World Bank Document

Home , Business loan, Consumer leverage ratio, Loan guarantee, Local currency

t/AA/ 3 g 7 J -•/// Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized iit,5.st Ni :1 2'f;3 - CIA 'I; T 2AI ReportNo. 11253-CIA

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STAFF A.PPRAISALREPORT

CHINA Public Disclosure Authorized

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

FEBRuARY11, 1993 Public Disclosure Authorized

Public Disclosure Authorized Industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office

llis document has a restridted distibution and may be used by redcpientsonly In the performance of their offlcial duties. Its contents may not otherwise be diselosed without Worid Bank authrizaon CURRENCYEOUIVALENTS (as of December 31, 1992)

Currency name = Renminbi (EME) Currency unit - Yuan (Y) - 100 fen Y 1.00 - $0.174 $1.00 a Y 5.75

WEIGHTS AND MEASURES

Metric System

ACRONYMS AND ABBREVIATIONS

ADB - Asian Development Bank BOCOM - Bank of Communications CIB - China Investment Bank CRS - Contract ResponsibilitySystem DEMC - Daming Electric Motor Company ERR - Economic Rate of Return FEAC - Foreign Exchange Adjustment Center PIs - Financial Intermediaries FRR - FinancialRate of Return FTC - Foreign Trading Company GOC - Government of China GVIO - Gross Value of Industrial Output ICE - InternationalCompetitive Bidding ICBC - Industrialand CommercialBank of China LIB - Limited InternationalBidding MOF - Ministry of Finance PBC - People's Bank of China PCBC - People's ConstructionBank of China PFIs - ParticipatingFinancial Intermediaries PRC - P3ople's Republic of China SMT - Surface-Mounted Technology SPC - State Planning Commission TAIC - Tianjin Auto Industry Corporation TCC - Technical Cooperation Credit TEPB - Tianjin EnvironmentalProtection Bureau TIDP - Tianjin IndustrialDevelopment Project TLIP - Tianjin Light Industry Project TMB - Tianjin Municipal Branch TMG - Tianjin Municipal Government THIB - Tianjin Machinery Industry Bureau TPC - Tianjin Planning Commission TVEs - Town and Village Enterprises TWBLO - Tianjin World Bank Loan Office

FISCAL YEAR

January 1 - December 31 FOR OMCAL USEONLY

CHII TINJIN INDUSTRIALDEVELOPMENT PROJECT

Loan and Proiect Summarv

Bgrrwe_s: People'sRepublic of China Deneficiaries: Municipalityof Tianjin(Tianjin) Amount: $150.0million equivalent

Terms: Twentyyears, including five years of grace,at the standardvariable interest rate

OnlendinaTerams: Tianjin would onlendthe proceedsof the loan as follows: (i) onlend the industrial credit componeatof $134.5million to participatingfinancial intermediaries (PPis),and (ii)out of the technicalassistance component of $15.5million, $200,000 to PFIs and $9.7million to eligibleenterprises, on the same terms and interest rate as that of the Bank loan. PFIs would onlendthe loan proceedsof the indust..ialcredit component to eligible enterprises for a maximum period of 15 years including up to 3 years of grace and at a variable interest rate equal to the Bank rate plus a minimum spreadof 1.2 percent. Subborrowerswould carry the foreign exchange risk under the industrial credit component, and, under the technical assistance component, PFis and enterpriseswould bear the foreignexchange risk on the respectiveamounts indicated above, while Tianiinwould carry the foreignexchange risk on the balanceof $5.6million.

ProlectDescrintion: The projectwould supportthe restructuringof five key industrialsubsectors (machine tools, construction machinery, automotive parts, electronic componentsand electricmotors). It would providefinancial assistance of $134.5million for the modernizationof enterprises and technicalassistance of $15.5million for strengthening of institutionalinfrastructure, studies and expert services for the five project subsectors. The project would aim to: (a) expedite policy and enterprise reforms at the regional level, leading to greater autonomy for and accountability of enterprise management, and encourage the municipal authorities to focus their activitieson supportingand guidingenterprises ratherthan directlycontrolling them; (b) assistinsti- tutionaldevelopment for strategicplanning, systems development and implementation, engineering and technical support services and human resource development and

This document has a restticteddistribution and may be used by recipients only In the performance of their oMcial duties. Its contents may not otherwise be disclsed without World Bank authorization. - it -

redeployment; (c) improve subsectoral organization and internalenterprise management and syetomss (d) modernize and restructureenterprises, including the support of high priorityinvestments5 and (e) further strengthen financial intermediaries. ProlectBenefits and Risks: The accelerationunder the projectof policyand system reforms,improved services of supportinstitutions and restructuring of enterprises would resultin improvement of subsectoral efficiency and performance. In addition, the subprojectsto be supportedwould meet economic viabilitycriteria and would contributeto higher exportsand efficientimport substitution. There are two main projectriskss (a) unanticipatedand adverse future macroeconomic developments and the cumbersome processof coordinationbetween the centraland provincial authoritiescould affectthe pace of Implementation of the agreedpolicy and enterprise reforms; and (b) variousactivities envisaged under the projectmay not be completed on time. However, given the Govern- ment's strongcommitment to the reformprocess, institutional arrangements made in Tianjinfor projectimplementation and experience gained under an earlier Bank- assistedindustrial project in Tianjin,these risksare unlikelyto pose a seriousthreat to the successof the project. - 11.1-

TotalProject Costs Local E.elsn TotatI ---- ($million) ---- Industrialinvestment 65.5 134.5 200.0 Technicalassistance & training 6.5 15.5 22.0 Total Costs 2272.0 150.0 222.0 FinancintPlant

IBRD - 150.0 150.0 PPIs, enterprisesand TMG 72.0 - 72.0 Total 72.0 150.0 222.0

EstimatedDibursement.: BankF 1994 1995 1996 1997 1998 1999 2000 -3------($ million) ------Annual 5.0 9.5 28.5 52.5 35.5 11.0 8.0 Cumulative5.0 14.5 43.0 95.5 131.0 142.0 150.0

EconomicRate of Returns Not applicable

la Tentativeestimates inclusive of taxes,duties, and contingencies.Final estimateswould d pend on individualsubproject cost estimateswhich PPIe would prepareat ihe time of subprojectappraisal. - iv -

STAFF APPRAISAL REPORT

CHINA

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

Table of Contents Pate No.

I. INTRODUCTION...... 1

II. TH INDUSTRIALSECTOR IN CHINA ...... 3

A. Background ...... * ...... 3 B. IndustrialDevelopment Strategy ...... 3 C. Bark Support to Industry ...... 6

IIl. THE-INDUS'LR1ALSECTOR IN TiANJIN ...... 10

A. Tianjin and its Industrial Sector ...... 10 Background...... * .* * * * 10 Structureand Performanceof Industry ...... 10 B. DevelopmentStrategies and Policies ...... 12 C. The Five Subsectors ...... 14 Enterprise and SubsectorPolicy Reforms ...... 14 Physical Restructuringof Subsectors--Issuesand Strategies ...... 17 Developmentof TechnologicalInfrastructure . . . . 21 D. Bank Role, Lessons Learned and Strategy ...... 21

IV* THE RJ;aCT . *ao * * 0 ** 0 3

A. Project Objectives ...... 23 B. Project Components.t.. * ...... ***. 23 FinancialAssistance Component ...... 23 TechnicalAssistance ..... * ***..... 24 C. Project Cost and Financing...... 26 D. Project ImplementationArrangements ...... 26 Role of the Tianjin Municipal Government (TIG) . . . 26 Role of ParticipatingFinancial Intermediaries(Plls) 27 E. EnvironmentalImpact ..*...... 30

This report is based on the findings of an appraisal mission that visited China in June/July 1992. The mission comprisedZ. Rhan (Task Manager), N. Hughes (SeniorOperations Officer), N. Lichtenstein(Senior Counsel), N. Mathieu(Senior Economist), M. Pharwani(Senior Engineer) and C. Punsalan (SeniorFinancial Officer). H. Sethiwho was a memberof the identification and preappraisalmissions also contributedto the preparationof this report. The peer reviewers are Messrs. J. Gamba and R. Heath. The Acting Division Chief is Mr. Z. Khan and the Director is Mr. S. J. Burki. V. TIM ...... 32

A. Main Featires of theLoan ...... 32 B. Procuremeni.ad Disbursements ...... 33 C. Reportingand Auditing...... 35 D. Benefitsand Risks ...... 35

VI. AGRE TAND RECOMNENDATION.9...... *. 37

ASUR

1. The Statement of the Tianjin Municipal Government on the Development Program and Strategy for Machine Tools, Construction Equipment, Electronics Components, Automotive Parts and ElectricMotors Subsectors ...... a...... 39 2. Economicand EnterpriseReforms in the Pive Subsectors If in Tianjin ...... 49 3. Institutional Strengthening for Workers'Retraining and RedeploymentinTianjin.. .*...... **. 00 56 4. Machine Tools Subsector *0 o ...... 59 5 Construction Machinery Subsector ...... 66 6. Automotive Parts Subsector ...... 72 7. Electronics Components Subsector . . . *...... 79 8. Electric Motors Subsector *.000 0...00 ... v 84 9. Institutional Infrastructure and its Development Program . . . 88 10. Terms of Reference of Studies/Project Implementation Work of Consultants ...... * * . o ... 0 0 4 107 11. Project ImplementationSchedule ...... ' . . . 112 12. KeyMonitoring Indicators ...... 113 13. Project Implementationand SupervisionPlan ...... 114 14. China Investment Bank (CIB) ...... 116 15. Industrial and Commercial Bank of China (ICBC) ...... 124 16. The Bank of Comunications s(BCBO)...... 133 17. EstimatedDisbursements ...... 140 18. DocumentsAvailable in the Project Pile ...... 141

TABLESIN TEXT

3.1 Tianjin: IndustrialOutput Trend ...... 11 5.1 TIDP - Procurement Arrangements ...... 34 TIANJIN INDUSTRIALDEELOPNMENT PROJECT

1. INTRODUCTION

1.1 Tianjin is one of China's three largest cities which have the status of province. It has a relatively large and diversifiedindustrial base. Although its industrial output accounts for only 3 percent of the national industrialoutput it is quite sizable in absolute amount--Y 72 billion ($15.2billion) in 1990. In line vith the national policy, the Tianjin Muni- cipal Government (TMG) is implementinga series of reforms to restructurethe industrialsector. The Bank has already started supportingthis program through Loan 3022-CHA (February1989) for the Tianjin Light Industry Project (TLIP). TLIP is assisting T¶G in restructuringthree priority subsectorsof the light industry sector through accelerationof economic and enterprise reforms, improvement of internal enterprise organization and managementSys- tems, physical restructuring of plants and strengthening of support institutions. The overall progress on implementationof the project is satisfactory. TMG has now prepared a second industrialrestructuring project, viz., Tianjin IndustrialDevelopment Project (TIDP) for Bank assistance. The proposed project would help to accelerateand broaden the reforms initiatedwith TLIP and extend Bank support for the restructuringof additionalpriority subsectors.

