines, a relatively large number of people continued to live in moderate poverty and were vulnerable to poverty shocks. There were 95.5 million people below the “lower middle income” poverty line of US$3.20 a day (in terms of purchasing power parity) and 373.1 million people below the “upper middle income” line of US$5.50 a day. Most important is the need to address inequality, which is relatively high, with a Gini coefficient of 0.46 in 2015.
4. Geography explains much of the inequality in China. Several studies indicate that disparities between urban and rural areas represent the largest share of total inequality. Unequal access to infrastructure and municipal services, which is associated with rural-urban disparity, is a significant contributor to overall inequality. Disparities between coastal and inland provinces are also high. Substantial state-led investments in the interior provinces have reduced the income gap in recent years but at the cost of capital misallocation, which is increasingly evident. The challenge to create sustainable income opportunities in the interior provinces thus remains.
5. The proposed project, part of a joint program with the International Finance Corporation (IFC), focuses on Gansu Province—the poorest province in China. The project will support towns and villages in Gansu in leveraging their human, cultural, and historical endowments to boost private sector growth and economic development, especially by supporting micro and small enterprises (MSEs) through financing and access to reliable infrastructure that enable them to tap into the growing service sector.
B. Sectoral and Institutional Context
6. Gansu Province exemplifies the challenge of spatial inequality in China. Despite Gansu’s rich natural, cultural, and historical resources, it is China’s poorest province and significantly lags other provinces on most
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economic and social indicators. Gansu’s per capita income is less than half the national average and a mere 23 percent of that in leading provinces. Measured by per capita disposable income and access to and quality of infrastructure, Gansu also ranks last among all the provinces. About 65 percent of Gansu’s population belongs to the national bottom 40 percent group, compared with only 9.21 percent of Beijing’s population. Agricultural development alone has proved inadequate to lift Gansu’s poor out of poverty. The once-powerful heavy industries are declining. The province is turning to the service sectors to drive its economic growth but so far has had only limited success. Uneven development and significant disparities exist within Gansu Province— there are also striking disparities between rural and urban areas, and a wide gap between the capital city, Lanzhou, and secondary cities and towns.
7. MSEs in rural areas across China face a critical challenge in gaining access to credit. According to the 2017 China Financial Inclusion Report and the 2017 Global Findex,1 about 86 percent of micro-enterprises and 65 percent of small and medium enterprises in China lack unconstrained access to finance, resulting in an MSE financing gap of US$1.9 trillion, equivalent to 17 percent of gross domestic product (GDP). Access to formal credit in China’s rural areas is only about 19 percent, compared to 44 percent in urban areas. The main barriers to access are the large physical distances to financial service providers, such as banks; limited credit records; lack of assets that can serve as collateral; short maturity of loans (12 months or less); and the informal nature of many MSEs, all of which render these businesses unable to meet banks’ lending requirements. Prospective borrowers in rural areas and small towns also lack basic financial knowledge and business experience. For those eligible to borrow, going through cumbersome procedures and waiting through a lengthy approval period is discouraging. Many MSEs turn to family and friends rather than rely on the formal financial sector. In Gansu Province, these barriers are exacerbated by underdeveloped financial markets and institutions.
8. Gansu is one of the most underbanked provinces in China. As of 2016, Gansu, with a population of 26 million, had only about 470,000 MSEs. According to a market demand assessment survey of MSEs in the cultural, tourism, and creative industries conducted in the province in 2018 to underpin this project’s design, 80.2 percent indicated immediate or mid-term needs for financing. Only 23.8 percent of them, however, had borrowed from banks, among which less than 7 percent of the borrowers were women, while 49.3 percent had their financing needs satisfied through informal channels, such as loans from relatives or friends. About 54 percent of the MSEs surveyed felt credit constrained. Among the MSEs in debt, about 30 percent revealed that bank loans obtained could not fully meet their financing needs, with an average credit gap of RMB 894,000. Although women-owned or managed MSEs only accounted for about 30 percent of the MSEs that participated in the survey, their immediate financing needs were greater than those of MSEs owned by men.
9. Financial institutions in Gansu lack the skills, methodologies, and tailored products to serve MSEs well. Operational costs of small and micro-loans are very high, and profitability is low. Internet penetration in rural areas and small towns is far lower than in big cities, which hinders the use of automated credit evaluation and approval based on big data. According to the market demand survey, the demand for credit by MSEs in Gansu concentrates on small but flexible loans, but current micro- and small-credit products are not diverse enough. To deal with MSEs profitably, financial institutions need to build capacity to use new approaches and develop new products.
10. Tourism is one of the four pillars of Gansu’s poverty alleviation program. Known as the “golden section” of the ancient Silk Road, Gansu is ranked fifth among all provinces in China in terms of the richness
1 World Bank, Global Findex database, 2018
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and uniqueness of its natural, cultural, and historical resources.2 Globally, and in Gansu, the creative industries sector is growing, and it contributes increasingly to GDP and job creation, employing more people between the ages of 18 and 29 than any other sector.3 The creative industries are defined as those which produce and distribute goods, services, or activities with intangible cultural content that conveys ideas, symbols, and ways of life, irrespective of their commercial value.4 Among Gansu’s prefecture-level cities, too, the more dominant the tourism industry, the smaller the gap in income relative to the national average.5 As a result of past investments by the government in tangible cultural and natural endowments, the number of tourists visiting Gansu each year increased from 43 million in 2010 to 239 million in 2017. Gansu’s revenues from tourism have also increased but are not yet commensurate with the increase in the number of visitors. Moreover, tourism remains concentrated in the big cities and, hence, does not yet contribute to reducing regional disparities.
11. Despite the potential of its natural, cultural and historical endowments, Gansu’s institutional capacity for managing and promoting them is poor. Strategies, policies, and mechanisms to guide the development of the service sector, especially the cultural, tourism, and creative industries, are still weak. The provincial government is starting to gain experience in working with the private sector to leverage resources and manage public assets. These pilot experiences are important, as many municipal governments are unable to operate and maintain public facilities and services at many important attraction sites, which are, consequently, deteriorating.
12. The lack of adequate infrastructure is one constraint holding back the creative industries in Gansu. Most products of the creative industries in Gansu are traditional arts and crafts, such as Chinese calligraphy, ink painting, jade carving, folk performance, and puppet show production and presentation. Knowledge of and skills for generating these creative products are passed on from one generation to another through the teaching and mentoring of apprentices by masters. Many masters and their workshops are located in decaying towns and villages that lack basic infrastructure. The dilapidation of these areas not only makes the younger generation reluctant to live in them and learn the skills, but it also limits their attractiveness to tourists. Many businesses in the creative industries are micro to small in size and often family based. Their business skills are insufficient, and they lack easy access to finance. Finally, lack of physical spaces, such as training facilities, business incubators, production centers, and marketplaces, limits the modernization and scaling up of creative industries.
C. Relevance to Higher-Level Objectives
13. The proposed project is consistent with the strategic themes of the World Bank Group’s Country Partnership Strategy (CPS) for China, discussed by the World Bank Board of Executive Directors in November 2012, and with the Performance and Learning Review, discussed by the Board in February 2016. The project’s main contribution is to CPS strategic theme 2, promoting more inclusive development, by using MSE credits and related infrastructure investments to catalyze private sector development and improve “last mile”
2 Gansu’s rich tourism and cultural resources are illustrated by several travel guidebooks. See for instance,
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The World Bank Gansu Revitalization and Innovation Project (P158215)
connectivity in poor areas. A new Country Partnership Framework (CPF), which is expected to be presented to the Board in early fiscal year 2020, will reflect a reorientation to a more strategic and selective World Bank Group engagement, consistent with China’s 19th Party Congress priorities and with the WBG capital package policy commitments. As part of the preparation process for the new CPF, the WBG country team and Chinese authorities jointly reviewed the lending pipeline and removed projects that did not sufficiently align with the capital increase policy commitments, which emphasize “strengthening policies and institutions required for sustainable IBRD graduation.” The proposed project was maintained in the lending pipeline because it will help strengthen institutions and private sector development in China’s poorest province.
14. The proposed project strengthens institutions and private sector development in China’s poorest province. The project will enhance the capacity of selected local commercial banks and newly set-up government financial institutions to better serve MSEs’ growth. It will enhance the capacity of the local governments to provide business-enabling environments and strengthen the capacity of participating MSEs through startup advisory services to ensure business success and sustainability. The project intends to assist the least-developed province of China in mobilizing private sector financing and solutions for growth, easing financial pressure on the local governments, and reserving scarce public finance for vital needs.
15. The project provides a global model of how small towns along major infrastructure networks can leverage their existing local endowments to benefit from, and contribute to, economic growth. The project will bring in global, national, and local financial resources for the creation of a sustainable credit market to support MSE development in Gansu and to narrowing the gender gap of in access to finance. The project will demonstrate how pockets of poverty can be reduced through vital improvements to local infrastructure, and by enabling MSEs to connect to the growing service economy. Provinces across China with similar challenges, as well as other developing countries, will learn through knowledge transfer on how to address such challenges effectively.
16. The project contributes to reducing gender gaps. Currently, less than 7 percent of small loans in Gansu are to female entrepreneurs. The project has a minimum target of 10-14 percent of its micro- and small credits going to female borrowers. The project will have a special focus on women for business startup advisory services and workforce development. The project will reach out to prospective women entrepreneurs and provide targeted trainings on such topics as preparing a business plan and understanding the market and the application process to gain access to finance.
17. The project supports global public goods. Several project activities are designed to reduce risks from extreme weather events, especially flooding. This includes regulating water abstraction, protecting wastewater infrastructure from increased flooding, dredging rivers, and engaging in greening activities. On the mitigation side, project activities aim to reduce emissions by incorporating green design standards into new buildings and infrastructure; supporting non-motorized transportation; reducing heat loss in regenerated buildings; and installing more energy-efficient facilities, equipment, appliances, and street lights. Project investments will result in a significant parentage of climate co-benefits (Annex 2, Table 2.8), subject to verification by the Climate Co-Benefits Assessment Team of the Climate Change Group.
18. The project supports China’s national policy priorities. It supports the 13th National Five-Year Plan (2016–20), the Development-Oriented Poverty Reduction Program for China’s Rural Areas (2011–20), and the Views on Promoting Rural Poverty Alleviation through Innovative Mechanism. The project is also aligned with
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the solutions for reducing poverty and stimulating local economy proposed in the Development-Oriented Poverty Reduction Program for China’s Rural Areas (2011–20). These include (a) expansion of the existing system of geographical poverty targeting national/provincial poverty counties and adoption of a broader regional development approach for investments; (b) investment by rural businesses in economic activities of comparative advantage in the poorest areas, conducive to environmental rehabilitation; (c) rural tourism; and (d) the complementary roles of the public and private sectors. This project is also in line with Gansu’s provincial strategies and programs for economic and social development, poverty alleviation, and development and promotion of the service sector including tourism and creative industries.
2. PROJECT DESCRIPTION
19. The project aims to create employment and improve livelihoods for lower-income urban and rural residents in Gansu. It comprises three components: (i) providing increased access to financial services for MSEs in the cultural, tourism, and creative industries; (ii) urban-rural regeneration by targeted interventions in infrastructure and public services and support for the local creative industries; and (iii) institution building and transfer of knowledge globally.
20. The project will help build institutions and capacity for Gansu’s development. Building on the success of completed and ongoing World Bank-supported projects in the province and on key lessons learned, as well as the Bank’s accumulated knowledge of and expertise in leveraging competitive cities6 and urban regeneration for economic growth and job creation, 7 the project will focus on strengthening the capacity of Gansu’s institutions for economic and social development. It will take an integrated approach to creating economic opportunities for the poor and vulnerable through the regeneration of urban and rural settlements, bringing about essential improvements to local infrastructure, enabling MSEs to connect to the growing service economy, leveraging Gansu’s rich cultural and historical assets, and addressing underlying institutional and market weaknesses.
21. The project focuses explicitly on learning and global knowledge transfer, as well as building replicable development models. The borrower has brought along international partners, such as the United Nations Educational, Scientific and Cultural Organization (UNESCO), the United Nations World Tourism Organization (UNWTO), and the China-supported World Tourism Alliance (WTA), to benefit from their experience in capacity building and their well-established global networks. The project will seek to develop models for other countries with similar endowments of creative industries and tourism that face difficulties in translating them into growth opportunities. It will support the establishment of a Gansu cultural and tourism knowledge hub, using existing underutilized facilities in Dunhuang Expo and Lanzhou to help share Gansu’s experience nationally and globally. The project will also co-sponsor, with the provincial government, the well- established Annual Gansu Silk Road (Dunhuang) Expo to bring in and disseminate knowledge.
22. Project areas have been strategically selected on the basis of poverty levels, bottom 40 percent population, and underutilized endowments. Among all the fourteen prefectures in Gansu, specific counties,
6 World Bank, Competitive Cities for Jobs and Growth, 2015,
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districts and towns in four prefectures along the Xi’an-Urumqi east-west corridor (the ancient Silk Road route) have been strategically selected to benefit from the project, based on the results of an economic geography and competitive cities analysis. These prefectures are Tianshui, Dingxi, Zhangye, and Jiuquan. The selection criteria used were (a) poverty level and size of the bottom 40 percent of the population (that is, the portion of the population with per capita disposable income below the national poverty line and the national 40 percentile); (b) transformation from agriculture or manufacturing to a service-based economy; (c) having underutilized endowments with high potential for local economic development; (d) location (that is, located along or connected to Gansu’s main tourism routes); and (e) not having previously received sufficient funds under various government and donor development programs to implement their development plans. Data reveal the extent to which counties, districts and towns of the project’s prefectures lag compared to leading cities in China. Project counties, districts and towns where large investments are made have an average per capita GDP of RMB 21,000 which is significantly below the national average of RMB 59,660, and only a fraction of the per capita GDP in Beijing (RMB 118,198) or Shanghai (RMB 116,562). Similar trends exist for per capita household disposable income. Most project counties have high poverty rates. For example, Tongwei county has a poverty rate as high as 17.61 percent in comparison with the national average of 2.19 percent. Poverty rates in Tianshui and Dingxi prefectures, where most project investments are made, stand at 9.80 percent, and 14.30 respectively (see poverty date in Annex 2, Figure 2.7 and Table 2.1).
A. Project Development Objective
23. PDO Statement. The project development objectives are to increase income-generating opportunities, improve access to infrastructure and services, and strengthen the institutional capacity of participating entities.
24. PDO Level Indicators. These indicators include the following:
Number of new jobs created by project-supported MSEs and new centers and facilities (disaggregated by the national bottom 40 percent and gender) Amount of co-financing leveraged by the Participating Financial Institutions (PFIs) Number of people benefiting from urban-rural regeneration, including improved access to infrastructure and services in the project areas (disaggregated by the national bottom 40 percent and gender) Number of PFIs that have completed and executed their institutional development plans with the project’s support Number of integrated cultural and tourism strategies adopted and budgeted for in provincial and local plans Citizen engagement—percentage of beneficiaries satisfied with project results (disaggregated by gender)
B. Project Components
25. Component 1: Increased Access to Financial Services for MSEs (total investment: US$150 million; IBRD: US$50 million equivalent; participating financial institutions (PFIs): US$100 million equivalent). This component supports private sector development through the provision of financing for new or existing MSEs engaged in the cultural, tourism, and creative industries. The component also seeks to support the creation of a sustainable credit market for MSEs by demonstrating the financial viability of the cultural, tourism, and creative sectors and by supporting the recently established provincial holding company to serve as a wholesale vehicle
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for meeting the demands of the underbanked segments in Gansu and for spurring financial innovation.
26. IBRD financing will be on-lent to the Gansu Finance Holding Group (GFHG). Established in 2016, GFHG is the wholesale financial intermediary and the provincial project management office (PPMO) for this component. Through a subsidiary agreement, GFHG will extend to PFIs a line of credit to co-finance sub-loans to eligible MSEs in the cultural, tourism, or creative industries in Gansu Province. At this time, Bank of Gansu (BoG) has been qualified and selected as the first PFI after meeting compliance indicators with regulatory requirements reflective of capital adequacy and asset quality and following a call for expressions of interest.8 An allocation of US$25 million is committed to BoG, which leveraged US$50 million from BoG. The remaining IBRD unallocated amount (US$25 million) will be used to partner with additional PFIs through subsequent expressions of interest using transparent selection criteria (Annex 1, Table 1.1). Success with the first PFI in terms of sub-loans co-financing is expected to generate interest among subsequent qualified PFIs, with the expectation that co-financing of MSE sub-loans would reach at a minimum ratio of 1 (IBRD):2 (PFI). GFHG will support interested PFIs through outreach and technical assistance and may contribute its own funds in subsequent rounds of allocations.
27. To ensure financing along the whole value chain, 40 percent of the financing under this component (that is, US$60 million equivalent) will be targeted toward the micro sector with a single credit limit of US$50,000. The remaining financing under the component will provide credits to small enterprises, with most credits around US$120,000. The component will increase the tenor of the average maturity for the MSE sector from the present one year to two years, corresponding to the need for longer-term financing identified in the market demand survey. A minimum of 40 percent of the component will finance interventions in project areas of Tianshui, Dingxi, Zhangye, and Jiuquan, while the remaining 60 percent may be used to finance enterprises in other prefectures of Gansu. The component is expected to create a minimum of 3,300 permanent jobs (40– 50 percent for women) in newly established and growing MSEs. In addition, a minimum of 10 percent of the financing is targeted toward women borrowers. Currently, less than 7 percent of small loans in Gansu are to female entrepreneurs (see gender gap analysis in Annex 2). To ensure sustainability, capacity building for GFHG and selected PFIs, as well as business startup advisory services for MSEs, will be provided under component 3.
28. In parallel, IFC will provide a senior loan of US$50 million equivalent, with additional syndicated loans, to expand lending by the China Foundation for Poverty Alleviation–Microfinance Management Co., Ltd (CFPA MF) to micro and very small enterprises (MVSEs). IFC aims to expand CFPA MF’s lending to women- owned/managed MVSEs in rural area in Gansu, and to support the growth of the tourism and service sector in Gansu. Working with CFPA MF, IFC will be targeting the micro and very small spectrum of the value chain with loan sizes ranging from below US$5,000 for micro-loans and below US$15,000 for very small-loans. Thus, collectively, the World Bank Group will cover the full range of enterprises that have expressed a need for credit.
8 According to OP10 due diligence carried out by the IBRD team, BoG is a commercial bank, established with the China Banking Regulatory Commission’s approval on September 27, 2011. BoG provides commercial banking services and products in the ordinary and usual course of business in China. It was successfully listed in January 2018 on the Hong Kong Stock Exchange (located in Hong Kong SAR, China) and has 202 outlets throughout Gansu. The principal lines of business include lending to large corporates, followed by retail clients. It is looking to focus more on the MSE sector and expand its distribution network. BoG’s total assets amounted to RMB 271.2 billion in 2017, representing a year-to-year increase of 10.6 percent. The selection of BoG under this project followed an expression of interest (EOI) exercise conducted in 2017. EOIs were sent to eight financial institutions (see details in Annex 2). Although the potential PFIs expressed interest in financing MSEs, a combination of needing to co-finance and lack of comfort with financing MSEs led to the selection of BoG for a first phase of implementation; BoG committed to contributing up to US$100 million, with US$50 million for the first round of credit.
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29. Also, in parallel, GFHG plans to invest US$50 million as paid-in capital. GFGC will use this investment to back up guarantees to be extended to financial institutions lending to MSEs, against the risk of payment default of such MSEs, up to an estimated amount equivalent to US$200 million. Technical assistance to GFHG under the project will help build its capacity to administer a credit guarantee facility, which may, over time, contribute significantly to improving financial access to MSEs and sustain project impact beyond the closing date.
30. Component 2: Urban-Rural Regeneration (IBRD: US$114 million equivalent). This component will make critical investments in small- and medium-scale infrastructure in project areas that will improve living conditions for residents and enable the creation of more income-generating opportunities in creative industries. One focus of the component is on the regeneration of urban areas and villages with cultural endowments. Another is to expand the cultural, tourism, and creative industries by constructing exhibition sites, spaces for MSE incubation and training, and creating marketplaces. The two sub-components will benefit local residents and visitors and create income-generating opportunities (Annex 2 provides details about the component).
(a) Regeneration of Historic Towns and Villages. The project will finance physical regeneration, including improved access to infrastructure and services and restoration of old houses and buildings, in four towns and nine villages located in four counties in Gansu. Each town or village is characterized by a distinct cultural or creative industry specialty, such as jade carving, calligraphy and ink painting, colored pottery, lacquerware, sculptures, or folk performance. Physical regeneration, together with the enablement of economic opportunities for MSE development provided under component 1, will stimulate social and economic regeneration of local communities and leverage private investments.
(b) Development of Creative Industries. The project will develop the creative industries in Gansu and provide clustered and conducive spaces for production, research, presentation, sales, and exchange of knowledge and experience. Based on market demand analysis and the comparative advantages of Gansu Province and project counties and towns, this subcomponent will finance the development of eight creative industry centers (including incubators and marketplaces) and three tourism facilities, including tourist information centers; physical and virtual display of the ancient Silk Road history, cultural, and creative industries; display and sales of cultural and creative products; and performance space for shows by local performers, using modern technologies.
31. Component 2 is expected to create 2,205 permanent jobs (40–50 percent of which will be for women) in newly constructed centers and facilities. All new centers and facilities will be connected to regenerated towns and villages by pedestrian pathways to enable visitors to engage with local cultures and experience the variety of performing arts, handicrafts, cuisines, and interpretations of local traditions. This, in turn, is expected to result in more tourism spending on local communities, as visitors buy handicrafts, dine, or stay overnight in homestays. All centers and facilities will be designed to use energy-efficient equipment and devices to reduce energy consumption and thus reduce operating cost. They will be leased out to professional operators to ensure sustainability of operation and maintenance (O&M) and generation of net revenues to local governments (Annex 1, Table 1.2 and Annex 2, Table 2.8).
32. Component 3: Institutional Strengthening and Global Knowledge Transfer (IBRD: US$16.0 million equivalent). This component aims to strengthen the institutional capacity in Gansu to manage economic and
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social development, using cultural, tourism, and creative industries as a pillar for inclusive and sustainable economic growth and poverty alleviation. It includes the following activities:
(a) Completion of studies and the development of sustainable site management plans, improved policies and regulations, marketing strategies, and Gansu branding and promotion activities. This will strengthen the capacity of local governments and the recently merged provincial Department of Culture and Tourism for better planning, policies, and regulations.