1.2 As part of project preparation,an in-depth study of the five subsectors has been carried out by internationalconsultants (financedunder an existing IDA credit--CreditNo. 1664-CHA)in two phases. Phase I has established Tinijin's comparativeadvantage in these subsectorsbased on selected product groups and has proposed strategiesand developmentprograms. Phase II provides implementation plans at the municipal, subsectoral and enterprise level for these strategiesand programs. Based on the findings and recommendations of the studies, a developmentprogram and strategyhave been prepared by 11G for the five subsectors (Annex 1) and were discussed and agreed upon with the governmentduring project appraisal. Economic and enterprisereforms are the focal point of the strategy and the proposed project would assist in their implementationon two fronts. On the one side, the project would help the government in carrying out subsectorpolicy reforms (such as liberaliza- tion of investment,production and pricing; improvementsin the foreign trade regime; increased labor mobility; social security and housing reforms; and promotion of industries where Tianjin has a comparative advantage), which are needed irrespective of the type of ownership of enterprises. On the other side, a set of enterprise reforms would be pursued (such as corporatization, improvementsin the contract responsibilitysystem, reorganizationof subsectors, introductionof modern management systems and procedures,and promotion of joint ventures), vhich will make enterprises more efficientand profit- making entities.

1.3 Some of the important elements in the above-mentioned economic and enterprise reforms are: (a) OwnershiRs All beneficiary corporations under TIDP will be shareholding companies and those meeting financial criteria and conditions of the central governmentwill also be allowed to issue shares to the generalpublic and employees;(b) Prices: About 95 percentof the products of the five subsectorsare alreadyoutside mandatory planning, all the remainingprice controls--bothmandatory and indicative--willbe removedby 1995!and (c) ForeifnTrade: The goverment has recentlyliberalized the eligibilityrequirements for exportrights for productswith high-technology content; enterpriseswith exportsof $1 millioncan now be given such rights comparedto the previous$3 millionlimit. Accordingly,most of the enterprisesin the five subsectorswill be able to exportdirectly; (d) SurDlus Labor: Almost 10,000workers are expectedto becomesurplus in the five sub- sectorsas a resultof restructuring.These workers will be removedfrom the enterprises(20 percentin 1993 and 40 percentin 1994 and 1995, respectively);and (e) SubsectorReorganizations The present81 enterprisesin the five subsectorswill be reorganizedinto 21 corporationswhich will allow economiesof scaleand specialization.Each corporationwill be a separate legalentity with its own profitand cost centers. Ten nonviableenterprises will be closedand 22 productgroups in which Tianjindoes not have a comparative advantage,will be discontinued. 1.4 The proposedBank loan of $150million would supportthe foreign exchangeneeds of the project;$134.5 million as an industrialcredit to be onlentthrough three participatingfinancial intermediaries (PFFs); viz., the ChinaInvestment Bank (CIB),Industrial and CommercialBank of China (ICBC) and Bank of Communications (BOCOM), for technological restructuring of enterprises in the five subsectorsand $15.5million for technicalassistance for strengtheningof supportinstitutions, studies, expert services, and training. The subprojectsto be financedby the PFIs will be consistentwith the Tianjin government'sstrategies for the five subsectorsand will also meet the investment criteriaof the PF1s. 11. THE INDUSTRIALSECTOR IN CHINA

A. Background

2.1 Industry is China's largest productive sector, accounting for nearly halr of its gross domesticproduct (GDP) in 1990 and employing 17 percent of the country'stotal labor force. About 104,000 state-ownedenterprises generate 55 percent of totalindustrial output; most of the remainder (36 percent) is producedby 1.7 millionnonstate enterprises--primarily urban and rural collectives,and townshipand villageenterprises (TVEs). The stateenter- prisesconcentrate mainly on importantraw materials,capital goods, and stra- tegiccommodities, while nonstateenterprises mainly produce downstream con- sumerproducts. Gross industrialoutput, which amountedto Y 2,392.4billion ($500.2billion) in 1990,is sharedalmost equally by light and heavy industries. The grossvalue of industrialproduction increased rapidly between 1978 and 1990,at about 12 percenta year in real terms. Duringthis period, lightindustry registered a much fasteraverage annual growth rate (13.9per- cent) than did heavy industry(10.3 percent). Chinesemanufactured exports have also grown rapidlyfrom around$9 billionin 1980 to about $46.2billion in 1990. 2.2 China'sindustrial development has been constrainedby several structuraldeficiencies that stemmedmainly from rigideconomic planning and past industrialstrategies oriented towards self-sufficiency at the national and regionallevels. The most obviousdeficiencies pertain to outdatedtech- nologies,institutional rigidities deriving in part from quota and price controls,a distortedstructure of prices,inadequate infrastructure and an underdevelopedfinancial sector. Theseproblems are reflectedin the low pro- ductivityof labor and low efficiencyof resourceuse in Chineseplants. The structureof industryalso is skewedtoward basic heavy industry. The emphasis on self-sufficiencyat the regionallevel has led to a fragmentednational market,reduced domestic competition, and the suboptimaluse of scarceskills and resou.ces.As a result,potential gains from economiesof scale are often missed. Institutionalinflexibility, compounded by inadequatemarket integration, has providedlittle incentive for industrialenterprises to improve managerialefficiency and productquality. The low pricesof energyand basic intermediatesfor industrialproduction also contributeto the inefficientuse of inputs. Investmentsin infrastructure,particularly for transportationand telecommunications,have laggedbehind those in industry. This disparityhas in turn been a major constrainton industrialdevelopment. The financial marketsare stillin their infancyand until recentlyonly providedlimited intermediationservices for enterprises. B. IndustrialDevelopment Stratetv 2.3 Since 1979,the ChineseGovernment has initiatedchanges in the industrialstructure and, as part of the ongoingeconomic reforms, has introduced incentivesand marketmechanisms to improveeconomic efficiency. The developmentstrategy has emphasizedmodernizing existing equipment, developing manufacturedexports and more efficientlight industry,and conservingmate- rial and energyresources in industry.The reformshave focusedmainly on four areas: (i) prices--expansionof the role of marketforces in price -4-

determinations(ii) enterprises--strengthening of enterprise autonomy and managementaccountability; (iii) trade--promotion of exportsto earn foreign exchangeto financethe importationof moderntechnology and equipment;and (iv) financialsector--enhancement of the scopeand efficiencyof financial intermediation.However, given littleinternational precedent or experience in successfultransition from centralizedplanning to an effectiveintegration of plan and market,these reforms continue to be a difficultprocess, requiring caution,experimentation and repeatedfine-tuning. Furthermore, the progress of reformshas variedfrom regionto regionand subsectorto subsector; the statusof reformsin Tianjinis elaboratedin ChapterIII. 2.4 The price reformsare designedto reducegradually the distortions that cause allocativeeconomic inefficiency, particularly by reducingthe scope for allocationof resourcesunder mandatory planning and by allowing marketforces to play a greaterrole in price determinstion.At present,a two-tierpricing system exists as a resultof differencesbetween the controlledprices for quota productionunder the stateall}cation plan and market-relatedprices for outputabove plan targets. Since the startof the economicreforms, the Governmenthas alloweda growingportion of industrial productsto be sold at marketprices outside the plan, and it has considerably raisedthe price of major industrialinputs, including energy. While the currenttransitory system is a significantimprovement over the strictprice controlof the past, distortionsin relativeprices and gaps betweencon- trcolledmarket prices have a numberof shortcomings:reduced allocative efficiency,discrimination across producers and consumers,administrative complex- ity, and creationof opportunitiesfor corruptpractices and otherdistor- tions. The Government'sstrategy is to continuereducing its administrative controlover pricingin parallelwith gradualdismantling of annualproduction planningand allocation. 2.5 Rapid increasesin freemarket prices and costsof urban livingin 1989 slowedthe pace of price reformsin recentyears. After the announcement of major price reformsin May 1988,urban consumerprices, having risen by 15 percentin the first two quartersof that year, soaredat an annualrate of over 60 percentin the thirdquarter. These developmentsforced the COC to rescindthe proposedprice reformsand initiatea major stabilization(austerity) program. Duringthe three-yearaudterity program, vhich couldhave implieda significantretreat to strongprice controlsover some strategic commodities,price reformremained a firmpart of the Government'sreform agenda. Major adjustmentsof controlledprices for agriculturalcommodities (soybeans,grain$ cotton, edible oils, energyinputs, coal, crudeoil and power)and transport(freight and passengertransport) were made during 1990-92. These adjustmentsare expectedto createa more favorableenviron- ment for furtherprice reform,including a gradualdecontrol of pricesand continuedenlargement of the shareof total outputallocated by markets. 2.6 Reformshave been introducedin the managementarrangements and ownership structureof enterpriseswith a view to improvingthe efficiencyof enterprises.The centraltheme of these reformshas been the decentralization of economic decision-making, from the government to enterprises and from highergovernment tiers to lowerones. Enterprises,whose main functionhad been to carry out productionmandates from the governmentbefore the reforms, have thus been providedvarious incentives to operatewith greaterautonomy in -5-

a more competitivebusiness environment. As a consequence of thesereforms, Chineseenterprises have now becomediverse in termsof ownership, size and organizationaland managementarrangements. Many small stateenterprises have been convertedto collectiveenterprises, and new rural collectiveenterprises,operated by TVEs, have proliferatedin areas closeto major cities. The scope for privately-owned enterprises was expanded greatly by new regulations in 1988, which eliminatedceilings on the number of employees,and expandedthe lines of business they can enter. New hybrid forms of enter- prisesbased on domesticjoint ventures among differentbureaucratic jurisdic- tions have also emerged,as a means of dealingwith interregionaltrade and investment barriers. As for the management arrangements of state enterprises, significant changes have also been made in the degreeof enterprisecontrol over their assets and profits. The state enterprisereforms introduced, among other things, a system of contract management responsibility, a uniform tax rate (55 percent) for many large enterprises, wage incentives for workers, and higherprofit retention by enterprises.