(b) Provision of technical assistance, trainings, and business advisory services to communities, MSEs, participating financial institutions, and local and provincial officials. This will build the institutional capacity of GFHG and PFIs, support the creation of a sustainable credit market for MSEs, and provide incentive for private sector investments. It will also provide technical assistance (TA) to GFGC on global good practice in executing and managing guarantees (see Annex 2, Box 2.1, on value added of IBRD support to strengthen capacity of GFHG and PFIs). Community outreach and the provision of business startup advisory services to prospective borrowers, especially women, will help them prepare business plans, apply for credits, and support their businesses during the startup phase so they do not fail.9
(c) Provision of support for project management and implementation. This will include compliance with environmental, social, and fiduciary obligations, design institutes, project management, construction supervision, and monitoring and evaluation of the project impacts.
d) dissemination of Gansu culture and tourism knowledge globally. Gansu’s experience in tourism, cultural, and creative industry development, including under this project, will be curated and shared with other countries with similar development challenges. Existing Dunhuang Expo facilities that are currently used once a year will be utilized throughout the year, as they will serve as a knowledge hub under this project. On-the- job training provided by UNWTO is envisaged for the preparation of tourism circuit development and plans, market demand analysis, workforce development, and the branding, marketing, and promotion of Gansu. UNESCO will provide on-the-job training in the preparation of sustainable site management plans and the safeguarding of intangible cultural heritage and promotion of creative industry. Both UNWTO and UNESCO will also help disseminate Gansu’s experience globally.
C. Project Beneficiaries
33. The total population of the four project prefectures below the national poverty line is estimated at 1.4 million. The project would reach 6,155,600 beneficiaries in four prefectures, of which 70 percent live in counties with an average poverty rate of 11.8 percent or around 6 times China’s average poverty rate of 2.2 percent. The beneficiaries fall into five major groups: (a) poor project households (below China’s absolute poverty line) in the four prefectures, who will benefit from improved living conditions and economic livelihoods; (b) lower-income residents (bottom 40 percent) living in project sites, who will be provided with improved living and economic livelihoods; (c) MSEs in the cultural, tourism, and creative industries, who will receive micro-credits and business advisory services from the project; (d) public employees of Gansu’s provincial government, as well as prefecture- and county-level governments, who will participate in the project and
9 UNWTO and UN Women, Global Report on Women in Tourism 2010, joint UNWTO-UN Women publication.
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benefit from on-the-job capacity building; and (e) financial institutions, including GFHG, GFGC and PFIs.
D. Results Chain
34. The results chain and theory of change of this project are illustrated in the chart below. DEVELOPMENT CHALLENGES PROJECT ACTIVITIES RESULTS LONG-TERM IMPACT
• 5,505 jobs created by MSEs, new creative industry Poorest province in China • Credits to MSEs in cultural, centers, and new tourism facilities (-) Limited financial tourism, and creative industries • 1,380 MSEs created or expanded, benefiting from line of Increased services to enterprises • New creative industry centers credit income- with incubators and new tourism • US$100 million leveraged by PFIs generating (+) Rich, but underutilized, facilities with tourist centers • 11 creative industry centers and tourism facilities opportunities • Business advisory services to ECONOMIC ECONOMIC cultural, natural, human, constructed and tourism endowments startups • 180 MSEs received business startup advisory services
Large low-income • 4,676,098 people benefited from urban-rural population with poor living Urban-rural regeneration: Improve regeneration conditions last mile connectivity—access to • 80 percent of beneficiaries satisfied with project results Improved infrastructure and services, improve • 8,211 households with access to improved sanitation access to infrastructure Disparities among localities green and public space, restore • 200 traditional houses and public buildings restored and services
PHYSICAL PHYSICAL and between rural and traditional houses and buildings • 66.22 km of roads constructed or rehabilitated urban populations • 534.33 m2 of green space constructed or upgraded
• TA on corporate governance, credit • 200 trained staff members in participating financial institutions risk management, fintech, and • 5 percent or less nonperforming loan ratio of sub-borrowers in guarantees new portfolio financed under the project as a result of Weak provincial increased capacity of participating financial institutions Strengthened and local • Institutional development plans prepared by PFIs institutional • TA on urban-rural regeneration, site government capacity of management plans, creative institutions participating industries development, and • 560 staff members trained on urban-rural regeneration, (financial and entities sectoral) integrated tourism and culture creative industries, site management, and tourism policies
INSTITUTIONAL planning and strategy • 8 global knowledge dissemination events completed • Dissemination of project results (conferences, workshops, and expos) globally • 6 integrated culture, tourism strategies adopted and budgeted
E. Rationale for Bank Involvement and Role of Partners
35. Development of the project is based on the Bank’s global expertise and experience gained through similar operations in Gansu. The WBG has experience with investments, to date, of US$9.5 billion in over 600 culture and tourism sector projects globally. This includes two IBRD loans in Gansu, approved in 2008 and 2017. This project complements the past operations, incorporates key lessons learned, and aims to help Gansu greatly strengthen its institutions. A more attractive and varied tourism circuit will combine cultural and natural heritage (the focus of past projects) with private sector and community-led creative industry and intangible heritage (the focus of this project). Building on the latest global knowledge, the project adopts an integrated approach that uses local endowments and human capital and traditional/artisan skills as drivers for local economic development and job creation.
36. The project builds on the Bank’s ongoing active support for China's urbanization transition. A 2014 report, Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization, was published jointly by the World Bank and the Development Research Center of the State Council of China. The report assessed the challenges and opportunities of urbanization in China and suggested the forging of a new model of urbanization
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that is more efficient, inclusive, and sustainable. This project builds on the findings and recommendations of the Urban China report. Proposed investments encourage upgrading old towns and villages to become more efficient and inclusive through an integrated urban-rural regeneration process, instead of demolishing them and relocating residents under the old model of urban redevelopment. Proposed centers for creative industries with incubators, marketplaces, and tourism facilities will have steady income streams, alleviating the fiscal burdens of local governments, which the Urban China report also cited as a key recommendation.
37. The World Bank is uniquely placed to help facilitate access to finance for MSEs. Improving access to finance and finding innovative solutions to unlock sources of capital is a core strength of the World Bank. Globally, the Bank has taken a holistic approach that combines advisory and lending services to clients to increase the contribution MSEs can make to the economy. In China, the World Bank Group is engaged at the national level in advising on key regulatory reforms (insolvency, secured transactions) that are expected to reduce the costs of access to finance, and it has substantial experience in the design of credit lines for specific industries (such as renewable energy) and client groups (such as women entrepreneurs). Both global expertise and knowledge of local financial market conditions have influenced the design of this operation.
F. Lessons Learned and Reflected in the Project Design
38. Lessons learned from international experience and previous Bank-financed projects globally, in China, and in Gansu have been incorporated into the project design. The lessons reinforce the importance of an integrated approach to improving economic livelihood; improving physical living conditions for livability; and building strong institutions for sustainability and replicability.
39. Investments in urban and rural regeneration, livability, and service delivery enhance the competitiveness of a location in attracting businesses. Experience shows that improving the livability of a destination through basic infrastructure and service delivery development is vital for attracting private investment. Projects successfully implemented in East Asia and the Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), and the Middle East and North Africa (MENA) have also shown that renewal of the historic cores and cultural heritage sites can be part of a spatial transformation that makes these areas more attractive, not only for residents, but for visitors and businesses, as well. Lessons learned from these projects show that public infrastructure investment in towns of cultural, tourism and creative industries through urban-regeneration goes hand in hand with local economic growth. For example, the Lebanon Municipal Services Emergency Project has showed that for each US$1 of investment made in public infrastructure, US$7 of private investment in real estate and SMEs has been leveraged in the targeted areas10. Georgia Regional Development Project has witnessed significant changes in Kakheti where the project's infrastructure investment helped the growth of the tourism economy. Between 2010 and 2016 the total number of visitors to Kakheti had increased by 305 percent. In the same period the total number of hotels in the region had tripled, and the total number of hotel beds increased 3.6 times. The number of hotel and restaurants enterprises officially registered in the region had more than doubled between 2010 and 2016. The total employment in restaurants, hotels and tourism related enterprises had almost tripled. The average wages in the industry have grown more than 300 percent. This amounted to producing additional annual income of GEL 5.5 million (US$2.15 million) for the population of the region.11 Similarly, a project in Shandong Province,
10 Implementation Completion and Results Report No. ICR00004600 of Lebanon Municipal Services Emergency Project (P050529). 11 Implementation Completion and Results Report No. ICR00002572 on Georgia Regional Development (P126033).
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China, has shown that investment in public infrastructure has improved number of tourists (in Qufu, from 4.26 million visitors in 2010 to 4.94 in 2016, and in Zoucheng from 100,800 in 2010 to 256,800 in 2016), tourism spending (Qufu witnessed a 267 percent increase, from RMB 392/person in 2008 to RMB 1,440/person in 2017, and Zoucheng 451 percent, from RMB 200/person to RMB 1,101/person), revenues from tourism (78 percent increase in Qufu, from RMB 8.9 billion in 2011 to 15.8 billion in 2016; 177 percent increase in Zoucheng from RMB 2.2 billion in 2011 to 6.1 billion in 2016), as well as share of tourism sector in GDP (from 33.5 percent of GDP in 2011 to 40.9 percent in 2016 in Qufu, and 3.5 percent of GDP in 2011 to 7.0 percent in Zoucheng). Moreover, the rehabilitation of Yinli River had showed not only improvement in living environment and quality of life, but also had led to the increase in number of small business (shops, restaurants, and homestays) from 15 in 2011 to 29 in 2017 (a 93 percent increase).12
40. Restoring built assets and reusing underutilized land supports the World Bank Group’s inclusive green growth agenda. Regenerating city core areas minimizes the need for new development. Despite the investments required to renew buildings, these areas have the potential to stimulate a city’s economy, with the revitalized, more attractive built environment helping to create permanent jobs.
41. Synergies between creative industries and tourism are emerging but require new capacities for local governments to fully exploit their potential. As the significance of the creative economy continues to grow, important synergies with tourism are emerging, offering considerable potential to increase demand and develop new products, experiences, and markets. These new links are driving a shift from conventional models of cultural tourism to new models of creative tourism based on intangible culture and creative industries.13 With limited income-generating options in rural areas of Gansu, creative industries could provide much-needed job opportunities, especially for women. Tourism also offers a powerful incentive for preserving and enhancing intangible cultural heritage, as the revenue it generates can be channeled back into initiatives to aid its long- term survival.14 Fostering the responsible use of this living heritage for tourism purposes can provide new employment opportunities and nurture a sense of pride among communities. Capacity building of local communities is key, however, to preserving and leveraging their cultural and historical endowments successfully.
42. A careful analysis of financial market failures and underlying demand is key to the successful design of financial intermediary projects. The project design has been based on a detailed market demand study among MSEs in Gansu. It incorporates the findings of this study as well as global lessons of experience in choosing a wholesale financing approach to encourage market development, careful targeting of ultimate beneficiaries and selection of PFIs based on their financial and management capacity, and comprehensive technical assistance to the wholesaling company, PFIs, and target MSEs. The design of component 1 has also benefited from the Independent Evaluation Group’s report, The Big Business of Small Enterprises: Evaluation of the World Bank Group Experience with Targeted Support to Small and Medium-Size Enterprises, 2006–12.15 The report emphasizes the importance of targeting SMEs that suffer from size-specific market failures or
12 Implementation Completion and Results Report No. ICR00004242, Shandong Confucius and Mencius Cultural Heritage Conservation Project (P120234). 13 OECD, Tourism and the Creative Economy, 2014.
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constraints, which is the case for MSEs in the cultural, tourism, and creative industries in Gansu.
3. IMPLEMENTATION ARRANGEMENTS
A. Institutional and Implementation Arrangements
43. Project institutional arrangements for implementation have been set up at the provincial, municipal/prefecture, and district/county levels. Responsibilities at each level are summarized below.
44. Provincial Project Management Office (PPMO). Gansu Financial Holding Group Co. Ltd (line of credit PPMO) will be responsible for micro-credit management under component 1. The Gansu Provincial Culture and Tourism Department (culture and tourism PPMO) will be responsible for components 2 and 3. Both PPMOs will report directly to a project leading group (PLG) and coordinate between themselves for common ground and actions on planning, policies, priorities, and ways to implement the project effectively.
45. The Gansu Provincial Foreign Loan Administration Committee of the provincial government, chaired by the executive vice governor and co-chaired by the vice governor responsible for culture and tourism, will serve as the provincial PLG. The PLG shall be responsible for ensuring leadership of the project, providing overall policy, financial, institutional, and strategic guidance on project implementation, and facilitating coordination among different implementing agencies within its jurisdiction.
46. At the local level, the project will be led by municipal-level project leading groups chaired by executive vice mayors at the municipal/prefecture level to ensure effective implementation. The project will be implemented by eight project implementation units (PIUs) in the respective cities/districts/counties under the four prefecture municipalities. The culture and tourism PPMO will be centrally responsible for overseeing, coordinating, and training its cascaded PIUs at lower levels for subproject management. Both PPMOs will be responsible for liaison with the provincial PLG, municipal PLGs, and the World Bank on all aspects of project management, fiduciary, safeguards, and all other areas.
47. Financial intermediaries (FIs) and participating financial institution (PFI). Under the direct oversight and management of the Gansu Provincial Department of Finance, GFHG is designated as the wholesaler FI to handle component 1. Under the direct oversight and management of the line of credit PPMO (GFHG), Bank of Gansu is designated as a participating financial institution to handle micro- and small credit transactions.
B. Results Monitoring and Evaluation Arrangements
48. The results framework serves as a basic tool for the monitoring and evaluation of project achievements. It includes a selection of specific outcome indicators, at PDO level and intermediate by component, with respective baselines and targets. The responsibility for general monitoring and evaluation (M&E), including project progress, outputs, and outcomes, rests with the PPMOs and PIUs at all levels. A project management company (PMC) will be hired to assist the PPMOs and PIUs with monitoring and evaluations, among other tasks. It will help put in place the necessary structures, systems, and processes for M&E. The PIUs will collect, enter, report, and analyze the data needed for M&E and submit this information to PPMOs, which will take actions accordingly to improve performance and achieve the intended results. Detailed M&E
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arrangements are articulated in Annex 2.
C. Sustainability
49. Sustainability considerations that have informed project design include the following:
(a) Building of stronger institutions to sustain and replicate project impact. The project will contribute to capacity building among financial institutions to better serve the MSE market in Gansu. The project will also enhance the capacity of the local governments to provide a business-enabling environment to ensure business success and sustainability. The project will help municipal governments prepare an asset management plan toward the end of the project to ensure sustainability of O&M. Lessons from experience from the project will be discussed with provincial and national authorities to facilitate replication. (b) Private sector participation. Participating financial institutions are expected to contribute with co- financing to gain access to IBRD financing. Bank of Gansu has already committed US$50 million from its own funds to co-finance the IBRD’s US$25 million allocation during the first round of credit. GFHG may also contribute its own funding to subsequent rounds of wholesale financing. Moreover, the project will provide MSEs with business advisory services to ensure the success and sustainability of their operations. (c) Increasing municipal revenues from created assets. All project assets are designed to be operated and managed by experienced and specialized private sector companies or state-owned enterprises (SOEs) under lease or concession agreements with, and lease fees paid to, municipal governments. Each center or facility is, therefore, designed with a clear revenue-generating stream, such as entrance fees, souvenir shops, lease of space to art collectors and producers, tickets to folk performances, restaurants, and cafes. Such revenues will enable private lessees or SOEs to operate and maintain assets properly and pay lease/rent fees to municipal governments, which are already in fiscal distress. (d) Efficiency and climate co-benefits. All investments will use energy-efficient equipment and devices to reduce energy consumption and thus reduce operating costs, while contributing to climate change mitigation. The regeneration of old buildings will also reduce the leakage of heat by replacing substandard roofs, walls, and windows. All such mitigation measures will contribute to sustainability, as well as climate co-benefits.
4. PROJECT APPRAISAL SUMMARY
A. Technical, Economic, and Financial Analysis
50. Technical analysis. The project introduces an integrated approach of using local endowments (human, cultural, and natural) and sustainable tourism as drivers for local economic development and job creation. As part of the overall project, the goal of component 1 is to support community economic development, through a line of credit (LoC), by contributing to the establishment of a sustainable credit market and financial institutions for MSEs in the cultural, tourism, and creative industries in Gansu Province. The design of component 1 benefits from a market demand assessment that was conducted as part of project preparation, as well as a community demand analysis done as part of the social assessment. Since an LoC is included in the project design, an OP 10 compliance review was carried out. It established that the project is compliant with
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OP 10 requirements and meets the overall commercial approach advocated by OP 10. All aspects of OP 10 will continue to be monitored during project implementation.
51. The project’s overall economic geography analysis and feasibility study report, as well as all subproject feasibility studies under component 2, have been prepared by the borrower and appraised by the Bank team. All subprojects are viable, with clear socioeconomic benefits to communities, clear revenue streams for sustainability, and clear O&M responsibilities once assets are created. All subprojects also incorporate principles of green infrastructure and buildings, thus maximizing climate co-benefits.
52. Both Gansu Province and the Bank have accumulated technical experience by working on similar projects in the sector. Design risks are mostly related to overdesign and high costs, which have been mitigated during project preparation through a combination of field visits to project sites, strict adherence to national regulations, standards, and codes, and technical advice given to the PPMO and the engineering design consultants. The overall risk of technical failure is judged to be low, although care will be needed in the design of cultural heritage activities in environmentally and ecologically sensitive areas, as well as O&M of built assets.
Economic and Financial Analysis
53. The main economic benefits of the project are (a) enhanced access to micro-credit for 1,380 MSEs and new enterprise creation, greater profitability, and generation of jobs; (b) higher operating income for subproject operators; (c) enhanced experiences for tourists resulting from the protection and development of heritage sites; and (d) greater economic revenue for cities and counties due to more tourists, longer stays, and greater spending. While the first stream of benefits will be generated by investments under component 1, the remaining three will be induced by component 2. Given the qualitatively different types of investments across components, two different classes of models were used for the economic and financial analyses, the results of which are summarized below.
54. The number of people benefiting from improved living conditions in the project areas is estimated at 6.4 million inhabitants. The direct beneficiaries of the project include local residents and service sector MSEs, like restaurants, bed and breakfast inns (homestays), tour operators, transport providers, and entertainment businesses. In aggregate, project investments are likely to generate at least 5,409 new jobs during the project’s life cycle.
55. For component 1, the analysis modeled the financial returns to MSE credit for tourism and creative industry enterprises in Gansu. Based on GFHG and the PFIs’ proposed lending program of US$150 million equivalent (IBRD: US$50 million equivalent), it is anticipated that 1,200 micro-loans and 180 small loans will be provided to MSEs16 during the project life cycle. Employing “with-project” and “without-project” scenarios, the financial model aggregated the incremental returns to investment in terms of net after-tax profits for MSEs
16 In China, according to the Ministry of Industry and Information Technology, the National Bureau of Statistics, the National Development and Reform Commission, and the Ministry of Finance issued the “Notice about Classification Standards for MSEs” (Ministry of Industry and Information Technology, No. 300, 2011) and the China Banking and Insurance Regulatory Commission’s “Notice about Further Enhancing the Quality and Efficiency of Financial Services for Micro and Small Enterprises in 2019” (China Banking Insurance Regulatory Office, No. 48, 2019) stipulates that enterprises with a credit line of not more than RMB 10 million (inclusive) are recognized as micro and small enterprises.
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and interest income for PFIs.17 The time horizon for the analysis was 20 years, in line with the repayment period for GFHG.
56. The analysis evaluated the investment using three metrics: net present value (NPV), benefit-cost ratio (BCR), and internal rate of return (IRR). The IRR for component 1 is estimated at 28 percent, with an NPV of RMB 2.7 billion (~US$389 million) and a BCR of 4.1. The investment remains highly profitable, even when the discount rates are varied between 5 and 10 percent (see Annex 3). Notably, these estimates only represent the component’s financial viability. The increased supply of credit for MSEs is also likely to lead to enterprise creation, higher survival rates, and new hiring, consequently generating new jobs. Based on the sizes of firms surveyed by the GFHG market demand study, it is conservatively estimated that MSE credit investments will lead to the creation of 3,204 new jobs for MSEs that receive loans during the project cycle. Since project funds will be revolved for newer rounds of lending in future years, overall impact on jobs will be significantly higher. Employing “with-project” and “without-project” scenarios, the financial model projects the incremental lending cash flows in terms of after-tax profits for MSEs and interest income for PFIs. The IRR for component 1 is estimated at 28 percent, with an NPV of RMB 2.0 billion (~US$291 million) and a BCR of 3.4, using a discount rate of 10 percent. The positive NPV and high BCR are strong indicators of a profitable investment, even if the opportunity cost of capital is conservatively considered to be 10 percent for China. The time horizon for the analysis was 20 years, in line with the repayment period for GFHG. See Annex 3 for details.
57. For component 2, the main economic benefits include: (a) higher operating income in the form of ticket sales and leasing income from businesses at subproject sites; (b) higher revenues accrued to local economies due to more tourists, longer stays, and greater spending; and (c) enhanced experiences or utility of tourists as a result of heritage site protection and development. The beneficiaries of the project are tourists (both domestic and international), local residents, and tourism MSEs, like restaurants, bed and breakfast inns, tour operators, and transport businesses.
58. Economic and financial analyses were carried out for each of the eight proposed subproject investments; the results are summarized in Annex 3. The financial IRR for the component is estimated at 5.3 percent, with a financial NPV (after tax) of RMB 25.3 million (~US$3.65 million) and an average payback period of 16 years. On the other hand, the economic IRR for component 2 is estimated at 21.2 percent, with an NPV of RMB 1.19 billion (~US$171 million) and a BCR of 2.42. As would be expected, the wider economic returns for cities and counties are larger than the purely financial returns that accrue to subproject operators. Furthermore, these returns are robust to demand shocks and cost overruns; the sensitivity analysis indicates the investments provide economic internal rates of return (EIRRs) of 18.8 percent and 20.9 percent, respectively, in scenarios of 15 percent drop in revenues and 15 percent increase in costs. See Annex 3 for the full analysis.
B. Fiduciary
(i) Financial Management
59. Summary. A financial management (FM) assessment was carried out to assess the FM capacity of (a)
17 Since only BoG is participating in the first round of credit being wholesaled through GFHG, the financial model was carried out using data for BoG and assuming similar returns for other PFIs.
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GFHG, which is the line of credit PPMO and the project implementing unit (PIU) of component 1; (b) the culture and tourism PPMO under the Gansu Provincial Department of Culture and Tourism; and (c) eight PIUs that are responsible for implementing components 2 and 3, to determine if the project’s FM arrangements, associated with risk mitigating measures, satisfy the World Bank’s minimum requirements under the Bank Policy and Bank Directive on Investment Project Financing.
60. Overall, the residual financial management risk, after taking mitigation measures into account, is rated as “Substantial.” The FM capacity assessment identified the following principal risks:
(a) The project implementation is decentralized; it is to be implemented by eight PIUs and managed by two parallel PPMOs. The project contents involve two different industry lines. These impose complexity and risks on the project management and consistent implementation, including the FM work. A PLG has been established to provide guidance and multiagency coordination to facilitate effective progress of the project.
(b) All of the project institutions are new to Bank-financed operations. All have very limited financial management capacity with either domestic invested infrastructure projects or internationally financed projects. To mitigate the risk, the financial management work is required to be carried out by designated qualified and experienced financial staff. An experienced consulting company to be hired by the project will provide another certain extent of assurance to the project financial management performance. A project financial management manual has been prepared by the culture and tourism PPMO in consultation with the Gansu Provincial Finance Department (PFD) to align the FM work in different PIUs. The PFD has agreed to assist the culture and tourism PPMO with organizing necessary FM training for the project, and the Bank will provide necessary guidance and training to the project financial staff, as needed, during project implementation support.