2.7 The economic environmentover the next severalyears is expectedto be conduciveto continuedand ratheraccelerated experiments with enterprise reforms. Such reforms,however, will continueto be graduallthe step-by-step processwhich has characterizedChina's successful reform efforts to date is likelyto continue. Main topicson the agendainclude modification (in some cases,phasing out) of the managementcontracting system for stateenterprises,introduction of a systemof uniformta-ation, alternative forms of enterpriseownership, separation of social(security) functions from commercial enterprises,and the introductionand applicationof company and bank- ruptcy legislation. In particular, the Chinesegovernment has in recentyears been activelyinvestigating theoretical and practicalissues related to adapt- ing a shareholdingsystem to Chinesestate enterprises, and is launchingcon- trolled"joint stock" experiments at selectedlocations. In this connection, an importantchange in the state investmentsystem was initiatedin early 1989 throughthe creationof state and local investment companies, which can provide equity-typefunding for stateenterprises. Until the recentpast, all state-sponsoredinvestments for state enterpriseshad been whollydebt- financed.1/ In 1992,the shareholdingexperiment was broadenedbeyond Shanghai and Shenzhen and regulationswere enactedextending the rightsof state enterprisesinto new areassuch as price setting,planning, labor and foreignexchange rights. 2.8 In this context,TMG has authorized,on an experimentalbasis, the creationof shareholdingcompanies in the five manufacturingsubsectors under the TIDP project. The majorityof shareswill be publiclyowned, i.e., held by the StateAssets Administration Bureau of Tianjin. A board of directors representingthe shareholderswill be establishedin each of the selected enterprisesand will be responsiblefor major corporatedecisions. The above experiments will be of two types: (i) enterpriseswith shareholdersbeing legal entities (limited liability companies) and (ii) enterprises with some of

1/ This practice Was an improvement over the preceding one of total grant financing. However, total debt financing of newly formed companies further complicated the ambiguity of enterprise ownership, and was also in conflict with a norm of prudent financial management. the shareholdersbeing individualsincluding enterprisestaff who may hold up to 20 percent of capital stock (limited share companies).

2.9 In foreign trade, the main changes so far have involved a break-up of the export and import monopolies. This has been done mainly through limited decentralizationof the export trade and the granting of direct trading rights to productionenterprises whose exports are above $3 million a year. A new round of foreign trade reforms has been put in place in 1991, involvingthe abolitionof export and import subsidies,and equalizationof retentionratios of foreign exchange earnings by enterprises. Transactionsin local foreign exchange adjustment centers (FEACe)have grown rapidly. Peri- odic adjustmentsin the official exchange rate hav- been made to the point that 1991 saw the introductionof a managed floating rate system.

2.10 The major financial sector refcrms includet (i) formal establishment of the People's Bank of China (PBC) as the country'scentral bank; (ii) divestitureof PBC's commercialbanking functionsto independentspecial- ized banks; (iii) creation of a few new banks and nonbank financial institutions for various financialservices; (iv) introductionof new financial instrumentsand establishmentof related financialmarkets; and (v) a gradual rise in interest rates to stimulate economic use of capital and to promote domestic resource mobilization. These reformshave led to considerablefinan- cial deepening despite some setbacks in the recent period of high inflation: the ratio of the size of monetary assets (M2) to gross national production increasedfrom 37 percent in 1979 to 75 percent in 1987, and the figure for 1990 was 88 percent. Notwithstandingthese advances,weaknesses remain. The system remains overwhelminglydominated by banks, in particular,the four specialized banks. Financial institutionshave still to undergo substantial institutionalupgrading to function as effectiveintermediaries. There has been a trend in the banking system of increasingportfolio arrearswhich needs to be arrested. Regulation and supervisionof the financial system needs considerablestrengthening as do the accountingand legal frameworks. Interest rates also need to be unified. While recent reliance on administrative mechanisms has enabled the government to regain control of inflation, in the longer term, PBC needs to develop its indirectmonetary policy tools.

C. Bank Support to Industry

2.11 The Bank's objectivesin supportingChina's industrial development are to assist the Government in: (i) improvingthe policy framework for the industrial sector as a whole; (ii) building sound institutionsand practices for subsectorplanning, project approval and implementation,and financial intermediation;(iii) promotingand implementingtechnology upgrading, plant restructuringand rehabilitation,and energy and material resource conserva- tion in selected sectors at the national and provincial levels; and (iv) carrying out various reforms, particularlyin the enterpriseand financial systems. As the Bank's relationshipwith China has deepened,lending and sector work have increasinglyconcentrated on the articulationand design of the specific policies, institutionsand procedures,which are integral parts of the reform effort.

2.12 The Bank Group's lending to the industrialsector in China, which began in December 1982, comprisesthe following: (i) five loans/credits - 7 -

totaling$945.6 million to CIB /Ito developit as a premierfinancial intermediaryproviding term financingfor small-and medium-sizedenterprises in a wide range of industrialsubsectors; (ii) four loans/creditstotaling $394.3million to the fertilizerindustry 3I to supportthe buildingof new fortilixerplant8, developmentof new phosphatemines, revampingof plants, and strengtheningof the institutionalinfrastructurel (iii) a loan of $100million for the ShanghaiMachine Tool Project(Loan 2784-CHA) in FY87, involvingrehabilitation and modernizationof the machinetool subsectorin Shanghai;(iv) a loan of $128million for the PharmaceuticalsProject (Loan 2934-CHA)in FY88 to supportthe expansionof pharmaceuticalproduction using moderntechnologies and propermanufacturing practices; (v) a loan of $154million for the TLIP (Loan3022-CHA) in FY89 to supportthe restructuring of textiledyeing and finishing,pulp and papermanufacturing, and packaging subsectors;(vi) a $20 millionindustry component of the GansuProvincial Project(Loan/Credit 2812/1793-CHA) in FY87 for modernizationof the rural industrybass; (vii)a loan of $50.0million and a creditof SDR 45.1 million ($64.3million equivalent) for the Rural IndustrialTechnology (SPARK) Project (Loan/Credit327412186-CHA) in FY90 to supportthe upgradingof standardsand technologyfor the dynamicTVEs, China's rapidly growing nonstate enterprises; (viii)a loan of $150 millionfor the ShanghaiIndustrial Development Project (Loan3288-CHA) in FY91 to supportrestructuring and developmentprograms in four industrialsubsectors--electrical apparatus, printing machinery, scien- tificprecision instruments, and electroniccomponents; and (ix)a loan of $82.7million for the RegionalCement Industry Project (Loan 3443-CHA) in FY92 for the developmentof the cementindustry. In addition,the Planning,Sup- port and SpecialStudies Project (Credit 1835-CHA), approved in FY87, includes componentsfor long-termplanning and strategicstudies in severalindustrial subsectors. 2.13 Physicalimplementation of most of the investmentprojects had pro- ceededgenerally on scheduleuntil the initiationof the economicausterity programin late 1989,when relatedlocal funding shortages began resultingin delaysin the implementationof severalBank-financed projects. Since late 1991,however, the implementingagencies have been takingsteps to expedite projectimplementation to catchup with the originalschedule. GOC has given assurancesthat the necessaryfunds would be made availablefor Bank-financed projects. Disbursementsof the above loans/credits,after some delaysduring 1990/91,have returnedto a satisfactorylevel. ProjectCompletion Reports (PCRs)have been preparedfor the first threeCIB loan/creditsand the Fertil- izer Rehabilitationand EnergySaving Project. 2.14 The Bank'sproposed future lending program in industryand finance includes: (i) supportfor selectedmajor industrialsubsectors--chemicals,

21 The five CIB loans/creditsares Loan/Credit2226/1313-CHA in FY83; Loan/ Credit2434/1491-CHA in FY84; Loan/Credit2659/1663-CHA in PY86;Loan/ Credit2783/1763-CiA in PY87; and Loan 3075-CHAin FY89. I/ The four fertilizerloans are: FertilizerRehabilitation and Energy SavingProject (Loan 2541-CHA) in FY85;Fertilizer Rationalization Proj- ect (Loan2838-CHA) in FY87; PhosphateDevelopment Project (Loan 2958- CHA) in PY88; AND Hubei PhosphateProject (Loan 3066-CHA) in PY89. -8-

fertilizers,electronic¢, building materials, etc.--at the nationaland pro- vinciallevel., within the frameworkof definedsector strategies including broad-based restructuring; (ii) assistance to enterprises in undertakingkey investmentprojects in important industrial subsectors; and (iii)support for developingthe infrastructurefor soundfinancial sector development, and for consolidatingthe centralbanking function of PBC, and furthersupport for CIB and other financialintermediaries in the contextof the overallfinancial sectorreform. The increasing devolution of responsibility for planning and implementationfrom the center to the provinces has expanded the role of pro- vincialauthorities in industrialdevelopment. While the centralgovernment rightlyrecentralized control of monetarypolicy as part of the austerity program, there is little practical evidence of a reversal in the overall trend. These developments in turn call for formulating a coherent national strategyfor key industrialsubsectors and a consistentset of investment prioritiesto be used as guidesfor provincialpolicies. The anticipated seriesof provincialand subsectoroperations is designedto help the central authoritiesand selectedprovinces articulate and Implementtheir new responsibilities.

2.15 As a result of ongoing reforms, significant developments have taken place in China in the financialand real sectors. However,many policydis- tortionsand Institutionalweaknesses still persist and will take time to resolve. Consequently,the resourceallocation efficiency of the financial sectorremains inadequate. While the effortsto furtherimprove the policy frameworkand to strengthenthe institutionalstructure are continuingand the Bank is playing an activerole therein,assistance to prioritysectors and subsectors of the economy throughcredit operations is necessaryand justified until the financialsector gains the necessarycapability for efficient resourceallocation.

2.16 The reformmeasures introduced in recentyears have creatednew opportunitiesfor the Bank to help China in identifyingand discussingreform- relatedissues and experimenting with new systems. For example, the Bank has produced severaleconomic and sectorstudies on key reformissues; workshops and symposiumson enterpriseand relatedreform issues have been jointlyspon- soredby the Bank and the Government. 2.17 The International Finance Corporation's (IFC's)support for the industrial sector has been limited mainly because, with only a few exceptions, joint ventures have to earn their own foreign exchange to service foreign exchange obligations. This provision has made it difficult for IFC to support import-substitutingjoint ventures even thoughmost potentialpartners in China are interestedin the domesticmarket. Since its firstoperation in 1985,IFC has provideda total of $43.0million to China,all of it to the industrial sector (equityparticipation of $3.0million and loansof $40.0million). Its five investmentsinclude; (i) Guangzhouand Peugeot AutomobileCo., Ltd. (InvestmentNo. 813, FY85);(ii) China InvestmentCo., Ltd. (InvestmentNo. 974, FY87);(iii) Shenshen China BicyclesCo., Ltd. (InvestmentNo. 1020,FY87); (iv) Shenzhen Crown Electronics Co., Ltd. (InvestmentNo. 1066,FY88); and (v) Shenzhen Chronar Solar Energy Co.,,Ltd. (InvestmentNo. 1119,FY89). - 9 -

2.18 Relatedto the above,the Bank Group has engagedin a dialoguewith the Government on the need to change the foreign exchange allocation and management system. The current system distorts investments and discourages importantimport-substitution projects. The foreignexchange adjustment centers,established in recent yearsin selecttrade citiesand provincesand playingan increasinglyimportant role (seepara. 2.9),have the potentialfor alleviating this constraint to a large extent. 2.19 In additionto Bank lending and IFC operations, the Bank's programs for economicand sectorwork in industryand financehave providedthe basis for an activepolicy dialogue with the Government.Major topicsfor which studieshave been completedinclude state enterprise management and ownership reforms,finance and investment,tax reform,industrial policies and struc- tural changes,external trade and capital,tax reform,phosphate subsector planning,and electronics.Ongoing and futurestudies will continueto addresssuch areas as enterpriseand financialsector reforms, industrial policiesand restructuringfor severalsubsectors (including electronics, machinebuilding and processequipment manufacturing). This work is increas- inglybeing carriedout jointlywith Chineseagencies. - 10 -

II. THE INDUSTRIALSECTOR IN TIANJIN

A. Tianlin and its Industrial Sector

Background

3.1 Tianjin, an industrial city at the confluence of the ancient Grand Canal and the Hai River, which flows to the Gulf of Bohai, is China's third largest city after Shanghai and Beijing. These three cities have the status of province and are directly under the jurisdiction of the central government. The city covers an area of 11,305 kI 2, including the city itself, seven subur- ban and maritime districts and five rural counties. The population of the municipality as a whole was 8.7 million in 1990, with 4.5 million people liv- ing in the city proper.

3.2 Tianjin holds a key place in the Chinese economy. Because of its location, Tianjin is a major land and water communication pivot in China. The two trunk lines of the Beijing-Shanghai Railway pass through Tianjin. The port of Tianjin is the third largest in China. It has thus become a large economic center serving Northern China.

3.3 Tianjin has a relatively large and diversified industrial base. In 1990, its industrial output reached Y 71.7 billion (current price) or $15.2 billion (1990 price), which was nearly 3 percent of the national industrial output. The share of light industry is above the national average: 55.8 percent compared vith 49.5 percent for China (at 1980 price). State-owned enterprises still dominate Tianjin's industry, but their share in the city's gross industrial output has declined from about 80 percent in the early 1980s to about 68 percent in 1990. The total labor force employed in Tianjin's industry in 1990 was nearly 1.5 million, of which about 0.9 million were in state- ovned units and 0.4 million in collective units, the remainder in either joint venture or private enterprises.

Structure and Performance of Industry

3.4 Tianjin's heavy industry covers a wide range of subsectors and, in 1990, it registered an output value of Y 23.3 billion (1980 price), accounting for 44.2 percent of Tianjin's total GVIO. The main subsectors are: (i) the machine building subsector (electric and nonelectric) which recorded an output value of Y 6.6 billion in 1990 (28.3 percent of total heavy industry output value); (ii) the chemical subsector, with Y 3.5 billion in 1990; (iii) metallurgical subsector, Y 3.0 billion; and (iv) the transportation equipment subsector, Y 1.8 billion.

3.5 In 1990, Tianjin's light industry achieved an output value of Y 28.5 billion (1980 price), accounting for 50.8 percent of the city's total industrial output. Light industry in Tianjin produces a large variety of consumer goods. The main subsectorsare textilesand clothing(with an outputvalue of Y 6.6 billionin 1990,which was 23 percentof total outputvalue of light industry)and food processing.Other products include beverages and ciga- rettes,paper and paper products,pharmaceuticals, bicycles, watches, TV sets, etc. - 11 -

3.6 Tianjin's industrialoutput grew at the rate of 10.2 percent per annum at constant 1980 prices between 1980-90. Also both heavy and light industries grew at about 10 percent per annum (Table 3.1). Tianjin manufactures 17 percent of China's medium- and big-sized tractors,5.3 percent of automobiles,2.5 percent of steel, 2 percent of electricmotors, 17 percent of bicycles and 5.4 percent of televisionsets. Its machine building industry accounts for 4 percent of the total subsector output value of China. Its electronic industry accounts for 5 percent of the nation's total output value.

Table 3.1: TIANJIN: INDUSTRIAL OUTPUTTREND (Y million, 1980 prices)

Avg. annual Outnutvalue strowth() 1980 1988 1990 1980-90

Gross output in industry 19,700 44,080 51,800 10.2 of which:

Heavy industry 8,830 19,590 23,300 10.2 of which: Machine building La 4,672 6,647 7,163 4.4 Transport equipment 431 1,633 1,800 15.4 Constructionequipment /L 25 116 116 16.6 Electronic equipmentla_ 438 2,072 2,927 20.9

Light industry 10,870 24,490 28,500 10.1 of which: Consumer electronics 40 811 854 35.8

La Estimates for 1990.

Sources: Forty Years of Tianiin. 1949-1989,pp. 424-438; China Statistics Yearbook. 1990, pp. 405-418; and Tian_in Plannina Commission (for 1990 data).

3.7 Exports of goods from Tianjin amounted to $1.8 billion in 1990 and grow at an average of 1.6 percent per annum in US dollar terms, during 1980-90. While the leading export earners are textiles, garments, foodstuffs and other light industry products, the export of machinery grew at 8.2 percent per annum during the same period.

3.8 Despite its Impressivegrowth, Tianjin's industrialsector is con- frontedwith many problems. It is often characterizedby lack of specialization, uneconomic size of operations,and inadequatemanagement systems. Gen- erally, the factory buildingsare old, technologyand equipment is outdated, plant layouts are cumbersome,and the consumptionof electrical and thermal energy and raw materials is high. - 12 -

B. DevelopmentStrategies and Policies

3.9 Duringthe 1970s,especially during the Fifth Five-YearPlan (1975-80),Tianjin developed the intermediatematerial subsectors necessary for the expansionand diversificationof its industry. In particular,priority was given to chemicaland steel subsectors.Since the early 1980s,some of the inefficientand obsoleteproduction capacity in heavy industrywas convertedto manufactureof light industrialgoods. Considerablenew capacity was also added in the light industrysector, especially after the mid-1980.to meet a fast-growingdomeotic demand for durableconsumer goods. 3.10 The developmentof the transportation,water and electricitysectors was given priorityin the mid-1980s. Substantialinvestments were made during the SeventhFive-Year Plan to increasethe supplyof electricityand fresh water. Also, incentiveswere providedto economizethe use of these scarce resources.Tariff rates for water were increased,and penaltyrates establishedfor use of electricityabove the industrialnorms. 3.11 In the future,emphasis will stillbe givento low energyconsuming and technology-intensiveindustrial activities. During the EighthFive-Year Plan (1991-95),TMG Intendsto make the best use of its local specific resources--saltand petroleum--toundertake large chemicalinvestment projects, and to make automotiveand electronicsleading sectors for the development of its industry. Prioritywill be given to subsectorswhere Tianjinhas a comparativeadvantage, including textiles, consumer durable goods, machinery and equipment,food processing,packaging, chemical processing, plastics and garments. In each subsector,specific groups of productshave been identified with good development potential. Machine tools, construction equipment, automotive parts, electric motors, and electronic components are listed among them. Export of small electric motors and automotive parts will be also pro- moted. 3.12 Tianjin considers industry to be its main engine of growth and expectsto gain a more importantplace in the economyof the countrythrough industrialdevelopment. It has alreadyembarked on a selectiveprogram of industrialrestructuring which includesgradual enterprise reforms within the nationalframework, strengthening of supportinstitutions (i.e., R&D centers, traininginstitutes, etc.), technological modernization of enterprisesand inprovements in their organization and management systems. While progressis being made on the restructuringof the industrialsector, TMG is conscious that, for a balancedand efficientgrowth, it needsa comprehensivelong-term industrial development strategy and the preparatory work for this purpose is already in progress, assisted by the Second Technical Cooperation Credit (TCC II, Cr. 1664-CHA). 3.13 Tianjin has activelypursued enterprise and policy reforms in industry, includingthe five subsectorsof the proposedproject (details in A 2). TMG has established economic corporations for most of the industrial subsectors; these corporations provide a layer between industrial bureaus and enterprisesand thus some degree of autonomy and accountability to enterprises. There is littlemandatory production planning; enterprises are generally subjectto indicativeplanning. The TianjinPlanning Commission (TPC) has the authority to approve projects costingless than Y 30 million for light - 13 -

industryand Y 50 millionfor heavy industry;projects with costsof more than these amountsare sent to the State PlamningCommission (SPC) or the State Councilfor approval.

3.14 At present,controlled prices apply to 35 productsand, indicative price.to 18 productstall otherproducts have marketprices. In actualprac- tice, productsunder indicativepricing are generallyin surplussupply and their pricesare also market-determined.As regardsthe five subsectorsof the project,about 95 percentof the productionis outsidethe nationalplan and thereforethe pricesare set by marketconditions. 3.15 Until mid-1992,direct export rights were given to enterprises which, interalia, could exportor had potentialto exportat least$3 million value per annum. This limit has now been reduced to $1 million for machinery sad electronic products with high technology content, and $2 million for products of the same categorywith low technologycontent. Most productsof TIDP will have a $1 millionlimit. This would promotedirect contact between the manufacturersand foreignbuyers and thus resultin technologytransfer, promptmarket response and efficientproduction planning by the Chineseenter- prises. The governmentis also encouragingthe use of foreigntrading companies (FTCs)as exportagencies whereby enterprises which do not have direct export rights pay a commission to FTCs for their marketing services. This arrangementallows enterprises to have directcontact with buyersand also entitlesthem to retainmost of the foreignexchange earned through exports. Already,several products of the project'sfive subsectors,e.g., gradersand automotiveparts, are directlyexported by enterprises. 3.16 Foreignexchange retention schemes have been abolishedfor enterpriseswhich exportthrough FTC. (nonagency basis). They must now purchase their foreignexchange at foreignexchange adjustment centers (FEACs). If the enterpriseswere benefitingfrom directexport rights, they can keep 80 percent of their foreignexchange earnings.