(c) The total project cost is about US$312.63 million, which includes US$180 million equivalent of IBRD loan, US$100 million from PFIs, and US$32.63 million equivalent of counterpart funding from participating municipalities. Counterpart funding will contribute to the cost of designs, studies, resettlement, and overhead expenses. A counterpart funding plan will be committed to by local governments and provided to the Bank by the client, segregated by source, amount, and timeframe. The amount of counterpart funds for the first year of project implementation will be included in the local government budget plan. A financial analysis was also conducted by the designated institution of the PFD to assess the counties’ fiscal capacity to provide the needed counterpart funding and repay the loan. The PFD has not highlighted any significant exceptions to meeting the fiscal requirements based on established fiscal capacity analysis in China.
(d) GFHG will be trained to implement interventions in the financial sector and take up these responsibilities in the short term through technical assistance and capacity building. The IBRD’s US$50 million will be on- lent to GFHG and other PFIs by the PFD, using the same term and rates as the Bank loan. GFHG will sign a subsidiary agreement with PFIs which will on-lend the loan. PFIs will lend at market rates to project beneficiaries and will be the risk-taking financial intermediaries.
(e) Relevant capacity building and technical assistance for component 1—for example, business startup advisory services, impact evaluation, and capacity building for GFHG—have been designed and embedded into component 3 to ensure synergy, success, and sustainability. As required by the Bank team, an operation manual has been prepared and will be maintained by GFHG in form and content satisfactory to
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the Bank. GFHG will implement component 1 in accordance with it. The operations manual is a living document and can be adjusted. A draft has been submitted and approved by the Bank; it will be finalized by the time the project is effective.
61. The proceeds of the IBRD loan will be passed on from MOF to the Gansu PFD on behalf of Gansu’s provincial government. The PFD will consecutively on-lend US$50 million equivalent under the same terms and conditions to GFHG for component 1. GFHG will be responsible for repayment of US$50 million to the PFD. The PFD will also consecutively on-lend US$130 million equivalent to municipal/county finance bureaus for components 2 and 3.
62. Internal control. All PIUs are existing government agencies and maintain minimum internal controls. Besides the existing internal controls in the PIUs, the following arrangements will supplement the project’s overall internal control system: (a) primary FM responsibilities of the cultural PPMO will include, but not be limited to, providing guidance to the PIUs’ FM work, reviewing expenditure reporting and financial reports submitted by the PIUs, consolidating and submitting project financial reports to the Bank in compliance with legal documents, and overseeing the implementation of project activities; (b) the PFD will maintain and manage the project designated account (DA) and oversee the use of the Bank loan for its intended purposes; (c) appropriate FM duty segregation, payment, and authorization controls will be in place in PPMOs and PIUs; (d) a project financial management manual (FMM) has been prepared by the culture and tourism PPMO in consultation with the PFD to unify the FM work of eight PIUs for the project activities of components 2 and 3; (e) an operation manual specifying the operational procedures for project activities under component 1 has been prepared by GFHG in consultation with the PFD and accepted by the Bank; and (f) an annual external audit will evaluate the fairness of project financial statements and the performance of the overall internal control system.
63. Accounting and reporting. Each PIU that executes the activities under components 2 and 3 will manage, monitor, and maintain project accounting records by establishing a separate cost center for the project activities within its existing computerized accounting system in accordance with Circular No. 13, “Accounting Regulations for the Bank-Financed Projects,” issued in January 2000 by MOF. The requirements set out in the circular will be followed to maintain project accounting records to generate the overall project financial statement, as follows: balance sheet of the project; statement of sources and uses of funds by project components; statement of implementation of loan agreement; statement of designated account; and notes to the financial statements (required only for annual financial statements).
64. GFHG will manage, monitor, and maintain project accounting records for component 1 by establishing a separate cost center for the project activities within its existing accounting system. GFHG will prepare the interim financial reports (IFRs) for component 1 and submit them to the World Bank within 60 days after the end of the calendar semester period. The cultural PPMO will prepare the consolidated IFRs for components 2 and 3 and submit them to the Bank within 60 days after the end of the calendar semester period. Each PIU will also regularly produce standalone project financial statements, in compliance with MOF requirements and acceptable to the Bank.
65. Auditing. The Gansu Provincial Audit Office (GPAO) will be assigned by the China National Audit Office (CNAO) as the project auditor. The annual audit report will be issued by GPAO. The project will have two sets of project audit reports, one for component 1 and the other for components 2 and 3. GFHG and the culture
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and tourism PPMO will submit audited project financial statements satisfactory to the World Bank for the respective components they execute and/or manage within six months after the closure of each fiscal year during the entire project life. According to the agreement reached with MOF and the China National Audit Office, the project audit reports will be made publicly available on both World Bank and GPAO official websites.
66. Flow of funds. Two designated accounts (DAs) will be set up and managed by the PFD. The DAs will be opened in a commercial bank acceptable to the Bank, and loan proceeds from the Bank will flow into it. To ensure proper use of project funds, for component 1, report-based disbursement will be used. The report used for the Bank loan disbursement purpose will be prepared by GFHG using financial data from GFHG’s financial records and reviewed and approved by the PFD on a semester basis. The Bank loan proceeds for this component will be disbursed from the DA directly to GFHG once the report is reviewed and approved by the PFD. For components 2 and 3, traditional disbursement will be used. Payment requests will be prepared by the PIUs, reviewed and approved by related county/municipal finance bureaus first, then passed to the culture and tourism PPMO for review, and, finally, approved by the PFD. The Bank loan proceeds will be disbursed from the DAs by the PFD directly to contractors or to PIUs if they make pre-financing.
67. The proposed funds flow arrangement and related processing period should ensure contractors receive payment within required dates stipulated in the signed contracts. The Bank’s task team will closely monitor disbursement efficiency during implementation. If material payment delays resulting from slow disbursement are noted, the task team will guide the project in exploring a more streamlined funds flow arrangement.
68. FM supervision plan. More intense FM supervision may be required in the initial part of the project; however, once the FM arrangements are in place, FM implementation reviews will be conducted once a year. The FM will also conduct desk reviews of the IFRs, annual audit reports, and management letters from the external auditors and will follow up on material accountability issues and provide ongoing FM advice and support throughout the life of the project.
69. Loan choice and disbursement. The borrower requested two different loan terms, as follows: For component 1 (Loan A): EURO denominated in the amount of EURO 44.6 million, commitment-linked variable spread loan, based on six-month EURO plus an additional variable spread. The borrower selected all conversion options, a bullet repayment profile with a repayment period of 20 years, including a 19.5-year grace period, payment of a front-end fee from the borrower’s own resources, and an interest rate cap/collar premium paid from the proceeds of the IBRD loan, if sufficient unwithdrawn balance is available to do so at that time. For components 2 and 3 (Loan B): EURO denominated in the amount of EURO 115.9 million, commitment-linked variable spread loan, based on six-month EURO plus an additional variable spread. The borrower selected all conversion options, a level repayment profile with a repayment period of 29 years, including a 6-year grace period, payment of a front-end fee, and an interest rate cap/collar premium from the borrower’s own resources.
70. Disbursement under the project will be carried out in accordance with the provisions of the disbursement guidelines (“World Bank Disbursement Guidelines for Investment Project Financing,” February 2017), the disbursement and financial information letter (DFIL), and the loan agreement. Details on the disbursement arrangements are provided in the project’s DFIL and loan agreement. All the Bank disbursement methods will be available to be used in this project: (a) advances into and replenishment of DA, (b) direct payment, (c) reimbursement, and (d) special commitment. The DA will be in EURO currency. Detailed
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requirement is documented in the disbursement and financial information letter. A provision for retroactive financing is made in the loan agreement. Withdrawals up to an aggregate amount not to exceed EURO 8.92 million and EURO 11.59 million may be made for payments made prior to signature date, but on or after March 31, 2019, for eligible expenditures under Loan A and B, respectively.
(ii) Procurement
71. The Gansu Financial Holding Group Co., Ltd (line of credit PPMO) will be responsible for micro-credit management under component 1, and commercial practice shall be applied to the procurement activities carried out by MSEs. The Gansu Provincial Project Management Office (culture and tourism PPMO) in the Gansu Provincial Culture and Tourism Department will be responsible for overall project coordination, preparation, management, and supervision under components 2 and 3, while the eight PIUs—in Qin’an County, Maiji District, and Wushan County in Tianshui Municipality, Lintao and Tongwei County in Dingxi Municipality, Ganzhou District in Zhangye Municipality, and Dunhuang and Jiuquan—will be responsible for procurement, contract signing, and implementation of those activities under their respective components or subcomponents.
72. Procurement risk assessment and mitigation measures. An assessment of the project agencies’ procurement capacity determined that neither the culture and tourism PPMO nor any of the PIUs have experience in implementing World Bank–funded projects. The culture and tourism PPMO and each PIU have assigned procurement staff to carry out procurement activities and contract management. One designated procurement staff member in the culture and tourism PPMO has implemented a Bank-financed project and has rich experience with the procurement of goods, works, non-consulting services, and consulting services; however, all the others lack experience working on projects supported by an international financial institution (IFI). Still, some have carried out procurement and contract management of projects financed by government funds, and the laws and regulations for domestic procurement procedures are quite similar to the Bank procurement requirements. The assessment concluded that the main procurement risks are (a) delays and noncompliance with the World Bank Procurement Regulations, either due to unfamiliarity with specific Bank procurement rules and procedures or to a preference to comply with local procedures when local regulations conflict with Bank procurement regulations and where procurement is to be conducted at local government public resources transaction centers; (b) a lack of familiarity on the part of PIU procurement staff with the procurement needs of Bank-funded projects; and (c) delays in payments, cost overruns, and a failure to meet completion dates due to weak contract management capacity.
73. Risk mitigation measures. To mitigate these risks, the following actions have been/will be taken during project preparation and implementation: (a) a procurement agent with experience in Bank procurement and contract management procedures has been recruited to help the culture and tourism PPMO and PIUs with procurement; (b) a project management consulting firm with experience in Bank procurement and contract management procedures will be hired early on to help the culture and tourism PPMO and PIUs in project implementation; (c) the culture and tourism PPMO will provide regular training to PIU procurement staff on Bank procurement regulations, methods, and procedures, as well as on the use of standard procurement documents and evaluation principles; (d) a procurement manual, as part of the project implementation plan (PIP), will be prepared and disseminated by the culture and tourism PPMO upon agreement by the Bank to guide project implementation; (e) procurement support has been and will continue to be provided to the project agencies by the Bank’s procurement specialist in the project implementation; (f) annual procurement supervision missions will be conducted to review the progress of the procurement; (g) the culture and tourism
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PPMO and PIUs and the Bank team will keep in close contact so as to identify and address any issues that may arise in the bidding process and management of contracts; and (h) a seven-year project implementation period will ensure completion of the project by the loan closing date.
74. Major procurement envisaged under the project. Most Bank loan proceeds will be used for the procurement of work, goods, non-consulting services, and consulting services; all work, goods, and non- consulting services will be procured through national open competitive procurement, while the consulting services contracts may be procured through QCBS/LCS/FBS or consultants’ qualifications (CQS). Following the above procurement procedures, together with the accompanying risk mitigation measures, the PIUs should be able to manage the procurement of the project satisfactorily; hence, the overall procurement risk for the project is assessed as “Substantial,” with the implementation of aforesaid proposed mitigation measures. For those contracts under retroactive financing, however, procurement will be done at a very early stage; as most of the mitigation measures will not have been taken, the procurement risk will be “High”.
75. Use of Systematic Tracking of Exchanges in Procurement (STEP). It is mandatory that all procurement transactions for post- and prior-review contracts under the project be, respectively, recorded in or processed through STEP, the Bank’s planning and tracking system. This ensures comprehensive information on procurement and implementation of all contracts for goods, work, non-consulting services, and consulting services awarded under the whole project will automatically be made available. This tool will be used to manage the exchange of information (such as procurement documents, bid evaluation reports, no objections, contracts, and so on) between the implementing agencies and the Bank. The Bank team will provide training to the borrower on how to establish its account and use the STEP system.
C. Safeguards
(i) Environmental Safeguards
76. The physical investments proposed for World Bank financing are distributed among eight counties/districts/cities of Gansu Province. Though no large-scale or complex activity is involved, the project is classified as Category A, given the historical and cultural significance and sensitivity of the sites involved and the limited capacity at local level. Three World Bank environmental safeguards policies are triggered by the identified subprojects under component 2: (a) OP4.01 Environmental Assessment (EA), disclosure date 2018/10/24; (b) OP4.04 Natural Habitats; and (c) OP4.11 Physical Cultural Resources. As a precaution— considering the subproject possibilities and uncertainties of component 1 at this stage—OP4.09 Pest Management, OP4.36 Forests, and OP4.37 Safety of Dams are also triggered. The applicability of OP4.04, OP4.09, OP4.36, OP4.11, and OP4.37 to specific investments under component 1 remains to be determined during project implementation. Therefore, a full impact assessment covering the whole project was conducted and the following environmental safeguards instruments developed, in accordance with domestic Environmental Impact Assessment (EIA) law and Bank safeguards policy requirements: (a) an EIA report and Environmental and Social Management Plan (ESMP) for component 2; (b) an Environmental and Social Management Framework (ESMF) to support the implementation of components 1 and 3; and (c) an Environmental Assessment Executive Summary for the whole project. In addition, considering the lack of experience of the PPMOs and PFIs on Bank-financed projects, a comprehensive safeguards capacity-building program has been integrated into the project ESMP and ESMF to ensure adequate and effective project management in accordance with the Bank’s safeguards policies and procedures. Further details are provided
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in Annex 2.
(ii) Social Safeguards
77. A full social impact assessment (SIA) was carried out to assess potential positive and negative impacts on local populations brought about by proposed project activities. Based on the SIA report, proposed project activities under component 1 and component 2 will require civil works and, thus, triggered the World Bank Involuntary Resettlement Policy (OP4.12). No ethnic minority concentrations have been identified, but because there are 54 different ethnic groups in Gansu Province, accounting for 8.7 percent of the total population, the Indigenous Peoples Policy (OP4.10) was triggered to safeguard ethnic minority cultural heritage and ensure its proper use, and an Ethnic Minority Development Framework (EMDF) has been prepared.
78. Involuntary Resettlement (OP4.12). Component 1 includes the provision of credits to MSEs in cultural, tourism, and creative industries. As agreed with intermediary institutions, micro- and small businesses that require land acquisition and/or resettlement will not be supported unless a strong case can be made that benefits to local poor people largely outweigh negative impacts from land acquisition and/or resettlement. Such cases will be further assessed. Component 2 involves land acquisition and resettlement. Permanent land acquisition is expected to affect 168 persons from 34 households, and temporary restrictions on land will affect 42 persons from 14 households. A general Resettlement Action Plan (RAP) and four separate RAPs covering different counties have been prepared. Some land acquisition and resettlements have already been completed in recent years; 568 persons from 143 households were affected by land acquisition and 48 persons from 12 households by housing demolition, and due diligence reviews have been carried out and due diligence reports prepared as part of the social safeguards’ instruments package. A Resettlement Policy Framework (RPF) has been prepared to guide future land acquisition and resettlement work for activities whose designs are not finalized at the appraisal stage.
79. Ethnic Minorities (OP4.10). Although no ethnic minority concentration has been identified in the proposed project areas, Gansu is known as a place where interactions among different ethnic groups have taken place throughout the history of the ancient Silk Road. Hence, an EMDF has been prepared in case activities proposed under component 1 trigger OP4.10 in the sense of utilizing ethnic minority handicrafts or other intangible heritage. The EMDF will guide preparation of an Ethnic Minority Development Plan (EMDP), which will ensure equal and free participation in and benefits from project interventions by ethnic groups.
80. Vulnerable groups. The project will support equal benefits to vulnerable groups, including women, lower-income families, and people with disabilities, by providing loans to micro- and small enterprises engaging in cultural, tourism, and creative industries, and the selection criteria encourage these businesses to employ people from all these groups. Monitoring and evaluation will include data on vulnerable group participation.
81. Influx of labor. Activities under component 2 involve construction that will need somewhat large numbers of workers. Since workers are mainly from nearby towns and villages, and local public security agencies require registration of those from outside the province, the anticipated risks from labor influx are manageable. The grievance redress mechanism will include monitoring of this aspect.
82. Public consultation and citizen engagement. During the social impact assessment, several rounds of public consultation took place in all selected project counties to assess local citizens’ views on the proposed
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activities. The SIA report was disclosed locally and at the World Bank InfoShop, together with other safeguards instruments. During project implementation, monitoring and evaluation will continue, with independent monitoring teams conducting public consultations to collect feedback and recommendations from local communities on project implementation.
83. Extensive consultation was conducted with residents from project areas during the social assessment to promote equal sharing of the project benefits with lower-income and vulnerable groups, to include views of local communities and potential beneficiaries from these groups on project activities, and to see how they could participate in the design, implementation, and monitoring and evaluation of the project. This represented an effort to move away from the traditional supply-driven model focusing on hardware and construction and to build the capacity of the project management office to develop people-centered and sustainable programs.
Grievance Redress Mechanisms
84. Communities and individuals who believe they are adversely affected by a World Bank–supported project may submit complaints to existing project-level grievance redress mechanisms or the World Bank’s Grievance Redress Service. The GRS ensures complaints received are promptly reviewed to address project- related concerns. Project-affected communities and individuals may submit their complaints to the Bank’s independent Inspection panel, which determines whether harm has occurred, or could occur, as a result of the Bank’s noncompliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank management is given an opportunity to respond. Information on how to submit complaints to the World Bank’s corporate GRS is available at http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress- service, and information on how to submit complaints to the World Bank Inspection Panel is at www.inspectionpanel.org.
D. Readiness for Implementation
85. The project is ready for implementation. The two PPMOs and all the PIUs have been established and have led project preparation. Activities and investments to be supported by the project for the first year of implementation have been designed by the government and its consultants and appraised by the Bank. The PPMOs have been working closely with all agencies concerned. The Bank team has appraised the following documents: Project Feasibility Study Report and all subproject feasibility studies; initial design of two years’ subprojects; all safeguards instruments (disclosed on November 19, 2018); terms of reference (TORs) of project management company, including performance monitoring and socioeconomic impact evaluation; TORs of construction supervision; procurement plan; and project implementation plan.
86. Additionally, based on lessons learned from past projects in Gansu, it was agreed with the counterparts that the following measures will ensure expedited implementation and disbursements once the project is effective: the project leading group (PLG) has been established, to be headed by Gansu’s executive vice governor to ensure strong leadership and commitment. The PPMOs, with support from the Gansu Provincial Department of Finance, will (i) maintain, throughout the implementation of the project, a procurement agent, on the basis of terms of reference, qualifications and experience satisfactory to the Bank; (ii) recruit, no later than December 31, 2019, and thereafter maintain throughout the implementation of the
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project, a project management consulting firm, on the basis of terms of reference, qualifications and experience satisfactory to the Bank; (iii) recruit, no later than December 31, 2019, and thereafter maintain throughout the implementation of the project as needed, design institutes, on the basis of terms of reference, qualifications and experience satisfactory to the Bank; and (iv) recruit, no later than December 31, 2019, and thereafter maintain throughout the implementation of the project, a construction supervision firm, on the basis of terms of reference, qualifications and experience satisfactory to the Bank.
87. As for component 1, a due diligence report on the PFIs has been completed, and a memo to demonstrate the project is compliant with the requirements of OP 10 has been produced and approved. This project meets the overall commercial approach advocated by OP 10. Within the policy framework dimension, the memo covers all relevant provisions. All aspects of OP 10 will continue to be monitored through the life of the project.
5. KEY RISKS
88. Based on the Systematic Operations Risk-Rating Tool (SORT), the overall project risk is rated as “Substantial.” Among the nine risk categories, four are rated “Substantial”: institutional capacity for implementation and sustainability, fiduciary, stakeholder, and environmental and social risks.
89. Institutional capacity for implementation and sustainability risk. The key institutional capacity risk in the design of the first component of the project is the relatively recent establishment of GFHG and the lack of prior experience of participating PFIs in the implementation of IBRD lines of credit. This risk is assessed as “Substantial”. An additional risk for project design stems from the fact that, while several potential PFIs operate in Gansu Province, only two banks—Bank of Gansu and Bank of Lanzhou—are headquartered there. This may make it more difficult to attract additional PFIs to participate in the project in the future. Mitigation of these risks is sought through the comprehensive technical assistance provided to GFHG to strengthen its capacity as a financial intermediary of funds for MSE credit and facilitate outreach to PFIs.
90. Technical design risk. The technical design of the second component of the project, which is multisectoral in nature, represents a substantial risk. Multiple activities with local- and provincial-level agencies may hinder timely and high-quality implementation of the project. To mitigate this risk, all proposed subprojects represent the critical minimum package of investments that can contribute to the spatial and economic transformation aspired to. A thorough system of screening, prioritizing, and evaluating proposed subprojects was established and applied during project preparation. Only critical minimum activities with the highest impact that can directly contribute to the achievement of the project development objective and desired results have been selected. Subprojects have been selected based on objective and transparent criteria. All subprojects are also aligned with the Master Plan for Gansu, the Gansu Provincial 13th Five-Year Plan, and other provincial development plans to facilitate a whole-of-government coordinated approach and provincial synergy.
91. Fiduciary risk. Another implementation and fiduciary risks relate to the geographical spread of the project activities across the four prefecture cities, which affects the institutional capacity for implementation and sustainability. To mitigate this risk, the PPMO will hire and maintain a procurement agent, a project management company and a construction supervision company to provide implementation and fiduciary
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support and provide quarterly monitoring and evaluation reports. Such implementation support companies will be located within the PPMO office at the provincial level and have offices within each city to ensure on- the-job training.
92. Stakeholders risk. The project is multisectoral and involves multiple communities and local- and provincial-level agencies. To mitigate stakeholders’ risk, several rounds of public consultation took place during project preparation to solicit stakeholders’ views on project design and proposed activities. During project implementation, consultations with all stakeholders, including local communities, will be maintained and documented.
93. Environmental risk. The project includes investment components to develop infrastructure and thus triggers the OP/BP 4.01 Environmental Assessment. None of the activities is expected to have significant, long- term, or irreversible impacts on the natural environment. The project is classified as environmental Category A. Physical investments are distributed in counties and districts of Gansu Province. Although no large-scale and complex activity is involved, the environmental risk is deemed substantial considering the historical, cultural, and natural significance and sensitivity of the sites involved and limited capacity at the local level. An Environmental and Social Management Framework (ESMF) has been prepared to guide component 1, along with an Environmental Impact Assessment (EIA) and Environmental Management Plans (EMPs) for the project as a whole. Considering the lack of experience of the PPMOs and PFIs on Bank-financed projects, a comprehensive safeguards capacity-building program has been integrated into the project ESMP and ESMF to ensure adequate and effective project management in accordance with the Bank’s safeguards policies and procedures. Additionally, to mitigate this risk, the PPMO will hire and maintain a safeguards management and monitoring company to provide implementation support.
94. Social risks Although the project does not envisage any large-scale resettlement or land acquisition, a Resettlement Policy Framework has been prepared and disclosed, along with the EIA and ESMF. Land acquisition and resettlement to accommodate proposed activities are unavoidable. One of the key challenges is to design and implement inclusive culture and tourism programs where lower-income households could equally benefit from project intervention. Capacity building and training for PIUs will be provided throughout the project cycle. The project will include a grievance redress mechanism (GRM), which will be administered by the PPMO and PIUs and supported by the PMC and will allow citizens to provide both positive and negative . feedback on the project.
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Gansu Revitalization and Innovation Project (GRIP) (P158215)
Results Framework COUNTRY: China Gansu Revitalization and Innovation Project
Project Development Objectives(s) The project development objectives are to increase income-generating opportunities, improve access to infrastructure and services, and strengthen institutional capacity of participating entities.
Project Development Objective Indicators
RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Objective 1. Increase income-generating opportunities in the project areas
1A Number of new jobs created by project- supported MSEs 0.00 200.00 500.00 1,000.00 2,000.00 3,000.00 3,300.00 (disaggregated by national bottom 40% and gender) (Number)
1B Number of new jobs created in project- supported creative industries and tourism 0.00 0.00 0.00 500.00 1,000.00 1,800.00 2,205.00 facilities (disaggregated by bottom 40% and gender) (Number)
1C Amount of co-financing 0.00 50,000,000.00 50,000,000.00 75,000,000.00 100,000,000.00 100,000,000.00 100,000,000.00
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RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 leveraged by the Participating Financial Institutions (PFIs) (Amount(USD))
Objective 2. Improve access to infrastructure and services in the project areas
2A Number of people benefiting from urban-rural regeneration, including improved access to 0.00 0.00 500.00 1,000.00 2,000.00 3,000.00 4,676,098.00 infrastructure and services, in the project areas (disaggregated by bottom 40% and gender) (Number)
Objective 3a. Strengthen capacity of participating financial institutions, local and prov'l gov't
3A Number of PFIs that have completed and executed their institutional 0.00 1.00 1.00 2.00 3.00 3.00 3.00 development plans with project's support. (Number)
3B Number of integrated culture and tourism strategies adopted and 0.00 0.00 2.00 4.00 6.00 6.00 6.00 budgeted in provincial and local plans (Number)
Citizen engagement: Beneficiaries satisfied with project results (disaggregated by gender)
Beneficiaries satisfied with project results 0.00 80.00 80.00 80.00 80.00 80.00 80.00 (disaggregated by gender) (Percentage)
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PDO Table SPACE
Intermediate Results Indicators by Components
RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Component 1: Increased Access to Financial Services for MSEs 1.1 Number of MSEs benefiting from line of credit (disaggregated by 0.00 200.00 500.00 800.00 1,300.00 1,380.00 1,380.00 national bottom 40% and percent of female owners) (Number) 1.2 Number of PFIs in the 0.00 3.00 project (Number) Component 2: Urban-Rural Regeneration and Development of Creative Industries 2.1 Length of sewerage networks constructed or 0.00 0.00 0.00 10.00 30.00 40.00 59.50 rehabilitated (Kilometers) 2.2 Number of households with access to improved 0.00 0.00 0.00 2,000.00 4,000.00 6,000.00 8,211.00 sanitation (Number) 2.3 Length of electricity networks constructed or 0.00 0.00 0.00 2.00 4.00 5.45 5.45 rehabilitated (Kilometers) 2.4 Length of roads constructed or rehabilitated 0.00 0.00 0.00 20.00 40.00 66.22 66.22 (Number) 2.5 Area of green space constructed or upgraded 0.00 0.00 0.00 100.00 250.00 400.00 534.33 (Square Meter(m2)) 2.6 Number of traditional 0.00 0.00 0.00 60.00 120.00 180.00 200.00 houses and public buildings
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RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 restored (Number) 2.7 Number of creative industry centers and tourism facilities 0.00 0.00 0.00 3.00 6.00 8.00 11.00 constructed (Number) Component 3: Institutional Strengthening and Global Knowledge Transfer 3.1 Number of MSEs received business start-up advisory services 0.00 40.00 80.00 120.00 180.00 180.00 180.00 (disaggregated by national bottom 40% and gender) (Number) 3.2 Non-performing loan ratio of sub-borrowers is less than 5% in new portfolio financed under NA Yes Yes Yes Yes Yes Yes the project as a result of increased capacity of participating financial institutions (Text) 3.3 Number of trained staff in participating financial institutions (disaggregated 0.00 50.00 100.00 150.00 200.00 200.00 200.00 by gender). (Number) 3.4 Site management plans in place with budget 0.00 0.00 1.00 2.00 3.00 3.00 3.00 (Number) 3.5 Number of staff trained on urban-rural regeneration, creative 0.00 60.00 120.00 180.00 300.00 560.00 560.00 industries, site management and tourism
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RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 policies (disaggregated by gender) (Number) 3.6 Socioeconomic impact evaluation surveys 0.00 0.00 1.00 2.00 2.00 3.00 4.00 conducted and evaluated (Number) 3.7 Number of periodic project dissemination strategies developed and 0.00 0.00 1.00 1.00 2.00 3.00 3.00 accompanying knowledge materials produced (Number) 3.8 Number of global knowledge dissemination events completed 0.00 1.00 2.00 3.00 5.00 7.00 8.00 (conferences, workshops and expos) (Number)
IO Table SPACE
UL Table SPACE
Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection The cumulative number of Semi-annual 1A Number of new jobs created by new permanent jobs project Annually Surveys Line of Credit PPMO project-supported MSEs (disaggregated created as a result of progress by national bottom 40% and gender) project's investments in reports establishing new, or
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expanding, MSEs. Disaggregation will be made by percentage of beneficiaries in the national bottom 40% income group, and percentage of women- targeting 40-50% from a baseline of 20-25%. Assumptions are: Each of the 1200 micro-enterprises to be supported under the project will create minimum of 2 new jobs (totaling 2,400). Each of the 180 small-enterprises to be supported under the project will create minimum of 5 new jobs (totaling 900). The cumulative number of new permanent jobs created as a result of project's investments in establishing 8 new creative Semi-annual 1B Number of new jobs created in industries centers and 3 project Culture & Tourism project-supported creative industries and new tourism facilities. Annually Surveys progress PPMO tourism facilities (disaggregated by Disaggregation will be made reports bottom 40% and gender) by percentage of
beneficiaries in the bottom 40% income group, and percentage of women- targeting 40-50% from a baseline on 0%.
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The IBRD allocated amount to component 1 (US$50 Semi-annual million) is expected to 1C Amount of co-financing leveraged by project leverage at least US$100 Annually Surveys PPMOs the Participating Financial Institutions progress million from PFIs for MSE (PFIs) report sub-loans co-financing at
ration of 1 (IBRD) : 2 (PFI) or above. Number of people benefited from urban-rural regeneration, including improved access to 2A Number of people benefiting from municipal services and urban-rural regeneration, including infrastructure and houses Semi-annual Culture & Tourism improved access to infrastructure and restoration, funded under Annually progress Surveys PPMO services, in the project areas the project. Disaggregation reports
(disaggregated by bottom 40% and will be made by percentage gender) of beneficiaries in the bottom 40% income group and percentage of women, targeting 50% from a baseline of 40%. Development and application of institutional development plans for Semi-annual Surveys and 3A Number of PFIs that have completed participating financial Annually progress performance evaluation Line of Credit PPMO and executed their institutional institutions, with reports reports development plans with project's support. benchmarks on applying the TA and measuring the results in the short term. 3B Number of integrated culture and Integrated culture and Annually Semi-annual Project impact Culture & Tourism
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tourism strategies adopted and budgeted tourism strategies of Gansu reports evaluation PPMO in provincial and local plans Province and the four prefectures of the project prepared/updated, budget allocated and implementation started. % of beneficiaries satisfied with project results (disaggregated by gender) measured by annual Semi-annual community feedback Project impact Culture & Tourism Beneficiaries satisfied with project results Annually progress surveys. The surveys will evaluation PPMO (disaggregated by gender) reports target 50% females
respondents and results will be disaggregated by gender. Control groups will be established. ME PDO Table SPACE
Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection The cumulative number of MSEs received credits from PFIs under component 1 to Semi-annual 1.1 Number of MSEs benefiting from line start-up/expand their Semi- project Impact evaluation of credit (disaggregated by national Line of Credit PPMO businesses, including annually progress surveys bottom 40% and percent of female working capital support. The reports owners) component is expected to support a minimum of 1200 micro enterprises
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(US$50,000 or less) and 180 small enterprises. Disaggregation will be made by percentage of beneficial MSE owners from the bottom 40% income group, and percentage of women- targeting an increase from less than 7% at baseline to 10-14% in new portfolio financed under the project. Semi-annual Number of PFIs in the Semi- project Impact evaluation Line of Credit PPMO 1.2 Number of PFIs in the project project aiming at working annually progress surveys
with 3 by end of the project reports
Length of new or Semi-annual rehabilitated sewage Semi- project Impact evaluation 2.1 Length of sewerage networks networks as part of urban- Culture & Tourism PPMO annually progress surveys constructed or rehabilitated rural regeneration reports subprojects in the project's
areas. Cumulative number of households benefiting from Semi-annual improved sanitary and solid Semi- project Impact evaluation 2.2 Number of households with access to Culture & Tourism PPMO waste collection as part of annually progress surveys improved sanitation urban-rural regeneration reports subprojects in the project areas. 2.3 Length of electricity networks Cumulative length of new or Semi- Semi-annual Impact evaluation Culture & Tourism PPMO constructed or rehabilitated rehabilitated electricity annually project surveys
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network as part of urban- progress rural regeneration reports subprojects in the project areas. Cumulative length of new or rehabilitated urban-rural roads, including storm- Semi-annual water drainage, sidewalks Semi- project Impact evaluation 2.4 Length of roads constructed or Culture & Tourism PPMO with ramps, and energy annually progress surveys rehabilitated efficient street lights, as part reports of urban-rural regeneration subprojects in the project areas. Cumulative area size of Semi-annual green space and parks Semi- project Impact evaluation 2.5 Area of green space constructed or constructed or upgraded as Culture & Tourism PPMO annually progress surveys upgraded part of urban-rural reports regeneration subprojects in
the project areas. Cumulative number of traditional houses and public buildings restored, Semi-annual including energy efficient Semi- project Impact evaluation 2.6 Number of traditional houses and Culture & Tourism PPMO roofs, facades, windows and annually progress surveys public buildings restored heating, as part of urban- reports rural regeneration subprojects in the project areas. Cumulative number of Semi- Semi-annual Impact evaluation 2.7 Number of creative industry centers Culture & Tourism PPMO creative industry centers annually project surveys and tourism facilities constructed (eight) and tourism facilities progress
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(three) constructed, reports equipped and efficiently operating under the project to receive visitors and provide incubator services to artisans. Cumulative number of MSEs received advisory services to start-up or expand businesses, including preparation of business plans, credit applications, efficient operation of Semi-annual business, hospitality, Culture & Tourism PPMO 3.1 Number of MSEs received business Semi- project Impact evaluation marketing and other in coordination with Line start-up advisory services (disaggregated annually progress surveys support during their of Credit PPMO by national bottom 40% and gender) reports operation to sustain
success. Disaggregation will be made by percentage of beneficial MSEs from the bottom 40% income group, and percentage of women- targeting 40-50% from a baseline of 0%. Percentage of maximum 3.2 Non-performing loan ratio of sub- non-performing loans Semi-annual borrowers is less than 5% in new portfolio (defaults or arrears) by sub- Semi- project Impact evaluation Line of Credit PPMO financed under the project as a result of borrowers under annually progress surveys increased capacity of participating component 1 should not reports financial institutions exceed 5% from a NA baseline as a result of
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improved systems and better skills for staff at GFHG, GFGC, BoG and other potential PFIs. A control group of comparable lenders to MSEs will be established at the beaning of project implementation. Number of staff in participating financial institutions trained on
corporate governance, risk Semi-annual management, utilizing 3.3 Number of trained staff in Semi- project Impact evaluation Fintech and global good Line of Credit PPMO participating financial institutions annually progress surveys practice in executing and (disaggregated by gender). reports managing guarantees.
Disaggregation will be made
by gender, targeting 40-50% women staff from a baseline of 20-25%. Cumulative number of site management plans (SMPs), including carrying capacity assessment, visitor Semi-annual management plans, and Semi- project Impact evaluation 3.4 Site management plans in place with Culture & Tourism PPMO institutional arrangements annually progress surveys budget for O&M, prepared, reports budgeted and in operation for sustainability. Critical sites to have SMPs as a priority include Dadiwan,
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Dunhuang and Majiayao.
Cumulative training hours provided to local and provincial officials on urban and rural regeneration, Semi-annual 3.5 Number of staff trained on urban- creative industry support, Semi- project Impact evaluation rural regeneration, creative industries, and site management. Culture & Tourism PPMO annually progress surveys site management and tourism policies Disaggregation of persons reports (disaggregated by gender) received training will be
made by gender, targeting about 50% women from a common baseline of 20-25% in Gansu in the sector. Cumulative number of impact evaluation surveys completed to assess improvement in Semi-annual beneficiaries' socioeconomic Semi- project Impact evaluation 3.6 Socioeconomic impact evaluation Culture & Tourism PPMO status and satisfaction with annually progress surveys surveys conducted and evaluated project results. Data will be reports disaggregated by the bottom 40% and gender targeting 50% from baseline 0%. Number of dissemination and communication Semi-annual 3.7 Number of periodic project strategies developed, with Semi- project Impact evaluation dissemination strategies developed and Culture & Tourism PPMO accompanying knowledge annually progress surveys accompanying knowledge materials content produced and reports produced distributed to share Gansu knowledge globally (both in
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hard copies and electronically). Number of international knowledge-sharing and dissemination events Semi-annual 3.8 Number of global knowledge successfully completed to Annually progress Surveys PPMOs dissemination events completed transfer Gansu knowledge reports (conferences, workshops and expos) globally to developing
countries with similar development challenges and endowments. ME IO Table SPACE
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ANNEX 1: Implementation Arrangements and Support Plan
COUNTRY: China Gansu Revitalization and Innovation Project
Project Institutional and Implementation Arrangements
1. Project Management and Leadership. The project will be managed at three levels: (a) Gansu provincial government, (b) Tianshui, Dingxi, Zhangye, Jayuguan, and Jiuquan municipal governments, and (c) Maji, Ganzhou, district and Qin’an, Wushan, Tongwei, and Lintao county governments. A provincial steering committee (PSC) has been established; it is led by Gansu’s executive vice governor and includes representatives from all key provincial government departments. The PSC is responsible for providing strategic oversight and guidance to the project management offices (PMOs) and project implementing units (PIUs). Municipal-level project leading groups (PLGs) have also been established in participating municipalities, districts, and counties, with similar roles and responsibilities at their respective levels.
2. Provincial-Level Project Management. The Gansu provincial PMOs are housed at the Gansu Cultural and Tourism Department (GCTD), which was established through the merger of the Gansu Cultural Department and the Gansu Tourism Department on October 31, 2018, and the Gansu Financial Holding Group (GFHG) Co., Ltd. The PPMO in GCTD (culture and tourism PPMO), headed by the director of GCTD, is responsible for overall coordination, management, procurement, contract management, disbursement, and project reporting for project components 2 and 3. The second PPMO (line of credit PPMO), housed at GFHG, is headed by the director of GFHG. It is responsible for on-lending the equivalent of the proceeds of the loan allocated for component 1 under a subsidiary agreement to be entered into between GFHG and Bank of Gansu, under terms and conditions approved by the Bank (see below); maintaining the operational manual in form and content satisfactory to the Bank; duly performing all its obligations under the operational manual; and not assigning, amending, abrogating, or waiving the operational manual.
3. Local-Level Project Management. The participating municipal, district, and county PMOs, located in their respective participating municipal, district, and county cultural and tourism bureaus, have also identified their respective PIUs and project owners. These PMOs will be responsible for coordinating overall project preparation and management and for overseeing the respective PIUs. None of the local PMOs has had experience in managing Bank-funded projects. As a result, strong project management support in all key areas (overall project coordination, procurement, financial management, and so on) will be provided through dedicated technical assistance under component 3. Each PMO will oversee one or two PIUs in the implementing agencies.
4. The PIUs for the project are fully government-owned companies who will be responsible for bidding and contracting and for the supervision of contractors. Together, the PMOs and PIUs will be responsible for all subproject preparation and management functions, including engineering and construction supervision, implementation of safeguards and fiduciary measures, and project monitoring and reporting. A project implementing plan (PIP) and procurement and financial management manuals, reviewed by the Bank, will help guide project implementation.
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5. Institutional Arrangements under Component 1. GFHG is responsible for intermediating the equivalent of the proceeds of the loan allocated for component 1 under a subsidiary agreement to be entered into between GFHG and selected PFIs, under terms and conditions approved by the Bank (see below); maintaining the operational manual in form and content satisfactory to the Bank; duly performing all its obligations under the operational manual; and not assigning, amending, abrogating, or waiving the operational manual or any provision thereof without obtaining the prior approval of the Bank. It is noted, however, that the operational manual is a living document.
6. The success of component 1 depends largely on the quality and business exposures of the participating financial institutions (PFIs). Strong and capable PFIs that are major players in the sectors on which the operation is focused will deliver funds effectively and efficiently to viable subprojects. Bank policy requires an assurance that PFIs are viable institutions, as determined by (a) adequate profitability, capital, and portfolio quality, as confirmed by audited financial statements prepared; (b) appropriate prudential policies, administrative structure, and business procedures; and (c) appropriate capacity, including staffing, for carrying out subproject appraisals. An expression of interest was launched and circulated to eight banks and financial institutions that are active in Gansu. Bank of Gansu expressed interest to partner and US$25 million has been allocated to it. Future PFIs will benefit from remaining IBRD funds for component 1. The project beneficiaries of future PFIs can also benefit from activities under component 3.
7. The IBRD’s US$50 million equivalent will be on-lent through the Ministry of Finance to the Gansu Provincial Finance Department (PFD), which will consecutively transfer the resources under the same terms and conditions to the Gansu Financial Holding Group (GFHG). Under the project, GFHG will intermediate the funds, in local currency (RMB), at a fixed interest rate of 4 percent, through identified PFIs, which in turn will on-lend to eligible MSEs in Gansu Province. To arrive at 4 percent, the cost of IBRD funds is increased by a margin of 2 percent for absorption of the exchange rate risk margin and an additional 1 percent for management fees (administrative cost). During the life of the project this can be adjusted in case of market shocks, but it is not expected. This rate is higher than the most appropriate comparable to the interest rate available in the market for which the team used the Shibor (Shanghai Interbank Offered Rate). Currently (April 15, 2019), the Shibor for one year is 3.072, which is down from the one-year rate of 3.51 in January 2, 2019.
8. Banks interested in using the line of credit (LoC) funding should be able to meet the established eligibility criteria, which are set as ongoing compliance indicators with regulatory requirements (see Table 1.1). Bank of Gansu is expected to continue to meet the eligibility criteria at all times. To confirm that future PFIs continues to meet the eligibility criteria, the following will be required: (a) a commitment to co-finance MSE sub-loans at a minimum ratio of 1 (IBRD):2 (PFI); (b) annual external audit reports; and (c) a semiannual compliance certificate, signed by management, confirming the PFI fully meets the requirements and prudential provisions of the supervisory authority. In case a PFI does not meet criteria, it can still hold the existing portfolio, however, will not be allocated additional funds.
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Table 1.1: Compliance with Regulatory Requirements as of End of December 2017
Regulatory requirements Capital adequacy indicators Core tier-one capital adequacy ratio ≥7.1% Tier-one capital adequacy ratio ≥8.1% Capital adequacy ratio ≥10.1% Asset quality indicators Nonperforming loan ratio ≤5.0% Provision coverage ratio ≥150% Provision to total loan ratio ≥2.5% Other indicators Loan to deposit ratio ≤75% A commitment to co-finance MSE sub-loans at a minimum ratio 1:2 of 1 (IBRD):2 (PFI)
9. GFHG and selected PFIs will enter into the subsidiary agreement mentioned above. The World Bank has discussed the template and agreed to it in principle. The subsidiary agreement will be cleared by the Bank once it is finalized and as a condition for disbursement.
10. Ownership, Management of Assets, and On-Lending Arrangements under Components 2 and 3. The proposed loan will be made to the People’s Republic of China, which will on-lend the loan proceeds to Gansu Province. The province, in turn, will on-lend the loan to the project city or county governments on the same terms and conditions as the World Bank loan to China. All implementing agencies will enter into subsidiary agency agreements with their city- or county-level governments. The subproject implementing units, ownership of assets, O&M responsibility of assets, and debt service obligations are shown in Table 1.2. All new creative industry centers and tourism facilities will be leased out to professional operators to ensure sustainability of O&M and generation of net revenues to local governments to service the debt (see Annex 2, Table 2.8).
Table 1.2: Subproject PIUs, Ownership of Assets, O&M of Assets, and Debt Service Obligations
No. Location Subproject Ownership of O&M of assets Debt service implementing assets obligations units 1 Qing’An Qing’An County Qing’An County Qing’An Dadiwan Cultural Qing’An County County PMO government Tourism Industry Park government Development Co. Ltd. 2 Maiji Maiji District PMO Maiji District Tianshui Lacquer Cultural Maiji District District government Tourism Co. Ltd. government 3 Lingtao Lingtao County Lingtao County Lingtao County Taomei Lingtao County County PMO government Culture Tourism Investment government & Development Co. Ltd. 4 Tongwei Tongwei County Tongwei County Tongwei County Urban Tongwei County
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County PMO government Investment Management Co. government Ltd. 5 Ganzhou Ganzhou District Ganzhou District Zhangye City Western Ganzhou District District PMO government Customs & Cultural Tourism government Investment Co. Ltd. 6 Jiuquan City Jiuquan City PMO Jiuquan City Jiuquan City Media, Jiuquan City government Entertainment News, government Publication, Sports, Culture and Tourism Bureau 7 Dunhuang Dunhuang City Dunhuang City Dunhuang Cultural Tourism Dunhuang City City PMO government Group Co. Ltd. government 8 Wushan Wushan County Wushan County Wushan County Media Wushan County County PMO government Culture & Tourism government Investment & Development Co. Ltd.
11. Strategy and Approach for Implementation Support. The strategy for implementation support revolves around the objectives of (a) achieving the project development objectives and project outcomes, as measured by the results indicators; (b) providing timely and high-quality support to ensure satisfactory progress of the implementation, covering the various facets of project activities, including technical, managerial, institutional, environmental, social, procurement, financial management, risks, and monitoring and evaluation; and (c) mitigating the key risks identified. The approach for implementation support focuses on the following:
(i) Management support: (a) implementation support for readiness, effectiveness, and progress; (b) PMO and PIU staff capacity; (c) review of annual plans; (d) monitoring of implementation progress (physical and financial targets); and (e) project changes and/or restructuring.