3.17 Almostall enterprisesin Tianjinare subjectto the contract responsibility system. The Tianjin Bureau of Finance signs a contract for two or three years. Tax payments are included in all contracts. During the Eighth Five-YearPlan period,the enterprisesare being submittedto more performancetargets than just the profit level. Yearly loan repayments are specified sad new contractshave a durationof three to five years. New workers in enterprisesare governedby laborcontracts. 3.18 The growth of financialinstitutions, including the arrivalof BOCOM in Tianjin, and the expansion of bank branchesand subbranches has provided a littlemore freedomto enterprisesin the choice of banks for deposit and creditoperations. Some competitionexists among financialintermediaries which results in betterservice to enterprises. 3.19 In order to addressthe issueof surpluslabor and the lack of labor mobility,TMG has prepareda citywidehousing reform plan which would be implemented from the beginning of 1992. The plan provides for a compulsory housing savings program for two thirds of city workers, housing bond acquisition for new rentalhousing, gradual increase of rent to "fullcost" levelby the year 2000, and the sale of about 20 percent of housing over 10 years at - 14 -

high discount. In addition,TMG has proposedto establishand supporthousing rentalcompantes; cooperative societies to buildhousing which enterpriseand governmentsupport; and municipal, enterprise and individuallevel "housing funds." 3.20 The city has pooledpension and unemploymentinsurance schemes at the municipallevel separatelyfor the government,SOE, and collectivesec- tors. For healthinsurance, the municipalityis preparingnew measuresto pool major medicalcare insuranceschemes in severaldistricts. These mea- suresare to be ready for implementationin 1993.

3.21 Despite significantprogress, enterprisereforms need to be further acceleratedin Tianjin as in the rest of China. The regulatory,ownership and management rc'vs of the governmenthave to be separated in more distinct terms. Enterprisemanagement should be given full autonomy and made accountable for corporate results. The relationshipbetween economic corporations and constituent enterprises needs to be streamlined. The entry and exit of enterprises has to be facilitated. The price structure has to be made fully market-oriented. Enterprises must now use the more liberal rights to exportdirectly. The contract responsibilitysystem needs to be overhauled, preferably to be replaced by a transparentand uniform taxation system. The financialsystem needs to be liberalizedto provide more efficientservice to the industrial sector. Labor mobility has to be enhanced by accelerating social security and housing reforms.

C. The Five Subsectors

3.22 The five subsectorsincluded in the project are machine tools, construction equipment,electronic components,automotive parts, and electric motors. These subsectors are among the priority subsectors in 7MG's development strategy (para. 3.11), and many of their products play a significantrole in the domestic market. During the preparationof the project, international consultantshave carried out an extensive analysis of strengthsand weaknesses of individualsubsectors includingmarket potential and comparativeadvantage of their main products, and have made recommendationsfor their future development strategy. The consultants'reports are available in project files. Based on this work and inputs of Bank staff, subsectorrestructuring plans focusing on (a) enterprise and subsectorpolicy reforms and (b) subsectorspecific products and market strategiesand organizationalchanges that would be supportedunder the project have been agreed between the Bank staff and TMG. The reforms and strategiesare briefly describedbelow.

BnterDrise and SubsectorPolicy Reforms

3.23 As mentioned earlier (para. 2.7), while the industrialsector reforms introduced in China, includingTianjin, representmajor policy initia- tives, the process consists of a step-by-stepapproach supportedby selective experimentation. In order to provide further autonomy and accountabilityto enterprisesand to make them more responsive to market signals, additional reforms are contemplated. In Tianjin, new measures are anticipatedin all the five subsectorsand the pace of implementationof certain reforms is to be accelerated.These reformsdealing with corporate governance, prices, domestic competition,foreign trade, production and investmentpolicies, taxation - 15 - and CRS, and labormobility, including housing and socialsecurity, are includedin Tianjingovernment's development program and strategy(Annex 1) for the five subsectorsof this project,which were discussedin detailwith Bank staffduring project preparation and appraisal,and which has been for- mally adoptedby Tianjin. Duringnegotiations, assurances were obtainedfrom TMG that it would take all stepsnecessary to implementthe agreeddevelopment program and strategy and exchange views with the Bank at least every six months on its implementation. Details of the reforms are outlined below. 3.24 Shareholding Slatem. In order to promote experiments in sharehold- Ing type companies, all beneficiary corporations under TIDP would have share ownership. The beneficiary corporations which, on the basis of their past two yeara' consolidated accounts, would have a minimum of 15 percent return on equity (net income before taxes as percentage of equity), and a percentage of net income (after taxes) to capital not less than a one-year bank deposit rate, will become "limited share companies." Furthermore, whenever they can meet necessary criteria and conditions, these corporations will also be allowedto issue sharesto employeesand individualinvestors, according to the new centralgovernment regulations. The shares of the corporations would be listed at Shanghai, Shenzhen, or Tianjin (should it have its own stock exchange) and the Tianjin government will seek central government approval for this purpose. Other beneficiary corporations will also be shareholding companies but would be classified as "limited liability companies," which do not issue publicly traded shares. Their shareholders would be typicallythe State Asset Management Bureau, some other corporationslenterprises, and nonbanking financialinstitutions. During project implementation, consultants will help to reorganizethe subsectorstructure into new corporations(paras. 3.41, 3.44, 3.48, 3.52 and 3.53). Tianjinhas alreadyprepared model chartersfor these corporations which provide for a shareholder-type structure, based on the new central government directives issued in 1992. The model charters and related explanations and clarifications have been made available to the Bank, and thesehave been discussedand agreed upon during appraisal. 3.25 Cross-regionalownership can be an appropriatesolution whenever an enterprisein Tianjinneeds anotherenterprise to share the productionof parts and assembly,in order to achievea high level of production,reduce costs and improvecompetitive position. However,there are still difficulties in persuadingenterprises in other regionsto investin such an enterprise. Nevertheless,TMG will try to establishinitially at least one corporation (mostlikely in the constructionmachinery subsector) with cross-regional shareholdingownership on an experimentalbasis. 3.26 Pricesand Competition.Measures have been taken in recentyears towardfreeing prices and productionfrom mandatory and indicativeplanning in the five subsectors(para. 3.14). However,further measures will be takento removeby 1995 indicativepricing and what remainsof mandatoryplanning in the five subsectors.In fact, indicativeprices have alreadylost their sig- nificanceand actualprices are generallydetermined by marketconditions in the five subsectors.

3.27 Investmentand Technoloav.In the automotivesector, the Tianjin governmenthas now been given the authorityto approveinvestments below Y 30 million,as in other subsectors.In the area of technologytransfer, the five - 16 -

subsectorswill use effectivelythe servicesof the TianjinInternational Science and Technology Consulting Company, the Tianjin Foreign Investment Advisory Center and other similar specialized agencies, to obtain information and seek suitable foreign partners. 3.28 PoreljnTrade. With the new lower limit for directexport rights (para.3.15), most of the enterprisesin the five subsectorswould be able to undertake direct exports. All otherenterprises would be allovedto use FTCs on an agencybasis which would make possibledirect contacts with foreign buyersand retentionof 80 percentof earnedforeign exchange by these enterprises. 3.29 Taxes and ContractResponsibilit System ICRS). CRS has too many performanceindicators (which may includeproduction, productivity, sales, employment, profits, taxes, etc.) and it, thus, becomes difficult for the enterprise management to maximize efficiency and profitability. In order to obtain greater benefits from the system,TMG will streamline the contract obligations by reducing the number of targets in new contracts to a few essential ones (viz., profits and debt servicing), and the contracts will not be revised during implementation. In the longer term, tax remittances would be completely separated from the CRS. 3.30 LaboL Mobilit=. Enterprises already have excess labor and its size will increase after restructuring. About 10,000 workers are expected to becomesurplus in the five subsectors as a result of restructuring. The surplus laborneeds to be redeployed, so that enterprises can operate with cost efficiencyand competesuccessfully in the internationalmarket. This is a very complexissue and has many dimensions: need for information on subsector labor surplusesand deficits,matching overall labor supplyand demandat the municipallevel throughthe supportof an employmentcenter, and provisionof unemploymentinsurance. Some reformsin the area of labormobility have been alreadyinitiated in Tianjinfor specificcategories of labor (Ane 2) TMG will addressthe labor surplusissue in the five subsectorsby developingthe existing employment center, improving unemployment insurance facilities, and creating employment opportunities. It will also take the following steps: (i) surplusworkers would be identifiedand releasedfrom the subsectors (20 percentin 1993,and 40 percenteach in 1994 and 1995);(ii) employment centers(including Tianjin Labor ServiceCompany) would activelysupport the releasedworkers in identifyingjob opportunitiesin other enterprises/subsec- torsi and (iii) financialsupport and trainingwould be assuredfor the workers to be redeployed. The Bank will provide technical assistance under the project to strengthen the institutional framework for labor redeployment (para. 4.10 and Annex 3). 3.31 Housint. ?MG is making the maximumuse of the facilities provided by the recent reforms undertaken in this area to promote individual housing transactions and to separate the supply of housing services from the enterprise activities.With these objectives,and withinthe frameworkof the municipalhousing reforms, TMG will introduceexperiments first in the five subsectorsunder :heproject. The reformswould includetransferring housing assets of enterprises,or theirhousing mangement rights,to the Tianjin Housing and Trust Company in charge of housing, and offering to workers in the five subsectors real opportunities to purchase dwellings. Tianjin would sub- - 17 -

stantiallycomplete by 1995 the implementationof housingreforms in the five subsectors. PhysicalRestructurin_ of Subsectors--Isouesand Strategis 3.32 The backgroundinformation on the five subsectorsof the projectis given in Annexes4-8. The subsectorshave a solid technicalfoundation for furtherdevelopment and throughsupport of specificrestructuring measures would be able to achieveincreased efficiency and competitivenessand make a demonstrativeimpact on othersubsectors in industry.The main issuesand subsectorspecific strategies for restructuringare as follows: 3.33 Structureof Subsectors.Most enterprisesIn the subsectorsare small in size in comparison to international standards and have fragmented production which inhibits efficiency, quality and competitiveness. The organizational structure of the subsectors needs to be revamped to allow the consolidation of enterprises into viable commercial organizations. This would help to achieve effective management control of the constituent enterprises, and create a large criticalmass to efficientlymobilize and allocate available financialresources. 3.34 Productand MarketConcentration. For historicalreasons, capital and resourceallocation decisions have been made by the governmentas a part of the planning process and without adequate consideration of commercial potential. This has led to manufacture of a wide range of products with low volumes and inadequate coverage of markets both domestic and export. Tianjin needs to concentratecapital and other resourceson those industrialactivi- ties where it has potentialcomparative advantage and the marketviability of productsis clearlyestablished. Success in buildinga strongdomestic market platformis a criticalstep towarddeveloping comparative advantage in export markets. In addition,the subsectorsneed to strengthenmarketing, sales, distributionand servicecapabilities.