(ii) Technical support: (a) technical advice on designs for infrastructure, discovery centers, tourism facilities, creative industry, etc.; (b) technical guidance for urban, town, and village regeneration, intangible cultural heritage, and tourism activities; (d) institutional strengthening and technical assistance; (e) review of training plans and activities; and (f) advice on communication and dissemination strategy for new development.
(iii) Procurement: (a) compliance with Bank procurement guidelines; (b) prior and post review; and (c) contract management.
(iv) Financial management: (a) compliance with financial management procedures; and (b) disbursement.
(v) Environmental, social, and other safeguards: (a) implementation of the relevant safeguards’ manuals.
(vi) Delivery, monitoring, and sustainability: (a) tracking achievement of PDO outcomes and intermediary results indicators; (b) monitoring and evaluation; (c) responsibility for and quality and availability of data for monitoring and evaluation; (d) help mitigating other implementation risks; and (e) alignment of Bank resources, staffing, and skills (supervision missions, team composition, budget).
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12. Implementation Support Plan. The implementation support plan (ISP) will cover the key areas of project implementation—mainly, technical, fiduciary, safeguards, monitoring and evaluation, and risks. The ISP will be developed to cover the entire project implementation period, from effectiveness to completion, and support activities will be designed to provide support at the right times to ensure tailored support. The ISP will be reviewed and updated based on periodic assessment of risks and appropriateness of the mitigation measures implemented.
13. Implementing Agency Capacity. The project PMOs and PIUs have little to no experience in implementation of Bank projects. This has been identified as a substantial risk to project implementation. Bank support in project management will initially focus on assisting the client in strengthening implementation capacity at all levels, particularly in financial management and procurement. Frequent supervision early on in the first half of the implementation period is expected to aid compliance with Bank policies and procedures in these areas. The Bank team will also support the client in implementation progress and annual plan reviews, project adjustments, and any restructuring required.
14. Technical. Specific technical expertise in the design of infrastructure, urban and rural regeneration, tourism development, and discovery centers will be mobilized. The challenges for sustainable operation and maintenance mechanisms will be monitored by the Bank’s technical specialists in the course of routine supervision. These specialists will also provide technical support to project implementing agencies and help resolve any technical issues that may arise.
15. Procurement: Applicable procurement rules and procedures. Procurement for the project will be carried out in accordance with the Bank’s Procurement Regulations for Goods, Works, Non-Consulting and Consulting Services, July 2016, revised November 2017 and August 2018 (hereafter referred to as the Bank procurement regulations), as required by the provisions of the loan agreement (LA). Also applicable to the project will be the Bank’s Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, October 2006, revised January 2011 and July 1, 2016. The requirements on anti-corruption and complaint handling mechanism for the project will be stipulated in the OM. The World Bank will supervise the project implementation on a regular basis to verify if the relevant requirements are fulfilled in practice.
16. In addition to the risk mitigation measures described in the main body of this project appraisal document, the following specific procurement-related procedures will be observed. Project procurement and contract management will be carried out by PIUs with the support of a professional procurement agent and procurement management specialists of the culture and tourism PPMO, who have experience with Bank- financed projects. All key procurement documents will be prepared by the procurement agent and subject to review by a project management consulting firm under the leadership of the culture and tourism PPMO; the procurement process will also be closely supervised by the relevant government supervisory departments, such as the local finance bureaus, the development reform commissions, and other administrative supervisory departments. The selected procurement agent will assist the PIUs with organizing the procurement of each contract, including advertising procurement notices, issuing procurement documents, providing clarifications, assisting with bid opening, preparing bid evaluation reports, publishing notifications of intention to award contracts, issuing contract award notifications to winning bidders, and preparing draft contracts. Project design and technical specifications preparation will be carried out by different design institutes selected by
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the culture and tourism PPMO or each PIU before project implementation. The terms of reference (TORs) for consulting services will be prepared by the culture and tourism PPMO and PIUs based on the specific requirements of each consulting services contract. The management of goods and works contracts, consulting services, and non-services contracts at city/county/district levels will be undertaken by the PIUs, with support from the procurement agent and the project management consulting firm to be hired. The consulting services procurement at provincial level will be undertaken by the culture and tourism PPMO, which will be responsible for overall coordination and communication with the Bank, including obtaining the necessary Bank “no objections”.
17. Project procurement strategy and procurement plan. Based on paragraphs 4.1–4.5 of the Bank’s procurement regulations, a project procurement strategy for development (PPSD) and an accompanying project procurement plan (PP) have been prepared by the culture and tourism PPMO in close consultation with the Bank. The PPSD states how procurement activities will help the project achieve its development objective and deliver best value for money using the fit-for-purpose procurement and risk-managed approach, giving due consideration to specific project needs and to the country’s operational and market context. Decisions on the selection methods and market approaches to be adopted in the project procurement plan are justified in the PPSD. This information will be made available in the project’s database, on the Bank’s external website, and at the project implementing agency’s office. The procurement plan will be updated annually, or in a way that reflects actual implementation needs and institutional capacity and will be agreed upon by the Bank. The PPSD and PP may need to be updated during project implementation.
18. Operations Manual. An OM has been prepared to indicate the rules to be followed by the MSEs for implementing the project activities under component 1. The OM defines the role of stakeholders as well as corresponding responsibilities on procurement. The commercial practices that are applicable for this project are described in the OM. Moreover, the OM specifies the minimum requirement on procurement in the case of adopting commercial practice.
19. Use of UN agencies. Under component 3, UNWTO may be hired to help Gansu with strategies, marketing, promotion, and branding of Gansu and project cities, capacity building in the newly merged culture and tourism departments, and the transfer of Gansu knowledge globally. UNESCO may also be hired to provide advisory services related to creative industry strategy, sustainable site management, and the transfer of Gansu knowledge in China and globally. Details will be specified in the PPSD and PP.
20. Procurement methods and Bank oversight. The thresholds of individual procurement methods and the requirements for the Bank’s prior review are shown in Table 1.3. These will need to be followed for project procurement activities, which have been agreed upon based on specific Bank procurement requirements, as well as the justifications provided in the PPSD. Specific procurement requirements will be included in the project procurement plan; however, any changes to needed procurement thresholds during project implementation will have to be justified in the updated PPSD and reflected in the updated PP. In addition to prior review supervision carried out from the Bank offices, Bank procurement supervision missions will visit the field at least once a year to carry out procurement supervision or post review of procurement activities. The post-review sampling ratio of contracts will be 1:10.
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Table 1.3: Thresholds for Procurement Methods and Prior Review
Expenditure Contract value Procurement method and Prior review Prior review category (US$) market approach threshold (US$) threshold (US$) for contracts under retroactive financing
1.Civil works ≥40,000,000 RFP, Open, International All N/A <40,000,000 RFB, Open, National ≥US$10 million N/A <500,000 RFQ N/A N/A Any value Direct Selection ≥US$10 million N/A 2. Goods/Non- ≥10,000,000 RFP, Open, International All N/A Consulting <10,000,000 RFB, Open, National ≥US$2 million N/A Services <500,000 RFQ N/A N/A Any value Direct Selection ≥US$2 million N/A 3. Consultant ≥300,000 QCBS/QBS/LCS/FBS, Open, ≥US$1 million ≥US$500,000 Services International, National <300,000 CQS, National Any value Direct Selection ≥1 million ≥US$500,000 Any value Selection of Individual ≥US$300,000 ≥US$200,000 Consultant Notes: RFP: Request for Proposals CQS: Consultants’ Qualifications–Based RFB: Request for Bids Selection RFQ: Request for Quotations DS: Direct Selection QCBS: Quality- and Cost-Based Selection IC: Individual Consultant Selection procedure QBS: Quality-Based Selection FBS: Fix-Based Selection LCS: Least Cost–Based Selection
21. Contract management. During project preparation, the World Bank team screened the proposed project procumbent contracts, focusing on the potential high-risk or high-value contracts. The PIUs need to develop key performance indicators for such contracts and closely monitor their implementation.
22. Financial Management Requirements. The financial management supervision strategy is based on the project’s financial management risk rating, which will be evaluated on a regular basis by the financial management specialist, in accordance with the financial management manual and in consultation with the task team leader. The financial management specialist will join the Bank supervision missions to review the implementation of the financial management manual. The specialist will also provide technical support to project implementing agencies and help bring about timely resolution to potential financial management issues. Training will also be provided by the Bank before the commencement of project implementation.
23. Safeguards. The team’s environmental specialist will monitor compliance with environmental safeguards and adherence to the environmental monitoring programs, PCR, and pest management plans. The social specialist will monitor adherence to the Resettlement Action Plan should any involuntary taking of land be required that was not foreseen at preparation. The Bank’s dam safety specialist will monitor any dam safety reviews required to be undertaken. All members of the Bank’s safeguards team are based in Beijing and will
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provide timely and on-demand implementation support to the client when needed.
24. Delivery Monitoring and Sustainability. The Bank team will support PMOs and PIUs in analysis and review of project monitoring information from the project management information system to address issues arising during implementation. In terms of sustaining the project approach, the Bank team will support PMOs in identifying successful mechanisms for integrating infrastructure, urban, town, and village regeneration, income-generating activities, and operation and maintenance measures from the project.
25. Exchange rate appreciation is identified as a moderate risk. The Bank supervision team will closely monitor exchange rate changes and their impacts on project implementation and work closely with PMOs to mitigate such impacts through agreed-on project measures.
26. Implementation Support Missions. An overview of the focus, timing, skills, and resource estimates is given in Table 1.4 and the required skill mixture in Table 1.5.
Table 1.4: Annual Supervision Input Estimate
Time Focus Specialists needed Resource estimate each year (in staff weeks) Procurement supervision and Procurement specialist 4 training FM and supervision FM specialist 2 Social safeguards/resettlement Social development specialist, 3 supervision community development specialist First 12 Environmental management and Environmental specialist 3 months supervision Technical supervision and support Urban specialist, culture and tourism development 16 specialists, municipal specialist, transport specialist Project management Task team leader 10 Procurement review, supervision, Procurement specialist 2 and training FM supervision and training FM specialist 2 Social safeguards/resettlement Social specialist, 2 supervision community development specialist Environmental management 12 to 72 Environmental specialist 2 supervision and support months Technical supervision and support Urban specialist, culture and tourism development specialist, municipal engineering 16 specialist, transport specialist Team leadership Task team leader 10
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Table 1.5: Skill Mixture Required
Specialists needed No. of staff weeks/year Number of trips/year Task team leader/lead urban specialist 8 2 SURR global coordinator for cultural heritage and sustainable tourism WBG co-lead of sustainable tourism global solution group Financial sector specialists 8 2 Culture and creative industries specialist 4 2 Tourism development specialist 2 2 Municipal engineering specialist 4 2 Road and transport specialist 3 2 FM specialist 3 2 Procurement specialist 3 2 Social development specialist 3 2 Environmental specialist 3 2
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ANNEX 2: Project Design Analysis
COUNTRY: China Gansu Revitalization and Innovation Project (GRIP)
Challenges and Opportunities of Development
1. The project design is underpinned by an in-depth economic geography analysis as part of project identification and preparation.18 The analysis reveals that Gansu has been historically constrained by its poor natural conditions, overpopulation, and landlocked location. Uneven development and significant disparities exist within the province and among prefecture-level cities and counties and within cities and towns. Underinvestment in all kinds of infrastructure is stark, but especially so in rural infrastructure. The living conditions of many residents and their economic opportunities are very limited. At the same time, Gansu is promising on several fronts. The province has reduced poverty in recent years, has anchored its growth strategy around service-based sectors, and is in the process of transforming its economy. Gansu’s rich endowments of natural, cultural, and the cultural, creative, and tourism industries have a chance to flourish and become a new driver of development. To develop this strategic sector further, several challenges need to be addressed: revenues of the cultural, creative, and tourism industries have slightly decreased in recent years; entrepreneurship is low; and the investment climate for MSEs is not yet ideal, especially with regard to access to finance.
2. Gansu, the poorest province in China, faces severe development challenges and significantly lags behind other parts of the country. While China as a whole has made significant progress in poverty reduction and economic growth, significant disparities remain in the country; Gansu has the lowest per capita GDP among all its provinces, standing at less than half the national average and a mere 23 percent of leading areas, such as Beijing and Shanghai (see Figure 2.1).19 Measured by per capita disposable income, Gansu also ranks last among all provinces.
3. Within Gansu, the gap between urban and rural areas and disparities among different prefectures are also quite significant. The urban-rural income gap is large and has been widening. In 2016, urban residents in Gansu, on average, had RMB 1,9687 more disposable income than rural residents, and this gap was 3.44 times as big as it was in 2000.20 A wide range of disparities also prevails among prefectures. The per capita GDP of the capital city, Lanzhou, for example, was 5.37 times that of the poorest prefecture, Linxia, in 2016. Figure 2.2 shows the variation in per capita GDP by prefecture in Gansu.
18 World Bank, Gansu Economic Geography Analysis (Washington, DC: World Bank, 2018). 19 According to the China National Statistics Bureau (2018), and the Gansu Statistics Bureau (2018), Gansu’s GDP per capita was RMB 29,238 (US$4,330) in 2017, ranking in the last position among all provinces, while China’s GDP per capita that year was RMB 59,660 (US$8,836). In contrast, Shanghai’s GDP per capita was RMB 124,606 (US$18,453), and Beijing’s GDP per capita was RMB 128,992 (US$19,102). 20 World Bank, Economic Geographic Analysis of Gansu, World Bank commissioned report for project preparation. Data are from Gansu Statistics Yearbook 2017 and China National Statistics Yearbook 2017.
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Figure 2.1: Average Per Capita GDP of Provinces in China, with Gansu Ranking Last
140000
120000
100000
80000
60000
40000
20000
0
Per capita GDP (RMB)
Source: Based on data from the Gansu Development Yearbook, 2017.
Figure 2.2: Per capita GDP (2016) by Prefecture in Gansu, with Significant Variations among Localities
Source: Economic Geographic Analysis of Gansu, World Bank commissioned report for project preparation. Data are from the Gansu Development Yearbook, 2017.
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2500000
2000000
1500000
1000000 RMB (RMB 10,000) RMB (RMB
500000
0
Exports Imports
4. Despite its development challenges, Gansu could further grow its service sector and leverage its rich endowment of resources for economic development. Gansu Province is an important place of origin for Chinese civilization and has many attractions. Its service industry has been growing dramatically and has become a main pillar for the local economy in recent years. From 2010 to 2016, revenues from the tourism industry had more than doubled, and tourist visits grew fourfold. The share of the tourism industry in the economy grew from 6 percent to 17 percent during the same period (see Figure 2.4). Furthermore, research has shown that developing the tourism industry could help boost rural employment and reduce the urban- rural income gap. Among Gansu’s prefecture-level cities, the more dominant the tourism industry, the smaller the gap between urban and rural income.
Figure 2.4: Share of the Tourism Industry in the Economy of Gansu, 2006–16 0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Based on data from the Gansu Development Yearbook, 2017.
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5. The financial sector in Gansu plays a limited role in helping the MSEs in the province’s service sector leverage its rich cultural endowment. Micro- and small enterprises (MSEs) are active in the province’s service industry, providing authentic cuisine, art, and performance experiences to visitors, as well as accommodation in homestays or boutique hotels, sightseeing, and local transportation. Such service enterprises provide an important source of employment and income for local residents. Most of these MSEs, however, do not borrow from the formal financial sector. The cost of getting credit and a complicated application process, compounded by the banks’ lack of understanding of the sector’s creditworthiness, means these enterprises are not able to expand and remain small scale.
6. Institutional capacity is very low in Gansu, too. The provincial and municipal governments are in the process of merging the Department of Culture and the Department of Tourism, following the administrative restructuring at the national level. Proper strategies, policies, and mechanisms to guide the development of the service sector are still missing, and the government lacks experience working with the private sector in managing public assets. Finally, because of Gansu’s low GDP and very limited government funding, infrastructure and public services in many important (tourism/cultural) sites and the communities around them are deteriorating and in urgent need of rehabilitation.
7. Green and climate-smart development is still a challenge in Gansu. Green development is a strategic goal of both China’s national-level development plan21 and Gansu’s provincial-level development plan22 for 2016–20. Gansu, however, faces several challenges in addressing climate change and conserving energy. First, Gansu is under great pressure to develop its economy. How to conserve the environment while the economy strives to grow is a major challenge. Gansu is going through rapid industrialization and urbanization and has many key investment projects to be implemented, which will consume much energy and other natural resources. Second, Gansu has very high rates of energy consumption. Measured by coal consumption per unit of GDP, its energy intensity is 1.7 times China’s national average. Third, coal consumption in Gansu constitutes a large share of total energy consumption, with the consumption of natural gas and other renewable energy still modest. Finally, Gansu has a few major concerns directly related to climate change. The province is experiencing lowering of the groundwater table, shrinking wetland areas, grassland deterioration, land desertification, frequent flooding, and geological hazards. Monitoring and reporting on greenhouse emissions by enterprises is lagging, and the awareness of the general public regarding these challenges is still low.23
8. In China, rapid economic growth has not yet fully addressed gender gaps in economic opportunities.24 The persistent gender gap in China is reflected in falling female labor force participation, widening gender gaps in wages, and significant underrepresentation of female leadership in business and management positions compared with other emerging economies. China’s service sector has been rapidly expanding, both in modern and traditional services. Research indicates the sector now accounts for the majority of women’s employment, while covering a diverse set of activities, from well-paid modern jobs to low-skilled traditional services. Labor force survey data show the gender gap is smallest in government and public institutions—around 15 to 17 percent, compared with 27 to 30 percent in the private sector. The disproportionate burden of unpaid work on women, which has been documented globally, also maintains in
21 Outline of the 13th Five-Year Plan for the National Economic and Social Development of the People's Republic of China (2016–20). 22 Outline of the 13th Five-Year Plan for the Provincial Economic and Social Development of Gansu (2016–20). 23 Gansu Province, Gansu Provincial Plan for Conserving Saving and Addressing Climate Change during the 13th Five-Year Plan, 2016. 24 Limin Wang and Jeni Klugman, “How Women Have Fared in the Labor Market with China’s Rise as a Global Economic Power.”
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China. The informal sector, which is largely in services, is an important source of livelihoods for women. Technology, which has been in recent years a powerful engine of employment and growth in China, holds promise to expand women’s business opportunities and financial inclusion. Especially in rural areas, women can benefit from the mobility of digital platforms that allow them to reach potential opportunities and combine work with household responsibilities.
9. Gender-based occupational segregation is more significant in rural areas, as well as for those urban women who are employed in the private sector or employed informally. This is reflected in women’s income, as the occupational segregation and education attainment gap result in income disparity between males and females. According to the Chinese Family Panel Studies in 2011, men’s wages were higher than women’s in every sector. The average income of urban women was 67.3 percent of men’s, while the income disparity in rural areas has been even greater.
10. In Gansu, gender inequality is similarly significant in access to education, employment, and finance. According to the National Labor Statistics Yearbook, female illiteracy rates are markedly higher than male rates, and females are disadvantaged with regard to attainment of senior school education and above, as Figure 2.5 shows.
Figure 2.5: Education Attainment Composition of Employment in Gansu, 2016
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Illiterate Primary Junior Senior Medium High College University Graduate School School School VocationalVocational Education Education
Female Male
Women have also comprised a much smaller share of the population employed in urban areas in Gansu Province, although the proportion increased slightly, from 31.43 percentage in 2013 to 33.23 percentage in 2016, as shown in Figure 2.6.
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Figure 2.6: Gender Composition of Population Employed in Urban Areas in Gansu
66.08% 68.57% 67.52% 67.03% 66.77%
33.92% 31.43% 32.48% 32.97% 33.23%
2012 2013 2014 2015 2016
Female Male
11. The tourism sector can contribute to reducing the gender gap in Gansu. The proportion of females employed in the hotels and catering sector is 62.5 percent in Gansu, which is 7.6 percent higher than national average. This implies that there is a good potential for this proportion to grow. By the end of 2018, there were 9,027 registered tour guides, of whom 79.1 percent (7,136) were female. Of the 16,665 homestays registered in Gansu, 23 percent were owned by women, and 70 percent of employed staff were female. However, the concentration of females in the tourism industry does not necessarily mean higher income for women because female staff are clustered in low- to middle-paid positions. As for women’s employment in the public sector, only 23.3 percent of employees of the Gansu Culture and Tourism Department are female. The number of female-led SMEs is also much smaller than those led by males. Overall, gender inequalities include occupational segregation, the gap in education attainment, income disparities, and low representation of women in the public sector and leadership positions.
12. Major barriers attributed to the gaps in access to finance include lack of diversity in the loan products, perceived high risks, low financial education, and lack of financial training. Although demand from females in rural areas is strong, they lack basic financial knowledge and business experience. Going through the lengthy procedures of applying for loans and preparing for the associated high risks are challenging for them. In addition, the financial products available in the market are not sufficiently diverse to meet the demands of the service industry, as most focus on the traditional agricultural sector. Financial institutions do not have incentive to offer small loans, given existing policy on interest rates and the low profits relative to the high operational costs.
13. This project includes gender-segregated consultation mechanisms in the community engagement strategies to ensure diverse voices are represented and heard. Under component 1, 10 to 20 percent of community micro-credit provided will go to women-led enterprises (see details of the market demand analysis in paragraphs 32-40). Under component 3, the project will deliver training and business advisory and incubator services to participants, at least 40 percent of whom will be women. Additionally, infrastructure investments will be screened for gender impacts to identify ways by which to address safety, inclusion, and benefits for women.
14. Gansu could leverage rich but underutilized endowments that have huge potential to contribute to local economic development. Lonely Planet, a renowned travel guide book publisher, awarded its Best
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Destination in Asia to Gansu in 2017.25 Gansu Province is an important location with respect to Chinese civilization and has many historic sites. Among its cultural resources are 68 national-level intangible heritage elements, 333 provincial elements, and 60 designated national-level intangible heritage assets. 26 The province’s tourism industry has been growing significantly and is becoming a main pillar for the local economy, poverty reduction, and job creation.
15. The rapidly growing service and creative industries have been widely recognized as green and sustainable development sectors. The travel and tourism sector contributes nearly 10 percent of global GDP and creates one out of every eleven jobs, with more than half filled by women and youth (WTTC 2016). China’s tourism sector contributed 11 percent of the national GDP and 10.3 percent of total employment in 2017 (CNTA 2018). It is also a major employer of women in China, where the female labor force participation rate is 61 percent and the male rate is 80 percent (WB Indicators website). In 2016, 12,000 enterprises were in the cultural and creative industries in China, with more than 220,000 employed and a value added of RMB 18.117 billion (equivalent to US$2.66 billion), a 15.67 percent increase from the previous year. Cultural industries accounted for 2.54 percent of Gansu’s GDP.27 In 2017, 122,600 people were alleviated from extreme poverty in Gansu through jobs in the culture and tourism sector (Gansu Tourism Development Commission, 2018). Further growth in the service sector is also directly relevant to the bottom 40 percent of the income groups. It would reduce the vulnerability of this population to economic shocks and prevent it from falling back into poverty.