3.35 Develoumentand AbsorDtionof Technoloat.Most enterpriseshave reliedheavily on centralizedR&D institutesand, recently,on licensing agreementsfor more sophisticatedproducts. However,the enterpriseshave not been able to develop capabilities for internal product development or full utilization of imported technologies. The subsectors should be more selective in acquiringmodern technologies and shouldseek greatercommitment from foreign partners to share new technology in the future. Internal organization sad expertise needs to be developed to adapt, absorb and commercialize technologies in Tianjin.

3.36 Plant Facilities and Layout. Most of the plant equipment is obsolete or outdated. Furthermore,plant facilitiesare, to a largeextent, poorlyorganized with inappropriateproduction layout and flow. These problems have to be resolvedto bringoperational efficiency and improvequality and, thus, to enlargemarket share.

3.37 ManasementDevelopment. Management skills are underdeveloped. Enterpriseslack an understandingof strategicplanning and the need to adopt flexible and innovative approaches to respond to market sinals and to make prompt adjustments in operations. There is a need to establish appropriate - 18 - manaSementfunctions at all levelsand to trainmanagers in areas of product and marketdevelopment, cost control,production planning, quality control, etc. Also, enterprisemanagement information systems should be strengthened to enableimproved enterprise management. 3.38 While the above-mentionedissues are commonto all five subsectors, theirmagnitude varies. Also, each subsectorhas a differentstructure. The followingparagraphs provide summary information on each subsectorand main elementsof Tianjingovernment's restructuring strategies (Annex 1). 3.39 MachineTools. The machinetools subsector represents one of Tianjin'skey industrialsubsectors under the TianjinMachinery Industry Bureau(THIB). It is organizedinto fivemajor productgroups and, in 1991, consistedof 16 enterpriseswith approximately15,300 employees and total sales of Y 245 million. Tianjin'sshare of the domesticmachine tools market has been stableat about 6 percent,but its share is much higherfor certain productssuch as hydraulicpresses for which Tiarnjinis a domesticmarket leader. The totalvalue of exportsin 1991was Y 3.6 million($0.69 million). 3.40 The restructuringstrategy for Tianjin'smachine tool subsector focuseson furtherdevelopment of hydraulicpresses in which Tianjinhas a strongposition and good futureprospects. Development of other productssuch as gear-cuttingequipment and machiningcenters would be undertakenin joint collaborationand technologyrelationships with foreignmanufacturers to upgradetechnologies, to provideTianjin access to exportmarkets and to ensureachievement of economiesof scale. The producersof selectedtools and accessorieswould continueto solidifytheir position. Uneconomicalproducts such as verticalspindle grinders, large lathes, and boringand radial machineswill be phasedout by December1994. Nonrelatedproducts (e.g., valves,pumps, and micromotors) have alreadybeen moved to other subsectors. The restructuringof the subsectorwould also includeconsolidation and upgradingof manufacturingoperations to reducecost, improvequality, phase out nonessentialfacilities and reduceinventories. 3.41 The presentsubsector organization, which includes16 state-owned enterprisesmanaged by THIB,would be restructured,into two independentand specializedcorporations, one each for machinetools and accessories.As a part of this organizationalrestructuring, the weakerpla:.s and inefficient workshopswould be divestedor phasedout by December1994.

3.42 ConstructionEquigment. In 1991,the constructionequipment sub- sectorconsisted of 11 enterpriseswith about 11,000employees and Y 290 million in sales. The subsectoris organizedunder TMIB. Tianjinis among the leading maufacturers of graders in China, with a market share of over 80 percent. Overall, the subsector in Tianjin is more productive than the rest of the country as measured by output value per employee. Nevertheless, the sub- sectorstill faces strongchallenges to its domesticposition.

3.43 Tianjin's construction equipment subsector has a strong base for improving its position. Tianjin's leadership position in motor graders can be maintained and production of crawler dozers can be further developed through rapid diffusion of imported technology to a full line product program and the expansion of capacity to reach economy of scale. As regards forklifts and - 19 - relateddiesel engines, Tianjin would plan their developmentin joint collabo- rationor technology-transferagreements with foreignreputed manufacturers. The manufactureof otherproducts such as freightelevators, heat exchangers, hoists,lifts and gearboxrepairs would be discontinuedby December1994. Tianjinwould also developmutually complementary marketing arrangements with other nationalmanufacturers so as to be in a positionto offer a wider product range. 3.44 In order to focussubsector efforts on viableinvestment productc, a new corporationwould be formedfrom the enterprisesengaged in earthmoving equipment,forklift trucks and dieselengines. The new corporationwould be responsiblefor development,engineering, manufacturing, marketing and management functionsrelated to the productsof the formerenterprises. It would allow greaterproductivity, lower manufacturing costs, improved product quality and betterforeign market prospects. 3.45 ElectronicComponents. The subsectoris under the TianjinElectron- ics and InstrumentsAdministration Bureau which has 198 enterprisesand about 100,000employees. The enterprisesare organizedinto 40 group companiesor corporations.The 12 enterprisesproducing passive components employ about 20*000persons. In 1991,the totalsales value of the passivecomponents subsectorwas Y 145 million. Despiteits relativelymodest market share, Tianjiln'spassive component subsector ranks fourthamong Chinesecenters that producepassive components. Nevertheless, Tianjin still has low outputvolume by internationalstandards. The marketpattern varies widely from one product to the other. For matureproducts such as fixedresistors and aluminumcapa- citors,20-30 percentof salesis made withinTianjin's electronic industry itself,another 40-50 percent is sold to the domesticmarket outside Tianjin und the remaining25-40 percent is exported. 3.46 The futuredevelopment of passivecomponents will be determinedby the growthin the electronicindustry in Chinaand the abilityof producersto competein domesticmarket as the nationalindustry restructures and consoli- dates over the comingdecade. It is, however,obvious that Tianjinhas to increaseits shareof the domesticmarket through restructuring the subsector and, thus, to achieveeconomy of scale and a competitiveposition among the major manufacturers. 3.47 Withinthe passivecomponents, Tianjin would focuson components such as capacitorsand resistorswhere it is a significantdomestic producer. Tianjinalso proposesto establishthe technologicalfoundation for surface mountedchip-type capacitors and resistors.These productswould be upgraded in terms of productand processtechnology and their capacityraised to economic scale. Effortswould be made to raise domesticmarket share to at least 10 percent. 3.48 The enterprisesin the subsectorare looseadministrative coalitions and lack full financialor managementcontrol of their constituententer- prises. In order to achievegreater competitive advantage and economyof scale,an organizationalrestructuring of the subsectorwould be carriedout in which all enterprisesproducing capacitors and resistorswould be merged into two separatecorporations, one for each of the productgroups. Enter- - 20 - prisesthat are nonviableand cannotbe restructuredhave been identified,and will be closedby December1994. 3.49 AutomotiveParts. The Tianjinautomotive parts subsectorconsists of 56 enterprisesproducing a range of automotiveparts and components[39 enterprisesunder the TianjinAuto IndustryCorporation (TAIC) and 17 small enterprisesunder TMG1. TAIC has been designatedby the nationalgovernment as a centerfor manufacturingand assemblingmini-vehicles. The Tianjinauto- motiveindustry has experiencedsteady growth during the 1980s. The total productionvalue of the industryincreased at 16 percentper year between1984 and 1990. Employment,production and exportsof the automotiveindustry in Tianjinwere about 7 percent,8 percentand 3 percent,respectively, of the nationaltotal. 3.50 Like the nationalindustry, Tianjin's automotive sector is frag- mentedand includesenterprises with small productionvolumes, high cost of manufacture,and low productivity.Less emphasishas been placedon developing componentswhich would meet world standardsand quality. Most of the Tianjincomponents do not have a strongposition in the Chinamarket. About two thirdsof the componentsmanufactured in Tianjinare sold internallyto TAIC. There is a strongneed to build foreigntechnical relationships for new productand processtechnologies, as it would help to enhancethe quality, raiseoutput volumes, and increaseefficiency.

3.51 In orderto improvethe performanceof the subsector,an innovative restructuringapproach and strategyhave been developedto restructurethe subsectoralong the lines of automotiveparts subsystemsrather than the individualproducts pursued at present. Tianjinwould concentrateon potential subsystemssuch as drive trainand auto-electricparts. These subsystems would be developedto provideTianjin with capabilityto supplyautomotive parts at the nationallevel and to leveragethe expandeddomestic position in foreignmarkets. Auto parts in which Tianjindoes not have comparativeadvantage have been identified;their production would be discontinuedand the concernedenterprises would be closedby December31, 1994.

3.52 As regardsthe subsectororganization, the enterprisesunder TAIC are constrainedby theirmajor role of satisfyingTAIC needs and thereby remainingsmall and locallyoriented. This structurewould be changedto one thatwould focus on closelyinterrelated product and processtechnologies and interrelateddomestic and exportmarkets. Under the new system,13 independent corporationswould be createdwhich will focuson manufactureof subsystems. The new organizationstructure would induceeconomy of scale in all functions.Each subsystemcorporation would oecomethe centerof product excellencewithin the subsectorand, thereby,develop recognition in markets providedby auto manufacturersand parts dealers.

3.53 ElectricMotors. Tianjin'selectric motor subsectoris relatively small,consisting of four enterprises,but dominatedby one largeenterprise. It employsabout 3,000 persons and has a salesrevenue of aboutY 70 million. The subsectorhas exported20-30 percent of the productionvalue to Southeast Asian markets. The subsectoris, however,characterized by low economiesof scale,outdated equipment, low productivity,obsolete product design and lack of a full line program. The situation also holds true for the country as a - 21 -

whole. Tianjin,therefore, plans to orientits productsto the full range of smallmotors, consolidate and upgradeits production,extend its domesticmarket, and solidifyits exports. The developmentprogram has been established by consultantsto meet theseobjectives. As a part of this program,the present lead companyin the subsectorwill form a jointventure with a leading internationalmanufacturer and would ceaseto exist in its presentform.