Project Design
16. Institutions. The territorial development of lagging regions starts with institutions that can plan strategically and enable economic opportunities for all. Gansu performs poorly—even worse than other poor western provinces in China—in ease of doing business because of institutional constraints and difficulty in accessing credit. With recent tightening of financial policies and restrictions on lending in China, access to finance for micro- and small enterprises has become more challenging since 2015.28 In terms of strategic and master planning, the province and cities also have underdeveloped tourism strategies and plans that do not fully meet demands or leverage local endowments. Components 1 and 3 tackle the institutional aspect.
17. Infrastructure. Territorial development provides a spatially coordinated approach to prioritizing and planning infrastructure investments. Major corridor infrastructure that connects lagging regions to economic centers is being provided in Gansu by the government. Yet secondary and tertiary infrastructure is urgently needed along the main connective infrastructure, especially in and around pockets of poverty. Urban and rural settlements in Gansu are often dilapidated and without adequate basic infrastructure, such as paved roads, water, heating, and wastewater and solid waste collection and treatment. Residents in or near places
25 Spotlight on Best in Asia 2017 Winner: Gansu, Lonely Planet, 2017. https://www.lonelyplanet.com/video/spotlight-on-best-in-asia- 2017-winner-gansu/v/vid/349. 26 For more information on tourism in Gansu, see Lonely Planet, “Gansu Travel”, https://www.lonelyplanet.com/china/gansu, and Top China Travel, “Gansu Tours”, https://www.topchinatravel.com/gansu/gansu-tours.htm. 27 Gansu Daily, “Creative Fusion and Digital Future Forum, Dunhuang”, September 20, 2017 http://gansu.gansudaily.com.cn/system/2017/09/20/016819110.shtml. 28 Blue Book of Gansu, 2016.
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with unique cultural and natural endowments often live in poor conditions. Component 2 of the project tackles the infrastructure aspect.
18. Targeted interventions. Spatially coordinated and targeted interventions provide tailored solutions to improve local economies in lagging areas. A sequence of interventions to maximize regional and local competitiveness has been strategically selected by examining the territory as a whole. As Gansu’s rich endowments are underdeveloped, such interventions aim to create economic hotspots for job creation and income generation, focusing on meeting demands by offering unique, well-connected, and high-quality tourism circuits for cultural, tourism, and creative industries. Component 2 of the project provides targeted interventions.
19. Human capital. Investments in institutions, infrastructure, and interventions must go hand in hand with developing human capital through training, capacity building, and entrepreneurship support. Building human capital is critical to preparing people for more active economic participation and—in the longer term— to alleviating poverty and stimulating prosperity. Gansu has a weak skills training system compared to other provinces, leading to common skills mismatch and underemployment. Moreover, its unique human resources, such as intangible heritage, face the challenge of lacking funding, inheritance, or promotion. The project’s component 3 focuses on the human development aspect.
20. Spatially, the project design adopts a “hubs and spokes” concept of economic clustering and local economic development. A “hub” is a node city along the main transport/trade corridor that is well connected and has a concentration of population and an agglomeration of economic activities. Investments in hubs under this project will focus on enhancing the hubs’ infrastructure, livability, and attractiveness as base cities, which will lead to improvement in the living conditions of the communities and more income-generating opportunities. The “spokes” represent a satellite system of attractive destinations as economic hotspots surrounding each hub (for example, World or National Heritage Sites, historic towns, traditional villages, scenic areas, creative industry centers). Investments in spokes aim to reduce disparities and uneven development within each prefecture. Well-connected, well-developed spokes will enhance local living conditions and economies by leveraging the spillover effect and diversifying economic activities around the hubs.
21. The project’s design is also based on World Bank’s established approach to competitive city development. 29 In addition to the elements already mentioned under approaches to lagging region development, the competitive city approach recommends that local governments provide support enterprises for the cities to thrive, contribute to the economy, and create jobs for local residents. Among many key conditions, firms need access to credit. This is a major constraint in Gansu, and a component in this project specifically addresses that. In sum, based on tested interventions for growing lagging regions and enhancing competitiveness of cities, as well as Gansu’s local context and conditions, the project is designed to support enterprises, cultivate key industry, invest in infrastructure, and provide training and capacity building to the residents. 22. Project areas: Counties, districts and towns in four prefectures in Gansu—Jiuquan, Zhengye,
29 Austin Francis Louis Kilroy, Megha Mukim, and Stefano Negri, Competitive Cities for Jobs and Growth (Washington, DC: World Bank Group, 2015), http://documents.worldbank.org/curated/en/902411467990995484/Competitive-cities-for-jobs-and-growth-what- who-and-how.
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Tianshui, and Dingxi—are selected under this project. Gansu as a whole severely lags behind other parts of the country. Figure 2.7 illustrates the proportion of local population who belongs to the bottom 40 percent population in selected provinces. About 64.5 percent of Gansu’s population belongs to the national bottom 40 percent group, compared with only 9.21 percent of Beijing’s population.30 Table 2.1 provides an overview of basic poverty and endowments data on the four prefectures’ counties and districts and compares them with Beijing and Shanghai. Data reveal the extent to which counties, districts and towns of the project’s prefectures lag compared to leading cities in China. Project counties, districts and towns where large investments are made have an average per capita GDP of RMB 21,000 which is significantly below the national average of RMB 59,660, and only a fraction of the per capita GDP in Beijing (RMB 118,198) or Shanghai (RMB 116,562). Similar trends exist for per capita household disposable income. Most project counties have high poverty rates. For example, Tongwei County has a poverty rate as high as 17.61 percent in comparison with the national average of 2.19 percent. Poverty rates in Tianshui and Dingxi Prefectures, where most project investments are made, stand at 9.80 percent, and 14.30 respectively. Jiuquan Prefecture is an outliner with relatively low poverty rate due to the location of four UNESCO world heritage sites out of the total seven in the province. The project makes small scale Investments in Jiuquan prefecture to connect a remote UNESCO site, Dunhuang Posthouse, to Gansu’s tourism circuit, which will benefit remote local communities and reduce pressure on the very famous Mogao Grottoes world heritage site.
Figure 2.7 Proportion of local population in national bottom 40 percent in selected province
70.00% 64.49%
60.00% 56.94% 49.15% 47.19%47.73%47.87% 50.00% 44.79% 42.47% 40.00% 33.46%33.89% 28.52% 30.00% 25.72% 21.28% 20.00% 9.20% 10.00%
0.00%
Source: team calculation using data from the 2013 Chinese Household Income Project (CHIP) Table 2.1: 2016 Comparable statistics on poverty and endowments by project’s counties and districts
30 The concept of the bottom 40 percent refers generally to the population living under the national 40th percentile of the welfare aggregate, which varies from one country to another, but in the case of China it is the household per-capita income. The share of bottom 40% population in each province is are calculated by the team using data from the 2013 Chinese Household Income Project (CHIP). The CHIP survey does not cover all provinces in China, and calculation is generated for where data is available.
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Prefecture Per Population Urban Rural Proportion Share of # # # Capita Size Households Households of the poor World National Provincial County/District/ GDP (million Per Capita Per Capita tertiary in total Heritage level Level Town (RMB) people) Disposable Disposable sector pop. Sites Cultural Cultural Income Income in local (%) and and (RMB) (RMB) economy Historic Historic (%) Sites Sites China 59,660 1390 36,396 13,432 51.6 2.19 53 4,266 NA Beijing 118,198 21.729 57,275 22,310 80.2 NA 7 128 357 Shanghai 116,562 24.197 57,692 25,520 69.8 NA 0 29 238 Gansu 29,326 26.26 27,763 8,076 52.77 7.20 7 141 714 1- Tianshui 17,800 3.323 22,684 6,499 52.50 9.80 1 16 70 Prefecture Wuying town 15,782 0.068 20,941 5,778 50.90 14.60 0 1 2 Qin’an County 10,445 0.592 22,333 6,584 50.30 10.56 0 3 12 Longcheng town 8,659 0.102 20,289 5,723 45.90 12.71 0 0 0 Dadiwan 8,921 0.073 19,422 5,423 48.70 14.98 0 1 1 Wushan County 12,672 0.442 21,359 6,759 43.20 6.44 0 3 11 Shandan town 28,472 0.211 21,282 11,295 50.90 7.20 0 0 1 Maiji District 16,779 0.781 23,048 6713.5 44.70 9.59 0 1 2 2- Dingxi 11,892 2.790 20,815 6,289 54.96 14.30 0 7 60 Prefecture Lintao County 12,469 0.515 20,923 6,594 48.28 9.32 0 3 14 Tongwei County 9,517 0.329 20,043 6,275 52.15 17.61 0 2 10 Majiayao 10,113 0.043 20,890 6,344 51.57 11.20 0 1 1 3- Zhangye 32,729 1.224 21,503 11,646 50.85 1.90 0 18 60 Prefecture Ganzhou District 32,790 0.516 22,067 12,218 54.70 3.41 0 4 14 Wulan town 31,000 0.046 21,340 11,790 52.20 7.31 0 0 0 4- Jiuquan 51,721 1.119 30,072 14,596 51.62 0.94 4 23 60 Prefecture Dunhuang City 73,987 0.189 29,467 15,311 60.86 0.51 2 2 15 Suzhou District 39,506 0.414 31,684 14,585 59.00 0.31 0 1 13 Source: Data from Gansu Statistics Yearbook, 2017
Project Components
23. The project is structured around three pillars/components that support development of (a) increased access to financial services; (b) targeted interventions in infrastructure and public services; and (c) institution building and transfer of knowledge globally. Proposed investments are interrelated and complementary to each other to maximize benefits to lower-income communities in Gansu Province, enhance the local economy, and build stronger institutions to sustain local economic development.
24. Component 1: Increased Access to Financial Services for MSEs (total investment: US$150 million equivalent; IBRD: US$50 million equivalent; participating financial institutions (PFIs): US$100 million equivalent). This component supports private sector development through the provision of financing for new
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or existing MSEs engaged in the cultural, tourism, and creative industries. The component also seeks to support the creation of a sustainable credit market for MSEs by demonstrating the financial viability of the cultural, tourism, and creative sectors and by helping to establish a well-governed and financially prudent wholesale holding company that aims to serve as a vehicle for meeting the demands of the underbanked segments in Gansu and for spurring financing innovation.
25. IBRD financing will be on-lent to the Gansu Finance Holding Group (GFHG). GFHG is the wholesale financial intermediary and the provincial project management office (PPMO) for this component. Through a subsidiary agreement, GFHG will extend to participating financial institutions (PFIs) a line of credit to finance sub-loans to eligible MSEs, which are already operating or starting to operate, along the cultural, tourism, or creative industries value chain in Gansu Province. At this time, one PFI, Bank of Gansu (BoG), has been qualified following an expression of interest.
26. To ensure financing along the whole value chain, at least 40 percent of the component financing (US$69.00 million) will be targeted to the micro sector, with a single credit limit of US$50,000. About 60 percent of the component financing will be targeted to the small-size enterprises, with a single credit. Small enterprises are expected to create more jobs and support micro-enterprises along the value chain. The majority of credits are expected to be around US$120,000. The component will increase the tenor of the average maturity for the MSE sector, corresponding to the need for longer-term financing identified in the market demand survey and what is typical for tourism and cultural assets financing. A minimum of 40 percent of the component will finance interventions in the project areas of Tianshui, Dingxi, Zhangye, and Jiuquan, whereas the remaining 60 percent may be used to finance enterprises in other prefectures of Gansu.
27. The component is expected to create 3,204 new permanent jobs (40–50 percent of them for women) in newly established and expanded MSEs. In addition, a minimum of 10 percent of the financing will be targeted toward women borrowers. Currently, less than 7 percent of small loans in Gansu are to female entrepreneurs. To ensure sustainability, relevant capacity building to GFHG and PFIs, as well as business startup advisory services for MSEs, will be provided under component 3.
28. In parallel, IFC will provide a senior loan of US$50 million equivalent, with syndicated loans, to expand lending by the CFPA MF, a microfinance institution founded by the China Foundation for Poverty Alleviation (CFPA Foundation), to micro- and very small enterprises (MVSEs). IFC aims to expand CFPA MF’s lending to women-owned/managed MVSEs in rural area in Gansu, and to support the growth of the tourism and service sector in Gansu. The IFC investment is targeted to help expand CFPA MF’s lending to female micro-borrowers to support the growth of the service sector, including cultural, tourism, and creative industries in Gansu. Working with CFPA MF, IFC will be targeting the micro- and very small spectrum of the value chain with loan sizes ranging from below US$5,000 for micro-loans and below US$15,000 for very small-loans. Thus, collectively, the World Bank Group will cover the full range of enterprises that have expressed a need for credit.
29. Also, in parallel, GFHG plans to invest US$50 million as paid-in capital. GFGC will use this investment to back up guarantees to be extended to financial institutions lending to MSEs, against the risk of payment default of such MSEs, up to an estimated amount equivalent to US$200 million. Technical assistance to GFHG under the project will help build its capacity to administer a credit guarantee facility, which may, over time,
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contribute significantly to improving financial access to MSEs and sustain project impact beyond the closing date.
30. At present, commercial banks are the main institutions providing micro- and small loans in Gansu, supplemented by government assistance funds and small and micro-loans provided by private loans. According to the Lanzhou central sub-branch of the People’s Bank of China, by the end of 2017, the loan balance of banking financial institutions in Gansu Province to MSEs was RMB 420,363 billion, up 13.35 percent from 2016, accounting for 35.44 percent of all loans. With the fast growth of disruptive technology, innovations in small and micro-loan products in China have been focusing on “Internet plus.” Its introduction into small and micro-loan products has lowered the financing threshold and the cost of MSEs, reduced the information asymmetry between banks and enterprises, and made transactions more convenient.
31. A market demand survey conducted in the project areas in 2018 as part of project preparation to underpin the project’s design revealed that local MSEs in the cultural and tourism sector generally operate on a small scale, with the majority in accommodation, catering, and retail, as shown in Table 2.2. A total of 172 valid samples was obtained during the survey. Among them, 76 percent were micro-enterprises. The majority reported registered capital valued at less than RMB 300,000, assets valued at less than RMB 500,000, and business scale valued at less than RMB 1 million. More than 60 percent started their businesses less than five years ago. These survey results indicate the majority of local MSEs operate on a small scale, and the demand for credit also concentrates on small but flexible loans.
32. In addition, the existing subsectors still focus on traditional areas, such as creative industries, handicrafts, souvenir shops, restaurants serving local cuisine, folkloric dance and performance, and homestays and boutique hotels. As the fast-evolving tourism industry needs innovation, product offerings have to be diversified in the project areas, and in Gansu generally, to get additional value for local communities. Baseline surveys and an annual socioeconomic impact evaluation will also be conducted to assess the project’s impact in terms of improving beneficiaries’ socioeconomic status, especially the bottom 40 percent income group and women. Table 2.2: Subsector Distribution of Surveyed MSEs
Type of Catering Wholesale and Accommodation Tourism products business retail processing Distribution 45.4% 16.9% 16.3% 12.2% Source: Survey data.
33. About 50 percent of the surveyed MSEs were optimistic about their future development, and 40 percent were planning to expand production and operation. Of those surveyed, 70 percent earned a profit, and 19 percent broke even. More specifically, 71 percent of the surveyed micro-enterprises earned annual income less than RMB 500,000, as Table 2.3 illustrates.
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Table 2.3: The Performance of Surveyed MSEs in the Cultural and Tourism Sector
Annual Income Less than RMB RMB RMB 500,000– More than RMB 100,000– 200,000– 1,000,000 RMB 100,000 200,000 500,000 1,000,000 Distribution 25.9% 19.6% 25.9% 17.9% 10.7% Source: Survey data.
34. In general, the surveyed MSEs were actively engaged in the credit market, and the formal bank sector was still the major source for credit. About 49 percent of the MSEs were in debt, of whom 49 percent had applied for loans from the bank sector and 23.8 percent from the informal sector, such as families and friends. Among the MSEs in debt, 54 percent reported having borrowed two or three times. The average total loan amount was RMB 333,000, and 86 percent of the loans were less than RMB 500,000. More specifically, the average current loan for small enterprises was RMB 869,000, while that for micro-enterprises was RMB 171,000.
35. From the demand side, access to mainstream banking products tends to be limited, as banks require from borrowers a good credit history, relatively large turnover and low levels of debt, and sufficient equity. The market failures the proposed project is addressing rest on two challenges found in the assessment. First, application procedures are cumbersome, and approval cycles are long. MSEs not only need to provide a lot of information when applying for bank loans; they also must go through different levels of investigation by bank personnel. Most MSEs in the survey waited about half a month to two months from the time they applied for loans to the time they finally got the funds. Second, guarantee requirements are high. Many small and micro- businesses in the cultural tourism industry operate on a small scale and cannot meet the requirements of banks on mortgage collateral. The proposed dual approach—that is, supporting MSEs with credit lines and risk guarantees—is a good way to tackle these challenges and ensure flow of funds toward this underserved segment of firms in Gansu Province.
36. The Rural Commercial Bank is the major source of bank loans, while private loans mostly come from friends and relatives. Of the bank loans, 41 percent are offered by the Rural Commercial Bank, while 92 percent of private loans are obtained from friends and relatives. Secured loans (guarantee and mortgage) make up 66.7 percent of the total loans, and credit loans account for a relatively low proportion of 33.3 percent.
37. MSEs show strong demand for credit, especially among the accommodation, catering, and retail industries in the better developed scenic areas. About 52 percent of those surveyed indicated they had demand for funding at present; in addition, 28.5 percent of the MSEs implied they might need additional funding in the future. About 58 percent of MSEs in the catering industry said they needed credit. On average, the amount of current credit demand was RMB 399,000 and of future credit demand RMB 1,204,000. Some 54 percent of the MSEs felt credit constrained. Among the MSEs in debt, 30.2 percent revealed the bank loans they obtained could not fully meet their financing needs and indicated an average credit gap of RMB 894,000.
38. There is a significant gender gap in MSE ownership and access to credit finance. According to the market demand assessment in the project areas, the majority of MSEs were owned by men. The average
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percentage of male business owners was higher (68 percent) than female owners (32 percent). The proportion of male and female owners was equal only in Jiuquan city.
Table 2.4: Gender Distribution of MSE Ownership in Project Areas Gender Total Tianshui Dingxi Zhangye Jiuquan Male 68.0% 68.4% 74.3% 76.7% 50.0% Female 32.0% 31.6% 25.7% 23.3% 50.0%
39. In addition, business owners indicated a strong demand for access to finance. As Table 2.5 shows, about 53 percent of surveyed female owners of MSEs expressed a strong demand for access to credit, as compared to 51 percent of male owners. This indicates women have the potential to gain access to more business opportunities under the project and narrow the gender gap.
Table 2.5: Micro- and Small Credit Demand, by Gender of Entrepreneurs
Gender Total Banking sector Private sector Male 51% 41% 18% Female 53% 44% 33%
40. Component 2: Urban-Rural Regeneration (IBRD: US$114 million equivalent). This component will make critical investments in small- and medium-scale infrastructure in project areas that will improve living conditions for residents and enable the creation of more income-generating opportunities in creative industries. One focus of the component is on regeneration of urban areas and villages with cultural endowments. Another is to expand the cultural, tourism, and creative industries by constructing exhibition sites, spaces for MSE incubation and training, and creating marketplaces. The two sub-components will benefit local residents and visitors and create income-generating opportunities.
41. Subcomponent 2.1: Regeneration of Historic Towns and Villages. The objective of this subcomponent is to carry out the physical regeneration of four towns and nine villages located in four counties in Gansu. Each has a distinct cultural or creative industry specialty, such as jade carving, calligraphy and ink painting, colored pottery, and lacquerware. Physical regeneration, together with enabling economic opportunities for MSE development provided under component 1, will stimulate social and economic regeneration of local communities and pump prime private investments. Regeneration activities include the following:
(a) Rehabilitation of municipal services and infrastructure. This includes energy-efficient water supply and regulation of water abstraction, sewerage collection and treatment, stormwater drainage, access roads, installing energy-efficient lighting on roads and streets, solid waste management and collection, parks and public spaces to support greenery and walkability, and infrastructure for nonmotorized transport. The rehabilitation will improve last-mile connectivity to infrastructure and the market, enable MSE productivity, and encourage more of the private sector to locate in regenerated urban and rural areas. All activities under this subcomponent will contribute to both
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climate adaptation and mitigation co-benefits. All infrastructure investments are designed to improve energy efficiency (mitigation) and/or reduce risks from extreme weather events, especially flooding (adaptation).
(b) Restoration of old houses and buildings in traditional style. This includes in situ restoration of facades and roofs of old houses with vernacular architectural design instead of following the old model of clearance and relocation. This investment, together with improved infrastructure and access to credits, will encourage residents to take advantage of their properties and start new businesses, such as homestays, artisan and handicraft workshops, souvenir shops, restaurants/café shops, and other micro- and small enterprises. Restoration of all houses and buildings will include improving energy efficiency (mitigation) by reducing heat loss in regenerated buildings by replacing substandard roofs, walls, and windows.
42. Table 2.6 blew shows details of investments made under subcomponent 2.1 by city and county/district.
Table 2.6: Subcomponent 2.1 Investments: Regeneration of Selected Historic City Cores, Small Towns, and Villages Prefecture-level Investment in Outputs city regeneration county/district Tianshui: Urban - Paving of 28.65 km of road regeneration of - Renovation and façade lifting of 32,500 m2 of old houses Qin’an County Wuying town of - Installation of lighting along the newly paved roads and near the Dadiwan area renovated houses - Purchasing/installation of solid waste collection equipment - Upgrading of 14,300 m2 of landscaping - Installation of 7.8 km of sewers - Installation of wastewater treatment facilities with capacity of 255 m3/day - Installation of 7.8 km of stormwater drainage - Rehabilitation of 2.40 km of Yanjiagou River Tianshui: Urban - Restoration of 36,000 m2 of old houses regeneration of - Restoration of 2,600 m2 of traditional courtyards Qin’an County Longcheng historic - Upgrading of 10,600 m2 of public space town of Dadiwan - Upgrading of 700 m2 of landscaping area - Rehabilitation of 21 km of roads and installation of lighting on the street, as well as sewers and drainage under the roads - Installation of two small-scale packaging plants - Purchasing/installation of solid waste collection equipment Tianshui: Urban - Renovation and façade lifting of 3,500 m2 of old houses regeneration of - Installation of stormwater drainage for the street Qin’an County Shangguan Ming- - Installation of power supply cable and Qing-Dynasty - Installation of heating pipelines historic street of - Construction of two public toilets Dadiwan area
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Tianshui: Urban - Rehabilitation of 8.8 km of roads regeneration of - Rehabilitation of one bridge Wushan County Shandan town of - Renovation of 23,000 m2 of old houses Wushan jade - Installation of 25 km of stormwater drainage industry - Installation of 17.5 km of sewers - Installation of 9 km of power supply cable - Installation of five mobile public toilets - Purchasing/installation of solid waste collection equipment Dingxi: Rural regeneration - Rehabilitation of 25.4 km of roads of eight villages of - Renovation and façade lifting of 40,000 m2 of old houses Lintao County Majiayao area - Installation of 25 km of sewers - Installation of eight mobile public toilets - Purchasing/installation of solid waste collection equipment Zhangye: Rural regeneration - Renovation of 103,692 m2 of old houses of folk village in - Upgrading of 13,523 m2 of landscaping Ganzhou District Wulan ancient - Rehabilitation of 7.36 km of village roads town of Zhangye - Installation of street lighting along the rehabilitated road - Installation of 23 fire hydrants and 408 fire extinguishers - Installation of 1.55 km of sewers - Purchasing of solid waste collection equipment
43. Subcomponent 2.2: Development of Creative Industries. The objective of this subcomponent is to support the development of creative industries in Gansu and provide clustered and conducive spaces for production, research, presentation, sales, and exchange of knowledge and experience. Based on market demand analysis and the comparative advantages of Gansu Province and project cities and towns, this subcomponent will finance the following:
(a) Development of creative industry centers and market places. This includes construction of eight creative industry centers (including incubators and marketplaces) in cities (functioning as hubs) adjacent to the towns and villages (functioning as spokes) that will be regenerated under subcomponent 2.1. The hubs and spokes will be connected to one another. This will connect production by local communities living within the last mile with markets and manufacturing with service. Each center will support its county’s distinct cultural or creative industry specialty. Dingxi Majiayao Center, for example, will specialize in colored pottery incubator, production, research, and display. Dingxi, Tongwei County will specialize in calligraphy and ink painting. Tianshui Maiji Yellow River Center will specialize in wood carving and lacquerware. Zhangye Center will specialize in folk embroidery and straw painting. Jiuquan Center will specialize in Silk Road manuscripts, Dunhuang painted sculpture, and costumes. Tianshui Wushan Center will specialize in jade carving, folk performance, and martial arts.
(b) Development of tourism services and facilities. This includes construction of three tourism facilities that include tourist information centers; physical and virtual display of the Silk Road history, culture, and creative industries; display and sales of the cultural and creative products; and performance space with modern technology for spectacular shows by local performers.
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44. Subcomponent 2.2 is expected to create 2,205 new permanent jobs (40–50 percent of which will be for women) in newly constructed centers and facilities. All new centers and facilities will be spatially connected to regenerated towns and villages by pedestrian pathways to enable visitors to engage with local cultures and experience the variety of performing arts, handicrafts, cuisines, and interpretations of local traditions. This, in turn, is expected to result in more tourism spending on local communities through the buying of handicrafts, dining, or staying overnight in homestays. All centers and facilities will be designed to use energy-efficient equipment and devices to reduce energy consumption and, thus, reduce operating cost.
45. Table 2.7 provides a detailed list of investments under subcomponent 2.2 by city and county/district.
Table 2.7: Subcomponent 2.2 Investments: Development of Cultural, Tourism, and Creative Industries Prefecture-level Cultural, Outputs Activities/products of creative industry city tourism, and supported by investment county/district creative industries Tianshui: Dadiwan Cultural Construction of: - Research and exhibition of the history Experience Zone, - Digital exhibition hall of pottery making Qin’an County Incubator Space, - Research and training center - Training and incubation of painted and Tourist - Interactive experience hall pottery production Service Center - Folk cultural exhibition hall - Tourist service center - Research and exhibition of legends - Nu Wa Cultural Exhibition Hall and history of Nu Wa - Qin’an Cultural Center Total area: 7,500 m2 - Creation, preparation, and performance of musicals and dances Installation of matching with the theme of Nu Wa stories infrastructure of water supply, sewage, drainage, power supply
Purchasing/installation of equipment and supplies for the centers and halls Tianshui: Yellow River - Construction of Carved Wooden - Research and development of Lacquerware Lacquerware Center, 7,355 m2 lacquerware beds, loungers, screens, Maiji District Creative Industry coffee tables, dining tables, and Incubator - Purchasing/installation of bookshelves, tea sets, and smoking Center equipment and supplies for the sets, as well as more than 200 kinds of center small craft souvenirs - Exhibition and sales of lacquerware products - Training and incubation of small businesses that will produce lacquerware Tianshui: Wushan Jade Art - Construction of Yuanyang Jade - Research and development of three Creative Industry Exhibition and Incubator Center, styles of Yuanyang jade carving Wushan County Exhibition and 3,822 m2 - Exhibition and sales of carved jade Incubator Center products
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- Training and incubation of small businesses that will produce carved jade. - Display and exhibition in the same space of Wushan District’s intangible cultural heritage, such as folk culture and art, the martial arts, and rotary drum dance Dingxi: Majiayao Construction of - Research and exhibition of Majiayao Cultural - Exhibition hall culture and history Lintao County Exhibition, - Archaeological experience hall - Experience of archaeological Research, and - Research center restoration for visitors (including field Incubator Center - Incubator space archaeological restoration, cultural relic Total area: 8,000 m2 restoration experience, archaeological lessons, colored pottery making) Matching infrastructure, including - Housing of research center in installation of 800 solar lights, Majiayao digital cultural library purchasing of electric cars, and - Training and incubation of small construction of a parking lot, businesses that produce traditional 1,200 m2 handicraft workshops - Training and incubation of small businesses that produce traditional fragrances
Dingxi: Tongwei Construction of - Display and interactive experiences Calligraphy and - Hanmo Cultural and Art for visitors in calligraphy, painting, Tongwei County Ink Painting Exhibition Center paper cutting, embroidery, shadow Creative Industry - Incubator and workshop space puppets, and straw painting Exhibition and of calligraphy and painting - Training and incubation of small Incubator Center producers businesses that produce the “scholar's Total area: 9,200 m2 four jewels” (writing brush, ink stick, ink slab, and paper) and related Matching infrastructure, including products construction of 2.5 km of - Production and sales of calligraphy pedestrian street and 30,948 m2 and painting-related products of public space. - Exhibition space also to be used for performances of Tongwei Opera and Shadow Puppet Show Zhangye: Zhangye - Restoration of 7,390 m2 of old - Research, development, production, Discovery and buildings into (a) Zhangye Cultural and exhibition of traditional handicrafts Zhangye City Tourist Service Research Center, 450 m2, (b) Folk (folk embroidery, straw painting, Proper Center Culture Hall, 1,982 m2, (c) Time chrome painting, dough molding, etc.) Tunnel to view Zhangye’s history - Research and exhibition of ancient virtually, 800 m2, (d) Xiaonan cold weapons and provision of Rock Paintings Hall, 450 m2, (e) interactive experience for visitors with digital display experience area, the ancient military sports activities 450 m2, (f) intangible cultural heritage products market area,
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800 m2, and (g) performance area, 2308 m2. - Conversion of 3,440 m2 of old buildings into (a) Zhangye Frontier Fortress Culture Center, 1,439 m2, (b) Weapons Show and Interactive Experience Hall, 800 m2, (c) Folk Sports Experience Hall, 206 m2, (d) 3D Experience Room, 277 m2, and (e) Zhangye Frontier Fortress Culture Research Center Jiuquan: Jiuquan Silk - Construction of 12,000 m2 Silk - Research, development, exhibition, Road Culture Road Culture Research Center and production of Dunhuang painted Suzhou District Research Center and Library, which includes (a) sculpture, luminous cup sculpture, and Library Reception & Tourist Service traditional Mongolian clothing Center, (b) Cultural Exhibition production Center, (c) Ancient Books & Historical Documents Research & - Research, development, exhibition, Exhibition Center, (d) Dunhuang and production of Dunhuang scrolls, Overseas Culture Heritage Digital bamboo slips of Han Dynasty, etc. Exhibition Center, and (e) library and reading area - Construing of virtual display artifacts - Purchasing/installation of and content through modern exhibition equipment and technology such as virtual reality and supplies augmented reality Jiuquan: Dunhuang - Construction of Posthouse - Information center, exhibitions, and Posthouse World Exhibition & Tourist Service spectacular show: use of modern Dunhuang Heritage Site Center scientific and technological means, County-Level Discovery and - Construction of matching such as virtual and augmented reality City Tourist Service infrastructure, including (a) 2.7 (VR/AR), to construct virtual display Center (adding km of roads for electric car and artifacts and content for visitors to this remote site horse carriage, (b) 1.5 km of experience the ancient post station and to Gansu’s tourist wooden walkway, (c) 3 km observe the cultural relics of the Han tourism circuit of mountain pathway, (d) four Dynasty will benefit local outdoor exhibition zones of - Display and sales of the cultural and communities 123,500 m2, (e) viewing platform creative products related to the ancient and reduce of 160 m2, (f) campground of post station pressure on the 10,000 m2 - Research, display, and sales of very famous bamboo slips (ancient letters) and Mogao Grottoes interactive experiences for visitors to World Heritage appreciate the use of letters and post Site) stations
46. Table 2.8 shows cost details of components 1 and 2, Bank loan amounts, estimated climate co-benefits, estimated net revenues from tickets and other fees, rent, and charges, estimated number of permanent jobs to be created with a gender target of 50 percent, and calculated EIRR.
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Table 2.8: Components 1 and 2 Details
Subproject Estimated Bank loan Estimated Net No. of EIRR/ cost US$ M US$ M climate co- revenues jobs EIRR% benefit %* US$ M** created Component 1: Increased Access to Financial Services for MSEs FIRR 150 50 30-40% N.A. 3,204 Installation of energy efficient 25% equipment and appliances and replacing old energy-consuming ones. Component 2: Urban-Rural Regeneration (investments by county): Dadiwan: (a) urban regeneration of 26.99 26.99 72% 4.23 375 16.4 Wuying, Longcheng, and Shangguan Historic Areas; (b) Dadiwan Cultural Experience Zone, Incubator Space, and Tourist Service Center Yellow River Lacquerware Discovery 7.88 7.88 75% 5.12 400 21.3 and Incubator Center Majiayao: (a) rural regeneration of eight Villages; (b) Majiayao Cultural 18.84 18.84 78% 16.48 500 25.8 Exhibition, Research, and Incubator Center Tongwei Calligraphy and Ink Painting Creative Industry Exhibition and 12.70 12.70 28% 19.03 230 27.0 Incubator Center Zhangye: (a) rural regeneration of Folk Village in Wulan Ancient Town; 11.99 11.99 78% 23.51 514 19.1 (b) Zhangye Discovery and Tourist Service Center Jiuquan Silk Road Culture Research 10.93 10.93 77% -7.92 66 21.9 Center and Library Dunhuang Posthouse Discovery and 15.70 15.70 78% 15.00 80 18.3 Tourist Service Center Wushan: (a) urban regeneration of Shandan Town; (b) Wushan Jade Art 8.96 8.96 70% 11.27 40 21.5 Creative Industry Exhibition and Incubator Center Component 2 total 114.00 114.00 45-55% 86.73 2,205 21.2 * Estimates are subject to further verification by Climate Co-Benefits Assessment Team of Climate Change Group. ** Net revenue refers to revenue net of O&M cost and taxes. Figures are proxies for the amounts of lease fees each municipal government can set as a minimum in selecting an operator under a lease contract.
47. Component 3: Institutional Strengthening and Global Knowledge Transfer (IBRD: US$16.0 million equivalent). This component aims to strengthen the institutional capacity in Gansu to manage economic and
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social development, using cultural, tourism, and creative industries as a pillar for inclusive and sustainable economic growth and poverty alleviation. It will help build an enabling ecosystem to support the productivity of people, communities, and micro- and small enterprises. Proposed activities would provide incentive for private investments and improve planning, policies, regulations, and institutional capacity to improve the business environment for the private sector to grow in an equitable and sustainable manner. The component includes the following activities (see also Table 2.9):
(a) Completion of studies and the development of sustainable site management plans, improved policies and regulations, marketing strategies, and Gansu branding and promotion activities. This will strengthen the capacity of local governments and the recently merged provincial Department of Culture and Tourism for better planning, policies, and regulations.
(b) Provision of technical assistance, trainings, and business advisory services to communities, MSEs, participating financial institutions, and local and provincial officials. This will build the institutional capacity of GFHG, GFGC, and PFIs, support the creation of a sustainable credit market for MSEs, and provide incentive for private sector investments. Community outreach and provision of business startup advisory services to prospective borrowers, especially women, will help them prepare business plans and apply for credits and will support their businesses during the startup phase so they do not fail.31
(c) Provision of support for project management and implementation, including compliance with environmental, social, and fiduciary obligations, design institutes, project management, construction supervision, and monitoring and evaluation of the project impacts.
(d) dissemination of Gansu culture and tourism knowledge globally. Gansu’s experience in cultural, tourism, and creative industry development, including under this project, will be curated and shared with other countries with similar development challenges. Content and communication strategies will be prepared. Existing Dunhuang Expo facilities that are currently used once a year will be utilized throughout the year, as they will serve as a global knowledge hub under this project.
Table 2.9: Component 3 Activities and Estimated Cost Component 3 Estimated Bank loan cost US$ M US$ M 3.1 Strengthening Financial System/Financial Institution Credit risk management and corporate governance 0.45 0.45 Financial technology in support of MSEs’ application and credit assessment 0.35 0.35 TA to GFGC on global good practice in executing and managing guarantees 0.20 0.20 3.2 Reform of Culture & Tourism System to Improve the Capacity of New Institutions Improve strategic planning and regulations of culture and tourism sector 0.22 0.22 Branding, marketing, & promotion 0.29 0.29
31 Global Report on Women in Tourism 2010. Joint UNWTO-UN Women publication. http://ethics.unwto.org/en/publication/global- report-women-tourism-2010
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Training of cultural tourism practitioners 0.29 0.29 Community outreach and training on creative industries and safeguarding intangible 0.29 0.29 cultural heritage Business startup advisory services for prospective micro- and small enterprise 0.29 0.29 operators, especially women Skills training in Tianshui lacquer carving 0.15 0.15 Community outreach and capacity-building services for low-income groups for 0.15 0.15 business startup 3.3 Capacity Building of Grass-Roots Governments Participating in the GRIP Project management consulting services, including socioeconomic impact evaluation 2.60 2.60 and beneficiary satisfaction surveys Establishment of project management information system (procurement of 0.41 0.41 standard software) Environmental impact assessment & monitoring 0.29 0.29 Social development assessment & monitoring 0.29 0.29 Consulting services for design, construction drawings, BQs of Qin'an County, 1.08 1.08 Tianshui Consulting services for design, construction drawings, BQs of Maiji District and 0.62 0.62 Wushan County, Tianshui Consulting services for design, construction drawings, BQs of Lintao County and 1.23 1.23 Tongwei County, Dingxi City Consulting services for design, construction drawings, BQs of Zhangye 0.48 0.48 Consulting services for design, construction drawings, BQs of Jiuquan and Dunhuang 1.06 1.06 Construction supervision of Qin'an, Tianshui, Tongwei, and Shandan Works 2.08 2.08 Construction supervision of Zhangye, Jiuquan, and Dunhuang 1.11 1.11 3.4 Global Knowledge Development and Transfer Advisory service with UNESCO to strengthen Gansu creative industry, support intangible heritage, develop Dunhuang site management plan, and support global 0.51 0.51 knowledge sharing (on-the-job capacity strengthening) Advisory service with UNWTO to review and enhance Gansu tourism strategy, enhance marketing, promotion, and branding strategy efforts, and support global 0.40 0.40 knowledge sharing (on-the-job capacity strengthening) Learning exchanges 0.76 0.76 Establishment of Gansu Global Culture and Tourism Knowledge Hub (curating 0.40 0.40 knowledge content and development of communication strategies) Total of Component 3 16.00 16.00
48. Box 2.1 presents the non-financial value added of IBRD support to strengthen capacity of GFHG, GFGC, and PFIs.
Box 2.1: Value Added of IBRD Support to Strengthen Capacity of GFHG, GFGC, and PFIs
Corporate governance and institutional mandate of GFHG. Financial and mixed financial holding company/financial conglomerates are growing rapidly in China. GFHG has formed a basic corporate governance structure, including shareholders, a board of directors, a board supervisor, and a senior management team. As a new financial institution, the overall structure needs to be gradually tested and improved. The technical assistance (TA) provided under the project will examine issues relating to risk management across complex financial holding groups and appropriate
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regulatory and supervisory frameworks. Global best practices will be incorporate on corporate governance for GFHC, and the TA will benefit both the financial holding company and financial regulator, thus enlarging its spillover effect. In addition, IBRD will work with GFHG to ensure it is able to meet the mandate for which it is set up.
Improving risk management of PFIs and capacity of GFGC to execute and manage guarantees. The Bank will work with the selected PFIs to help improve their in-house practices and benefit from new technology. As a first PFI, BoG has already implemented comprehensive risk management strategies to enhance risk management systems and has developed different strategies based on the nature and characteristics of major risk categories. Under the TA component, however, fintech solutions will improve the overall risk management framework of BoG as first PFI. The aim is to use fintech to overcome information barriers, especially while lending to MSEs in the distant corners of the province. Big data and machine learning have the potential to reduce the cost of credit risk assessments. By lowering the cost and applying better digital tools, fintech will also facilitate PFIs’ ability to lend at more attractive rates. The capacity of GFGC, as a new guarantee company in Gansu, to execute and manage guarantees will also be improved.
Financial technology (fintech). For both GFHG and PFIs, the next step is to make good use of fintech to enhance inclusion and access to finance. Again, fintech can help overcome information barriers and improve efficiency in client acquisition and risk management. Working with the fintech company under the TA component to tap its data resource further can achieve both through the use of big data, such as borrowers’ online behavioral data, locations, and footprints; demographics; social connections; online payment and transaction data; financial information, mobile device information, and third-party credit scores and reports; and new statistical tools and algorithms to process this larger volume of information. Under the TA component, fintech offers opportunities for GFHG and PFIs to leverage innovative and less costly business models to serve this large uncovered or underserved segment of the market; in short, well-designed fintech can change Gansu’s financial industry by increasing competition and efficiency. These solutions can also serve as a test case for similar interventions in other parts of the world.
Improving safeguards practice. Currently, no Environmental and Social Management Framework (ESMF) is applied to the BoG MSEs credits. An ESMF has been developed for the project by the Bank team to guide GFHG, PFIs, and future sub-borrowers on consistent and sustainable environmental and social management during the preparation and implementation of activities supported by World Bank loans, providing the principles and approach to be followed to minimize and mitigate any adverse environmental and social impacts resulting from relevant project activities.
Providing business startup advisory services to prospective borrowers in remote locations, especially women. Several prospective borrowers of MSEs who fall in the bottom 40 percent of income groups do not have the knowledge to complete a new business plan or complete the application process to get access to funds under component 1. A special outreach will be made to women in remote locations who have skills potentially to benefit from the creative industries growth and line of credit. The objectives of this TA are to (a) design and conduct a community outreach campaign; (b) help interested borrowers who show a minimum level of capacity to complete their business plans and submit applications to BoG/PFIs; (c) nurture successful applicants during their business startup phase so they do not default or fail in their new or expanded businesses; and (d) carry out socioeconomic baseline surgery and impact evaluation.
49. The development impact of IFC’s contribution will be twofold:
The IFC-supported project is expected to improve access significantly to finance for MVSEs, particularly women-owned or managed MVSEs in Gansu. It is expected to help increase the number of MVSE borrowers of CFPA MF in Gansu from 31,521 (including about 21,075 women borrowers) as of December 2018 to at least 101,500 (including about 65,800 women borrowers) by 2023.
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Beyond the IFC-supported project, IFC anticipates the investment will contribute to market creation through the promotion of market inclusiveness by encouraging more market participants to replicate CFPA MF’s rural MVSE lending model and to focus more on the unbanked and underbanked rural women MVSEs, particularly in Gansu.
Value added of working with IFC:
50. Microfinance companies in China face significant funding constraints due to the low regulatory leverage ratio cap, which limits commercial banks’ lending to them. Most international lenders do not have local currency, which IFC can offer. Meanwhile, very few lenders in the market can provide long-term funding to microfinance companies. In Gansu, the microfinance company regulation lags that of many other provinces, primarily because of the slower development of the microfinance industry in the province. In addition, the low education level of many women in the rural areas of Gansu has contributed to their low financial literacy and prohibited them from participating in economic activities in the formal economy. Through the proposed investment, IFC will (a) mobilize local currency funding from international investors, (b) provide longer term funding beyond what is available to the microfinance sector in the market, (c) catalyze the microfinance sector regulatory framework in Gansu, and (d) share knowledge and build capacity to support financial literacy education work with women borrowers in Gansu. Working collectively with IFC will ensure that over time a market for such borrowers is created (see Box 2.2).
Box 2.2: IFC Financial and Non-financial Additionalities
IFC’s additionality is both financial and nonfinancial. Financial additionality includes (i) providing longer-term funding than is available to the MCC sector in the market; and (ii) mobilizing long-term funding from international investors and potentially helping them convert foreign currency into RMB. IFC’s financial additionality builds on previous engagements with CFPA MF and supports the client’s expansion in Gansu. Non-financial additionality includes (i) revising the MCC regulatory framework in Gansu; and (ii) sharing knowledge and capacity building to support the client’s financial literacy training to women borrowers in Gansu.
Financial Additionality
Financing structure: Very few lenders in the market can provide long-term funding to MCCs in China. According to data provided by IFC’s Global Macro and Market Research team, over the last twelve months, sixteen US$- denominated syndicated loans were provided to the financial services sector, with a total face value of US$5.02 billion. The tenor of these loans ranged from one to eleven years. About 85 percent of the total face value of loans had a tenor of five years or less. For MCCs, however, local currency funding with a tenor of more than one year is typically unavailable. For CFPA MF, 79 percent of its external local currency funding is up to one year.32 IFC’s five-year funding can help CFPA MF improve its funding structure and strengthen its ability to withstand potentially volatile liquidity conditions.
32 The remaining 21 percent have tenors up to five-year. Commercial banks, peer-to-peer lending platforms, insurance companies, and international developmental financial institutions account for 53 percent, 26 percent, 12 percent and 9 percent of CFPA MF’s external, local-currency funding, respectively.
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Resource mobilization: Prevailing domestic regulations on China’s MCC sector limit an MCC’s borrowings to two to three times its shareholders’ equity, and it can only borrow from up to two commercial banks. Borrowings from international markets is allowed, but most international lenders cannot provide local currency or do not offer local currency funding at longer tenors. This constrains local MCCs’ access to commercial funding from international markets. Through the proposed investment, IFC will provide its structured treasury solutions to mobilize commercial funding from international lenders and offer local currency arrangements for CFPA MF. This will also be the first syndicated loan received by CFPA MF.