Development of Technological Infrastructure 3.54 All the subsectors have their own research and design institutes and vocational trainin8 schools(Annex 9). They functionunder the concerned industrialbureaus or the sectoralcorporations. These institutescannot provide the desiredservice because of lack of modern equipment including computerhardware and software,testing equipment and teachingaids and facilities. They have limitedcontacts with similarinstitutions in developed countriesand it is, therefore,difficult for them to keep up with the latest technologicaldevelopments abroad. Subsectorenterprises themselves have not given sufficientattention to the importanceof R&D. The auto parts industry, in particular,has laggedbehind and it needs to substantiallystrengthen its R&D center. The electronicssubsector would need to establisha technical centerin which the technologicalfoundation for surface-mountedtechnology (SET)products can be laid and the developmentof other electronicsproducts can be undertaken.Machine tools and constructionmachinery subsectors also need to strengthenR&D to developand assimilatenew technologies.The developmentprogram and strategyaim at establishingtechnical centers within each corporationand strengtheningtraining schools through the importof necessary equipmentand software.The techbical centers would providedemand-driven product development, systems engineering and other related services aimed at improvingproduct design and operational efficiency of the subsector corporations. D. Bank Role. Lessons Learnedand Strateav 3.55 In line with the Bank strategyfor the industrialsector in China, the proposedproject has been designedto deepenenterprise reforms and to restructureindustry in Tianjinwith the objectiveof improvingits efficiency and competitivenessboth in domesticand internationalmarkets. A develo;iment strategyand progrsmfor specificsubsectors have been preparedto achievethe above objective,and reflectextensive preparatory work in which the Bank has played a major role. 3.56 Internationalconsultants have carriedout comprehensivestudies of the selectedsubsectors. The studieshave helpedto determinethe comparative advantageof key productsin each subsectorand recommendedrestructuring measuresthat would lead to economiesof scale,product specialization, new marketingstrategies, phasing out of nonviableproducts, reorganization of the subsectors,improvements in enterpriseorganization and managementsystems, and strengtheningof institutionalinfrastructure. The Bank has considerable experiencein industrialrestructuring based on its earlierwork in China and other countriesand has, thus,been able to provideclose guidanceto consultants in developingappropriate programsand strategies.Furthermore, a very constructive dialogue initiated with TMG on this subjectunder TLIP has provided a good foundation for advancing reforms by adopting new measures and - 22 - undertaking new experiments in the industrial sector in Ti.njin. Thesemea- sures and experiments go far beyond those initiated under TLIP. 3.57 The overallimplementation of TLIP is satisfactory:most of the policy and enterprise reformsincluded in the projecthave been carriedout by the Tianjin government. The credit line componentof the projecthas been fully committed.Institutional strengthening and consultants'studies under the technicalassistance component have been substantiallycompleted. The projecthas, however,faced certaindifficulties during implementation. Sub- projectsrequiring ICB have been slow to implementbecause of lack of experience of CIB (TianjinBranch) and enterprisesin theseprocedures. A similar problemwas faced in the selectionof consultants.However, the experience gainedunder TLIP would be beneficialin alleviatingsuch problemsin the future,particularly for TIDP. Two largesubprojects are facingcost overruns becauseof prolongedtime taken in preparationand an unusuallyhigh increase in the cost of importedequipment. In the future,PFIs will need to prepare cost estimatesmore carefully and, during the subprojectreview process, Bank staff will ensure that the cost estimatesare realistic and that adequate contingencyprovisions have been made. Foreign training of staff under TLIP has been slow, mainly because of their lack of proficiencyin English or other foreign languages. TIDP would thereforeput greater emphasis on training within China with the help of foreign experts.

3.58 During the implementationof TIDP, the Bank will maintain close dialoguewith TMG to ensure continuousprogress in economic and enterprise reforms. It will also ensure that the Bank loan proceeds will be used for modernizationand technicalrestructuring of enterprisesand strengtheningof institutionalinfrastructure in accordancewith the developmentprogram and strategy for the five subsectors. This would be pursued through regular supervisionmissions, review of subprojectsto be financed by PFIs under the Bank loan, and detailed periodic reportingby the Tianjin government and PPIs (para. 5.9). In addition, internationalconsultants will be engaged under the technicalassistance component to assistin projectimplementation, with particularfocus on physicalrestructuring of subsectorsand introductionof modernmanagement systems and practices(para. 4.8). (Theproject implementation and supervisionplans are given in Annex 13.) - 23 -

IV. THE PROJECT

A. Proiect Obiectives

4.1 The proposed project forms part of the Bank's overall effort to support the implementationof the GOC's program of industrialrestructuring. The project will focus on five importantindustrial subsectors in Tianjin, viz. machine tools, constructionequipment, auto parts, electroniccomponents, and electric motors, that have been given high priority for developmentby the municipal governmentin the 1990s. It would assist the implementationof the Tianjin government'sdevelopment program and strategy for the above subsectors and would have the followingspecific objectives:

(a) accelerationof policy and enterprise reforms in the selected subsectors;

(b) modernizationand restructuringof subsectoralenterprises based on economic criteria and commercialviability;

(c) strengtheningof institutionalinfrastructure for strategicplanning, systems developmentand implementation,engineering and technical support services,and human resource developmentand redeployment; (d) organizationalrestructuring and improvementof internalenterprise managementand systems;and (e) diversificationand strengtheningof the financialintermediation process. B. ProiectComponents 4.2 The projectwill have two main components:

(a) financialassistance for the technologicalrestructuring of enterprisesin the five subsectors;and

(b) technicalassistance for the overallsubsector restructuring programs includingthe strengtheningof institutionalinfrastructure in Tianjin.

The descriptionof two componentsis as follows. FinancialAssistance Component 4.3 The projectwill providefinancial assistance of $134.5million out of the proposedIBRD loan to meet the foreigncurrency requirements of the technologicalrestructuring of enterprisesin five subsectors.The funds would be onlentthrough financial intermediaries, which wouldbe responsible for the appraisaland assessmentof overallviability of individualsubprojects. At present,there are 16 subprojectsin the pipelinethat are proposed to be financedunder TIDP. In the machinetools subsector, subprojects will - 24 - includefurther development of hydraulicpresses, gear-cutting machines, and machiningcenters; the lattertwo to be consideredfor assistanceprovided the sponsoring enterprises obtains foreign technical collaboration. As regards the construction equiRment subsector, crawler dozersand motor gradershave been identifiedfor financialassistance so as to improvethe product-mixand achieveeconomies of scale. A few otherproducts would also be eligiblefor assistance if Tianjin enterprises develop joint ventures and/or technical collaborations with leading international manufacturers. In the electronics subsector, subprojects will aim at improvementsin productand processtech- nologyand economyof scale in productionof capacitorsand resistors. Finan- cial assistancewill also be providedto the auto garts subsectorfor subprojects belongingto two prioritysubsystems, viz. drive train (includingclutch, gearbox,propeller, shaft, differential, rear axle,wheel break drums,and suspensioncomponents) and auto-electricalsubsystem. Only thoseproducts in the above subsystemswill be includedin the subprojectswhere economiesof scaleand potentialdomestic and internationalmarkets will give comparative advantageto Tianjinenterprises. In the electricmotors subsector, there is only one subproject for improving quality and producing a full range of small motors. 4.4 The line of credit will be used by borrowing enterprises to import machinery and equipment and to finance incremental working capital (i.e., importedinputs) and interestduring construction on loans in foreign exchange. PFIs would ensurethat (a) all subprojectsto be financedunder TIDP are consistentwith the developmentprogram and strategyof the Tianjin government and its own investment criteria which include a minimum ERR and PRR of 12 percent, (b) the subproject snd sponsoringenterprise/factory are in compliance with environmental control guidelines(para. 4.29), (c) subborrowers shall be corporations established pursuant to the organizational restructuring of subsectors as agreed between the Bank and the Tianjin munici- palityand with chartersacceptable to the Bank (para.3.24) and (d) such enterpriseswould have a satisfactoryprojected financial position, in particular a debt-servicecoverage of at least 1.5 times,a currentratio of at least 1.5:1and a long-termdebt/equity ratio of no more than 70:30. The subprojectsin the pipelineare subjectto changeif PFIs' detailedanalysis shows them not to be viableor, as a resultof changesin the plans of specific enterprises,they are no longersuitable for financing. 4.5 Althoughthe projectis primarilyintended to assistthe five iden- tifiedsubsectors, PPIs will be allowedthe flexibilityto financesubprojects in other subsectorsto be agreedbetween the Bank and the Tianjingovernment on the basis of studiesand developmentstrategies to be preparedby the municipality.During negotiations, assurances were obtainedfrom PPls on the above eligibilityand investmentcriteria for assistingenterprises under the industrialcredit component of the project.

Technical Assistance 4.6 Technical assistance of $15.5 million will be provided out of the proposed IBRD loan to finance equipment, computer hardware and software, advisory and consultancy services, staff training, studies, etc., for overall subsectorrestructuring and strengtheningof PPIs, as describedin the following paragraphs.During negotiations, assurances were obtainedfrom IMG that - 25 -

it will carryout the technicalassistance component in accordancewith the programto be agreedwith the Bank. 4.7 Develoumentof TechnolozicalInfrastructure. The projectwill help to strengthenthe designand researchactivities and vocationaltraining in the five subsectorsto implementthe Tianjingovernment's strategy for the developmentof technologicalinfrastructure (pars. 3.54). Detailedinforma- tion on the currentstatus of all the supportinstitutions and the programfor theirdevelopment to be supportedby projecttechnical assistance is given in Annex 9. The equipment,consulting services and trainingto be providedunder this componentwill help the beneficiariesto upgradetheir researchand testing facilitiesand teachingsids, and enablethem to increasetheir contacts with counterpartinstitutions in developedcountries, thereby increasing their exposureto latesttechnological developments. A sum of $11.8million has been providedfor this technicalassistance component. During negotiations, understandingswere reachedwith TMG on the necessarydetails.