Non-financial Additionality
Frameworks- Policy and regulatory changes: With help from the IFC advisory team, Chinese regulators are preparing new, national-level regulatory guidelines for the MCC sector. A key change expected in the new regulation is the lifting of geographical coverage limitations for well-performing MCCs. Some provinces have already piloted policies to effect provincial operation licenses. MCC regulation in Gansu lags other provinces, primarily because of the slower development of the microfinance industry in Gansu. As of February 2019, only two MCCs had obtained regulatory approval to lend across the province, both state owned. No privately owned MCC in Gansu has a province-wide lending license. CFPA MF currently has county-level lending licenses in Gansu and is applying to upgrade these to the provincial level so it can expand its Gansu MCC’s business coverage to the whole province. Drawing comfort from its good track record—and CFPA MF being an equity investee of IFC—the regulator will allow CFPA MF to use the proceeds of the IFC project for lending across the province as a test case. The provincial regulator has also indicated it will offer a positive opinion on approving a provincial lending license for CFPA MF following sound performance from CFPA MF while supported by the IFC project. IFC’s participation will accelerate the formalization of the province-wide operations of CFPA MF, create a best-practice example for privately owned MCCs in Gansu, and contribute to catalyzing the MCC regulatory framework in Gansu as a whole.
Knowledge, innovation, and capacity building: About 70 percent of CFPA MF’s borrowers in Gansu are women. More than 90 percent of the borrowers are in rural households and have education at or below middle school level. Around 75 percent are first-time borrowers of formal loans. The low education level of many women in the rural areas of Gansu has contributed to their low financial literacy and prohibited them from participating in economic activities in the formal economy. Most MCCs and banks in Gansu are reluctant to provide financing to women entrepreneurs in rural areas as a result of perceived higher credit risk due to their weak financial position, unstable income, a lack of decision-making power over family or business matters, or generally low education levels. To familiarize its borrowers with concepts of timely repayment, accumulating savings, and better financial planning, CFPA MF has mandatory basic financial literacy training before disbursement. This represents the first financial education for a majority of CFPA MF’s borrowers, particularly women borrowers. By leveraging the gender finance experience accumulated globally and regionally, IFC plans to provide advisory services to help CFPA MF enhance its capacity to design and deliver more systematic and broader financial literacy training to women borrowers through digital channels. CFPA MF will cover the costs of such advisory services. CFPA MF has been a long-term IFC advisory client since 2007, but this will be the first IFC advisory service to CFPA MF, and any MCC in China, focusing on financial literacy training to women borrowers. In previous advisory engagements, IFC mainly focused on the commercial transformation of CFPA MF and enhancing the Company’s management and operation capacity through advisory programs in the areas of organizational structure, credit management, risk management, and internal controls.
Environmental Safeguards
51. Environmental Assessment (OP4.01), disclosure date 2018/10/24. A full impact assessment covering the whole project was conducted and the following environmental safeguards instruments developed, in accordance with domestic Environmental Impact Assessment (EIA) law and Bank safeguards policy
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requirements: (a) an EIA report and Environmental and Social Management Plan (ESMP) for component 2; (b) an Environmental and Social Management Framework (ESMF) to support the implementation of components 1 and 3; and (c) an Environmental Assessment Executive Summary for the whole project.
52. According to the EIA report, the integrated interventions proposed under component 2 are anticipated with overall environmental benefits, including proper management of domestic wastewater (1.04 million m3/a) and household garbage (13,500t/a), rehabilitation of river courses (24,800m2, mainly slope protection and landscaping, no dredging), and additional landscaping (200,000m2) in the selected counties/districts/cities. To avoid or minimize potential negative environmental impacts, recommendations were made during the EA process to optimize the subproject design from environmental perspectives, particularly in relation to siting and facility capacity. Based on the current design, negative environmental impacts anticipated during construction will be mostly short term and site specific, limited to damage to identified physical cultural resources (PCRs) if without proper management, construction noise and dust, soil erosion, vegetation loss, and potential impacts on public traffic and local communities. For the operation stage, anticipated negative environmental impacts include nuisance from the operation of small-scale wastewater treatment plants and solid waste transfer stations, noise and dust from increased traffic, and pollution from dust, wastewater, and solid waste produced by small-scale artifact processing.
53. The ESMP has proposed mitigation measures to address these adverse impacts by considering the applicable WBG Environmental, Health, and Safety (EHS) Guidelines. These include (a) application of an Environmental Code of Practices (ECOP) to reduce general construction nuisance and (b) specific mitigation measures to be taken during the design, construction, and operation phases, including a management plan for the conservation of identified PCRs in the project-affected areas. Details of subproject-specific monitoring plans, institutional arrangements, and capacity-building activities are also specified in the ESMP.
54. The ESMF was developed because the microfinancing services for MSEs to be provided under component 1 are designed to support only the positive list of investments in cultural, tourism, and creative industries, and the involved activities and their locations can only be determined during project implementation. The ESMF provides (a) safeguards policies, guidelines, and procedures to address environmental and social issues caused by physical activities under this component and covering safeguards screening criteria, an exclusion list, environmental assessment categorization, safeguards instruments to be prepared, and consultation and disclosure requirements; and (b) implementation arrangements and a capacity-building program to address the gaps identified during capacity assessment, parts of which have been integrated into component 3 of the project. The ESMF is also designed to ensure the safeguards compliance of the TA activities (component 3) under the project, with specific arrangements as needed.
55. Natural Habitats (OP/BP4.04). The policy was triggered in consideration of the river rehabilitation activities (mainly slope protection and riverbank landscaping) to be supported by component 2. The ecological survey conducted during the EA process found no critical or sensitive natural habitats and no protected species of plants or animals in the project-affected areas. The EA concluded the project would not have the potential to cause significant conversion or degradation of natural habitats. For the construction period, measures have been included in the ESMP to minimize the temporary and site-specific impacts anticipated. In addition, in consideration of subproject uncertainties under component 1 during implementation, the screening criteria under the ESMF will be used to exclude any investment that may result in significant
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conversion/degradation of natural habitats. The ESMF also requires the ecological impact assessment, together with mitigation measures, if any subproject under component 1 is expected to have negative impacts on natural habitats.
56. Physical Cultural Resources (OP/BP 4.11). For component 1, all the proposed investments will be screened to exclude any activity within or with direct impacts on the legally protected areas for cultural heritage or registered ancient trees. Construction activities could still be allowed, however, adjacent to the protected areas or targets, which could bring indirect impacts on the identified PCRs if not well managed during implementation. In such a case, the ESMF requires a specific management plan to be developed to mitigate indirect impacts on the PCRs to an acceptable level. For component 2, some activities are adjacent to national- and provincial-level historical and cultural heritage sites, including one UNESCO world heritage site, and one ancient well in Longcheng Town. Proposed activities have been screened during the EA process to exclude any investment within the control zone designated by relevant authorities, and a PCR management plan has been developed as part of the ESMP to integrate all the mitigation measures for the identified PCRs and to provide a chance-find procedure for any relics accidentally uncovered during construction. All the subproject designs will be reviewed and cleared by the cultural heritage authorities at the appropriate level prior to construction to ensure compliance with corresponding cultural relics conservation plans and applicable laws and regulations.
57. Pest Management (OP 4.09), Forests (OP 4.36), and Safety of Dams (OP4.37). In consideration of subproject uncertainties under component 1, triggering of these policies is precautionary. Screening procedures and subproject preparation requirements for when the policies are triggered have been incorporated into the ESMF for future implementation.
58. Public consultation and disclosure. Two rounds of public consultation and information disclosure were conducted during EA preparation, respectively in February and July 2018, as per the Bank requirements for a Category A project. Information on the project and key EA findings were shared with the public, particularly identified key stakeholders, who included project-affected persons (PAPs), representatives of pertinent government agencies, and local experts in interested sectors. A combination of questionnaire surveys, interviews, and public meetings was adopted during the process, and public opinion has been incorporated into the project design and the EA reports. The full draft EIA report was disclosed to the public on July 16, 2018, in all the subproject counties/districts/cities, and the EA documents were disclosed on the Bank’s external website on October 24, 2018.
59. Implementation arrangements. Since the PPMOs and the PFI (Gansu Bank) have no experience with Bank-financed projects, a comprehensive safeguards capacity-building program has been integrated into the project ESMP and ESMF to ensure adequate and effective project management in accordance with the Bank’s safeguards policies and procedures. The ESMP and ESMF also detail the requirements for environmental monitoring for the construction and operational phases to track the effectiveness of mitigation measures. The ESHS requirements, including but not limited to those defined in the ESMP, the ECOPs, and the PCR management plan, will be integrated into procurement documents for civil works and supervision under the project. In addition, an experienced external consulting team will be engaged during project implementation to support safeguards management, particularly at the startup stage.
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Project cost and financing
60. The final project costs total an estimated US$312.63 million, without the parallel financing from IFC, CFPA MF, GFHG, and GFGG (RMB 2.148 billion at exchange rate US$1 = RMB 6.8718), broken down as shown in tables 2.10 and 2.11.
Table 2.10: Cost Estimate and Financing Plan (by component)
By component/expenditure category Project cost World Bank financing % of US$ m RMB m US$ m Total
1 Increased Access to Financial Services for MSEs 150.00 1030.77 50.00 33% Urban-Rural Regeneration and Development of 114.00 114.00 100% 2 Creative Industries 783.39
2.1 Regeneration of Historic Towns and Villages 75.89 521.50 75.89 100%
2.2 Development of Creative Industries 38.11 261.88 38.11 100% Institutional Building and Global Knowledge 16.00 109.97 16.00 100% 3 Transfer 3.1 Financial System/Financial Institutions 1.00 6.87 1.00 100%
3.2 Institutional Capacity of Cultural & Tourism 2.43 16.70 2.43 100%
3.3 Institutional Capacity of LGs and Project Mgt 11.26 77.40 11.26 100%
3.4 Global Knowledge Transfer 1.31 9.00 1.31 100%
Total Base Cost 280.00 1,924.13 180.00 64%
4. Front-End Fee 0.33 2.23 0.00 0%
5. Commitment Fess 0.92 6.32 0.00 0%
6. Land Acquisition and Resettlements 1.58 10.86 0.00 0% 7. Institutional Strengthening and Global Knowledge 1.60 0.00 0% Transfer (NBF) 10.99
8. Project Overheads 28.20 193.78 0.00 0%
Total Project Cost 312.63 2,148.32 180.00 58%
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Table 2.11: Cost Estimate and Financing Plan (by Expenditure Category)
Category Amount of Loan A Amount of Loan B Percentage of allocated allocated expenditures to be (expressed in EUROs) (expressed in EUROs) financed (inclusive of taxes) (1) Sub-loans under Part 1 of 44,600,000 0 33% the project (2) Goods, works, non- 0 115,900,000 100% consulting services, and consulting services, incremental operating costs and training and workshops under parts 2 and 3 for the project (3) Interest rate cap or 0 NA Amount due pursuant interest rate collar premium to Section 4.05 (c) of for Loan A the General Conditions TOTAL AMOUNT 44,600,000 115,900,000 Note: No withdrawal or payments shall be made prior to the signature date, except that withdrawals up to an aggregate amount not to exceed EURO 8,920,000 and EURO 11,590,000 may be made for payments made prior to this date but on or after March 31, 2019, for eligible expenditures under categories 1 and 2, respectively.
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ANNEX 3: Economic and Financing Analysis COUNTRY: China Gansu Revitalization and Innovation Project
Economic and Financial Analysis
Component 1
1. For component 1, the analysis modeled the financial returns to micro-credit for cultural, tourism and creative industry enterprises in Gansu. Based on GFHG and Bank of Gansu’s proposed lending program of US$150 million (IBRD: US$50 million equivalent), it is anticipated that 1,200 microloans of less than US$50,000 and 180 small loans will be provided to MSEs during the project life cycle and will support the creation of a sustainable credit market. Based on the distribution of tourism MSEs identified during the market demand survey, the bulk of beneficiaries are likely to be restaurants, food caterers, bed and breakfasts, and hospitality providers.
2. Employing “with-project” and “without-project” scenarios, the financial model aggregated the incremental returns to investment in terms of net after-tax profits for MSEs and interest income for Bank of Gansu. Based on information gathered from GFHG and Gansu Bank, the model populated key parameters by utilizing the following assumptions: (i) the total volume of lending—US$150 million—will be disbursed over a five-year period; (ii) Gansu Bank will continue to offer its standard product for MSEs—loans at market interest rates with a one-year repayment period; and (iii) the average default rate is 2.5 percent among MSE borrowers. For MSEs, the analysis drew on secondary data to populate the following baseline parameters: (a) the average micro- and small enterprises were assumed to generate annual revenues of RMB 50,000 and RMB 500,000, respectively; (b) the average growth rate of revenues was taken to be 6.5 percent, the growth rate for the tertiary sector in Gansu in 2017; and (c) the marginal tax rate was taken to be 10 percent, based on the preferential tax policy that benefits MSEs.
3. The model aggregated incremental after-tax profits for MSEs and interest income for Gansu Bank over a time horizon of 20 years. On the cost side, the model aggregated the variable interest and front-end and commitment fees to be paid by GFHG. Through a cost-benefit analysis, the investment was evaluated using three metrics: net present value (NPV), benefit-cost ratio (BCR), and financial internal rate of return (FIRR). The FIRR for component 1 was estimated at 28 percent, with an NPV of RMB 2.7 billion (~US$389 million) and a BCR of 4.1. The investment remained highly profitable, even when the discount rates were varied between 5 and 10 percent (Table 3.1). Employing “with-project” and “without-project” scenarios, the financial model projects the incremental lending cash flows in terms of after-tax profits for MSEs and interest income for Gansu Bank. The IRR for component 1 is estimated at 28 percent, with an NPV of RMB 2.0 billion (~US$291 million) and a BCR of 3.4, using a discount rate of 10 percent. The positive NPV and high BCR are strong indicators of a profitable investment, even if the opportunity cost of capital is conservatively considered to be 10 percent for China. The time horizon for the analysis was 20 years, in line with the repayment period for GFHG.
4. Notably, these estimates only represent the component’s financial viability. The increased supply of
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microcredit for MSEs is also likely to lead to enterprise creation, higher survival rates, and new hiring, consequently generating new jobs. Based on the sizes of the firms surveyed by the GFHG market demand study, analysis assumes that the average micro and small enterprises have 3 and 10 employees, respectively. Sixty percent of loans will be allocated to micro-enterprises, which will generate about 3 new jobs each. The remaining allocation will be for small-enterprises, which will generate about 10 new jobs each. Utilizing these assumptions, it is conservatively estimated that microcredit investments will lead to the creation of 3,204 new jobs for MSEs that receive loans during the project cycle. Since project funds will be revolved for newer lending, overall impact on jobs will be significantly higher.
Table 3.1: Summary of Financial Analysis – Component 1
Metric Discount rate = 5% Discount rate = 8% Discount rate = 10% NPV (RMB) 4.2 billion 2.7 billion 2.0 billion BCR 5.4 4.1 3.4 FIRR % 28 Jobs 3,204
Component 2
5. The main economic benefits of component 2 include (a) higher operating income in the form of ticket sales and leasing income from businesses at subproject sites; (b) higher revenues accrued to local economies due to more tourists, longer stays, and greater spending; and (c) enhanced experience or utility of tourists owing to heritage site protection and development. The beneficiaries of the project are tourists (both domestic and international), local residents, and tourism MSEs, such as restaurants, bed and breakfasts, tour operators, and transport businesses.
Benefit Streams
6. Operating income. The direct financial revenues accrued by subproject operators consist of (a) revenues from ticket sales and (b) rental income generated by the leasing out of subproject spaces to local small businesses, such as souvenir and handicraft shops, homestays, cafes, and others catering to tourists. To compute ticket revenues, current visits and site-carrying capacity were used to forecast annual visits and ticket sales. Rental income was computed by projecting a 3 percent growth in local rental values and considering planned subproject space allocations for business leases.
7. Higher spending in local economy. The development of tourist attractions and geo-tourism maps, destination management, and improved urban infrastructure are expected to attract more tourists and result in longer local stays and greater spending on the local economy. To compute this benefit stream, an estimate needed to be made of the additional revenue accruing to the city/county attributable to project investments. To do so, the analysis took a demand-side approach and computed incremental local revenue as the product of forecasted annual visits and local spending, both of which were projected using historical tourism data at the city/county level. To avoid double counting, calculation of this additional revenue excluded operating income accrued at subproject sites and included only aggregate consumption in the wider economy—that is, spending on accommodation, food and beverage, local transport, and entertainment and hospitality services.
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8. Consumer surplus. Measured as the difference between visitors’ willingness to pay (WTP) for subproject improvements and entry fees, consumer surplus is the additional visitor utility derived from an enhanced experience that is unaccounted for in ticket prices. It is particularly significant for historical preservation sites (for example, the Dadiwan relic site and Xuanquanzhi Posthouse in Dunhuang), where operating income from ticket sales and leasing income are limited.
Costs
9. The economic cost of component 2 mainly includes fixed asset investment, annual operation and maintenance costs, resettlement costs, and costs of net carbon emissions.
10. The fixed asset investment of the project includes four items: construction and installation engineering costs, purchase costs of equipment, tools, and instruments, other capital construction costs, and reserve costs. Based on the investment estimation, tax, price increase reserve costs, and interest are excluded. The land cost is calculated according to the shadow price.
11. Annual operation and maintenance expenses include wages and welfare expenses of employees, purchased fuel and power expenses, daily maintenance expenses, overhaul expenses, and other expenses, which are adjusted according to the shadow price based on the financial analysis. The main adjustment according to the shadow price is to the wages of employees. According to the Economic Evaluation Methods and Parameters of Construction Projects (Version III), the coefficient of technical labor force is 1; the coefficient of nontechnical labor force is 0.7, which is considered as 0.76.
12. The cost of increased carbon emissions due to construction and energy consumption is estimated by using carbon trading price sources from the average price of the most recent trading day of the China carbon trading network. The carbon trading price is shown in Table 3.2.
Table 3.2: Carbon Trading Price List Date Trading market Price (RMB/ton) 2018/3/19 Shenzhen 33.67 2018/3/19 Beijing 56.60 2018/3/19 Shanghai 38.00 2018/3/19 Guangdong 13.99 2018/3/19 Tianjin 8.51 2018/3/19 Hubei 14.86 2018/3/19 Chongqing 31.93 2018/3/19 Fujian 15.79 Average 26.67
13. Economic and financial analyses were carried out for each of the eight proposed subproject investments, and the results are summarized in Table 3.3. The FIRR for component 1 is estimated at 5.3 percent, with a financial NPV (after tax) of RMB 25.3 million (~US$3.65 million) and an average payback period of 16 years.
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14. The EIRR for component 2 is estimated at 21.2 percent, with an NPV of RMB 1.19 billion (~US$171 million), and a benefit-cost ratio of 2.42. As would be expected, the wider economic returns for cities and counties are larger than the purely financial returns accruing to subproject operators. These returns are robust to revenue shocks and cost overruns; the sensitivity analysis indicates the investments provide EIRRs of 18.8 and 20.9, respectively, in scenarios of 15 percent drop in revenues and 15 percent increase in costs.
Table 3.3: Summary of Financial and Economic Analysis – Component 2
Subproject FIRR % FNPV, RMB Payback EIRR ENPV, BCR (after tax) period % RMB M (after tax) 1. Dadiwan: (a) Urban regeneration of 3.0 –38.2 22.1 16.4 159.0 2.07 Wuying, Longcheng, and Shangguan historic areas; (b) Dadiwan Cultural Experience Zone, Incubator Space and Tourist Service Center 2. Yellow River Lacquerware Discovery and 5.1 0.3 17.4 21.3 86.7 2.68 Incubator Center 3. Majiayao: (a) Rural regeneration of 5.7 9.6 18.3 25.8 259.3 3.61 eight Villages; (b) Majiayao Cultural Exhibition, Research, and Incubator Center 4. Tongwei Calligraphy and Ink Painting 7.9 32.9 14.9 27.0 212.5 3.05 Creative Industry Exhibition and Incubator Center 5. Zhangye: (a) Rural regeneration of folk 9.7 51.1 14.9 19.1 109.3 1.95 village in Wulan ancient town; (b) Zhangye Discovery and Tourist Service Center 6. Jiuquan Silk Road Culture Research –1.8 –50.9 0.0 21.9 146.8 2.70 Center and Library 7. Dunhuang Posthouse Discovery and 6.1 14.1 17.0 18.3 118.5 2.00 Tourist Service Center 8. Wushan: (a) Urban regeneration of 6.7 14.1 17.2 21.5 97.6 1.86 Shandan town; (b) Wushan Jade Art Creative Industry Exhibition and Incubator Center Overall 5.3 25.3 16.0 21.2 1,190.1 2.42
15. Sensitivity analysis. At a 15 percent drop in revenues and 15 percent increase in costs, the investments will remain robust, with overall EIRRs of 18.8 and 20.9, respectively (Table 3.4).
Table 3.4: Sensitivity Analysis – Component 2
Parameter Rate of change NPV (RMB million) EIRR % Revenue –15% 921.6 18.8 Revenue –10% 1,011.1 19.6 Revenue –5% 1,100.6 20.4 Cost 5% 1,179.8 21.1 Cost 10% 1,169.5 21.0
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The World Bank Gansu Revitalization and Innovation Project (GRIP) (P158215)
Parameter Rate of change NPV (RMB million) EIRR % Cost 15% 1,159.1 20.9
16. Sustainability. Financial position and debt capacity assessment of all participating local governments (Table 3.5) found annual loan repayments for the subprojects to be relatively small, representing only about 0.11–2.0 percent of the total local government expenditures. The project districts/counties have committed to allocating sufficient funds annually during the loan repayment period. To guarantee operation and management after project completion, local governments are committed to enhanced debt management, private capital mobilization and corporate bonds, and seeking upper-level government financial support, if necessary. With these mitigation measures, project districts/counties are expected to have adequate fiscal capacity to service their share of the Bank loan for the proposed project.
Table 3.5: Local Government Financial Evaluation
Financial Annual repayment as share Annual repayment Subproject name expenditure in of financial expenditure in RMB million 2017, RMB million 2017 1. Dadiwan: (a) Urban regeneration of Wuying, Longcheng, and Shangguan historic areas; (b) Dadiwan Cultural 15.6 780.0 2.00% Experience Zone, Incubator Space and Tourist Service Center 2. Yellow River Lacquerware Discovery 4.8 4,271.3 0.11% and Incubator Center 3. Majiayao: (a) Rural regeneration of eight villages; (b) Majiayao Cultural 11.1 821.0 1.35% Exhibition, Research, and Incubation Center 4. Tongwei Calligraphy and Ink Painting Creative Industry Exhibition and 7.5 2,942.0 0.26% Incubator Center 5. Zhangye: (a) Rural regeneration of folk village in Wulan ancient town; (b) 7.1 5,218.8 0.14% Zhangye Discovery and Tourist Service Center 6. Jiuquan Silk Road Culture Research 6.5 2,426.4 0.27% Center and Library 7. Dunhuang Posthouse Discovery and 9.2 2,291.2 0.40% Tourist Service Center 8. Wushan: (a) Urban regeneration of Shandan town; (b) Wushan Jade Art 5.4 1,771.9 0.31% Creative Industry Exhibition and Incubator Center
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The World Bank Gansu Revitalization and Innovation Project (GRIP) (P158215)
ANNEX 4: Map
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