4.8 ProiectImnlementation Support. Consultantservices will be requiredto assistin the implementationof the project,with particularfocus on organizationalrestructuring, production consolidation, management information systems,financial and cost accounting,and industrialengineering and operationaleffectiveness in the five subsectors.A sum of $2.5million out of the technicalassistance funds will be used to financeconsultant services. Detailedterms of reference(TOR) for the work which would be carriedout by internationallyrecruited consultants are given in Annex 10. The TOR were discussedand agreedto with TtG duringproject appraisal and were confirmed duringnegotiations [see para. 6.3(b)]. In view of the importanceof the consultants'role in the successfulimplementation of subsectoralrestructuring program,the appointmentof consultantswill be a conditionof loan effectiveness. 4.9 Trainintof EnterpriseManaaement and Staff. The trainingof senior managersand staffof enterprisesin modernpolicies, strategies and methodol- ogies relatingto investmentproduction, marketing and personnelmatters is essential.Broad outlinesfor such traininghave been establishedwith the assistanceof consultantsengaged to carryout subsectorstudies. Detailed training programs to be organized within China and abroad will be developed by consultants who will assist in project implementation. A sum of $700,000 out of the project'stechneical assistance funds has been allocatedfor trainingof enterprisemanagers and staff;$500,000 to be used to engageforeign experts to organizeseminars in China in the areas of productionplanning and control, human resourcemanagement, finance, marketing and sales,operations and inventory management,quality control, and foreigntechnical relations and trade; and another$200,000 for foreigntraining. About 250 traineeswill partici- pate in 3-4-weekseminars within China (sevenseminars with 30-40 participants each) and about 15 trainees will go abroad for about two months each. During negotiations, assurances were obtained that TMG will furnish to the Bank for approval, by October 31 each year, a 12-month program for local and overseas training to be financed under the project. 4.10 Strenathenint of Institutional Framework for Labor Develonment. Thereare several organizations in Tianjinthat assistin the redeployment of surplusworkers. These includeemployment centers (including Tianjin Labor - 26 -

Service Company), an unemploymentinsurance schemeand severaltraining centers. The role of these organizationsneeds to be widenedand made more effectiveto copewith surpluslabor in the industrialsector in Tianjin, includingthe five subsectorsof TIDP. In order to strengthenthe above institutionalframework, technical assistance of $300,000will be providedas outlinedin Annex 3. The main focusof technicalassistance will be on the TianjinLabor Bureauand the Labor ServiceCompany. Consultantswill help to improvetheir organization, systems and procedures;their managers and senior staffwill make study tours of a few employmentcenters abroad; and computer equipmentwill be procuredto strengthenthe databasefor unemployedworkers, their retrainingneeds, and employment opportunities.

4.11 Strenatheningof PFIs. For staff of the PPIs, $125,000would be allocated for training in project identification,appraisal and supervision. PFIs' project staff would attend a four-weekcourse to be offered by foreign consultantsin Tianjin at the beginning of project implementationand once again 18 months later. It is expected that about 25 staff would attend each course. In addition, $75,000would be allocated for specializedtraining abroad for PFIs' staff. During negotiations,an assurancewas obtained from PPIs that stafftraining would be carriedout in accordancewith a training program agreed with the Bank. C. Proiect Cost and Financing

4.12 The main component of the project is the restructuringof enterprises which will be financed through a credit line of $134.5 million to PPIs. The cost of this componentwill be the sum total of individualsubproject costs that will be estimatedby PFIs at the time of subprojectappraisal. Consequently,the cost of this main componentcannot be estimated accurately at this stage. However, on the basis of past ratios of foreign and local currency cost componentsin such subprojects,the total cost of the project including incrementalworking capital is estimated at about $222 million equivalent. The totalcost of the technicalassistance component is estimatedat about $22 millionof which $15.5million would be in foreignexchange.

4.13 The proposed Bank loan will meet the foreign currency requirements of $150 million. Local currency requirementsfor technologicalrestructuring would be financed by PPIs, other Chinese banks and enterprises'own resources. The Tianjin governmentwill provide the necessary local currency funds for the technical assistance componentof the project.

D. Proiect ImplementationArrangements

Role of the Tianiin Municival Government (T1G)

4.14 TMG, CIB, ICBC and BOCOM (Tianjin)will be responsiblefor overall project implementation. TMG, besides carrying out economic and system reforms as outlined in the developmentprogram and strategy,will coordinate and monitor all project-relatedactivities. Tianjin has establisheda high-level task force headed by a Vice Mayor for industrial restructuring. It comprises senior officials from the Tianjin Finance Bureau, Tianjin Economic Commission, Tianjin Machinery Industry Bureau, Tianjin ElectronicsBureau, Tianjin Auto Industry Corporation,Industry Department of TPC, PCBC, CIB, ICBC and BOCOM. - 27 -

This task forcevill be maintainedand will be supportedby the TianjinWorld Bank Loan Office,a projectimplementation unit originallyestablished for TLIP. This office,which has a full-timestaff of 15, vill be responsible, interalia, for follow-upon (a) implementationof the developmentprogram and strategyfor the five subsectors;(b) implementationof the technicalassistance for supportinstitutions; and (c) consultants'work for the implementation of the project. The officewill also liaiseon a regularbasis with the concernedmunicipal government departments, central government institutions, CIB, ICBC,BOCOM and the Bank. It will preparesix-monthly reports on project implementationtogether with PFFI (para.5.9). Duringnegotiations, assuranceswere obtainedfrom the Tianjingovernment on the maintenanceof the existingtask forceand the above officewith competentstaff in adequate numbers,and with functionsand responsibilitiesacceptable to the Bank. The expertiserequired for supervisionwould involvemechanical and electrical engineersfor the reviewof subloansand ICB procurement,as well as financial analysts/operationofficers for subprojectreview and generalsupervision. It is expectedthat this would involve8 staff-weeks(SW) in FY94, 12 SW in FY95, 16 SW in FY96 and 11 SW in FY97. A projectimplementation and supervision plan is given in Annex 13.

Role of ParticipatingFilnancial Intermediaries (PFls) 4.15 Three financialintermediaries, viz., CIB, ICBC and BOCOM,will onlendthe Bank loan proceedsto subprojectsin the five subsectors.They will also be responsiblefor the appraisaland supervisionof subprojects.A briefwrite-up on these intermediariesis givenin the followingparagraphs (detailsin Annexes14-16). 4.16 China InvestmentBank (CIB)commenced operations in 1981 as a developmentbank financingmainly investment projects in the industrialsector. While CIB is under the supervisionof MOF, it retainsclose linksto the People'sConstruction Bank of China (PCBC)and many of its seniorstaff are ex-PCBC staff. CIB has 31 branches and 28 subbranches. Although some degree of lendingauthority is delegatedto branches,decisions on largeprojects are taken at the Read Officein Beijing. CIB's investmentpriorities and policies are definedin its Statementof OperatingPolicies and Proceduresand its DevelopmentStrategy Statement. During negotiations, assurances were obtained from CIB that it will exchangeviews with the Bank on any proposalto modify its charteror these statements. 4.17 Since 1982,CIB has receivedfive loans from the Bank, has been the sole financialintermediary (FI) under the TLIP, and was one of the several FIs for the SPARK Projectand ShanghaiIndustrial Development Project. At the end of 1991,CIB had total assetsof Y 14.7billion and a total long-termloan portfolioof Y 8.2 billion. CIB's lendingactivities have declinedsince 1989,reflecting the effortsof the government'sausterity program that con- tinuedfrom late 1988 to 1991. CIB also had difficultiesin mobilizingfor- eign currencyresources after Tiananmen events of June 1989. Its loan arrears,though still relativelysmall, increased from 2.5 percentof the totalportfolio in 1990 to 3.2 percentin 1991,which is partlythe resultof a conservativepolicy of CIB'smanagement on loan rescheduling.CIB's overall loan collectionrate was also low at 75 percentin 1991. CIB needs to make more concertedefforts to improveits collectionperformance. During negotia- - 28 -

tions,understandings were reachedwith CID that before submissionof its first subprojectto the Bank, CIB wills (a) reviseits policy statement to includea loan recoverytarget of 90 percentof loan repayments due; and (b) submita plan satisfactoryto the Bank for reachingthe abovetarget, including projectedloan recoverypercentages for 1993-95. Furthermore,in the contextof supervisionof CIB I-V andnew operations,including the proposed assistancefor flnancialinstitutions' development in China,the Bank is engaged in an active dialogue with the government and CIB on the latter's future role, operational strategy,and resources. 4.18 CIS has stayed within agreed prudential limits on debtsequity and debt and interest service coverage. During negotiations, assurances were obtained that it would maintain a maximum long-term debttequity ratio of 5:1 as providedIn CID V. As requiredunder CIB V, CIB is increasingprovisions for doubtfulloans so as to reach 2 percentof the totalportfolio at the end of 1992. Althoughincreased provisions for bad debtshave reducedCIB's prof- itabilityin recentyears, profits are expectedto increasein 1993 and there- after,with the returnon equityreaching 6 percentby 1995. 4.19 CIB's Tianjinbranch was one of its earliestbranches and its staff have gained significant experience and expertise in project appraisal and supervision. As of December 31, 1991, the Tianjin branch had approved 71 Bank-financed subproject. under the five CIB loans for a total amount of $72 million in foreign currency and Y 154 million in local currency. Of the 71 subprojects, 29 have been completed with the subloan fully repaid, 38 are operatingand repaymentsare satisfactory,and four are stillunder construction. UnderTLIP, 15 subprojectsare being financedfor a total of $141 million in foreigncurrency and Y 280 millionin localcurrency. The performance of the Tianjinbranch and of its subprojectshas been satisfactory. 4.20 Industrialand CommercialBank of China (ICBC) was founded as a spinoff of two departments of PBC. Its top echelon includes a President and four ExecutiveVice-Presidents with 20 major departmentsat the head office. At the end of 1991,it was the largeststate-owned commercial bank with total assetsof Y 1,117.5bllnion ($203.2 billion) and net worth of Y 48.0 billion ($8.7billion). It accountsfor nearlyhalf of the loansand depositsin China'sfinancial sector. It has the largestnumber of branches(over 30,000) and employsover 500,000people. Its Shanghaibranch is a participantin the Bank'sShanghai Industrial Development Project. ICBC'sTianjin Municipal Branch(TMB) would be implementing its participation under TIDP. 4.21 The head office of ICBC is involved mainly in policy formulation and overall supervision of branch operations. Lending operations are fairly decentralized in its provincial and regional branches, down to the district subbranch level with varying delegated authorities. It has prudent financial policies which should promote a diversified portfolio, e.g., exposure limits on Industrial sectors (30 percent of loan portfolio) and single borrower (10 percent of equity), and maximumproject size of up to Y 2 billion, maximum debt/equityratio (4:1)for projectfinancing, minimum financial rate of return(15 percent)and positivecurrent ratio and debt servicecoverage of eligibleprojects. It "matches"its uses and sourcesof funds in terms of interestrates, maturities, and currencies. - 29 -

4.22 ICBC has receiveda creditline of $100million from ADS. To help implementICBC's program to modify,upgrade, and modernizeits accounting, auditingand MIS, ADB has also providedtechnical assistance funds to finance consultancy/advisory services and training. It is committed under the ADB projectto maintaina maximumtotal d-ebt/equityof 20 times and net long-term debt/equityof 10 timeswhich are reasonable.During negotiations, assurances vere obtained from ICBC that it would maintain the above limits. Under TIDP, TMB has adopted,for the firsttine, a formalstatement outlining more detailedand specificoperations and financialpolicies which are appropriate (Annex14). Duringnegotiations, assurances were obtainedfrom ICBC that it will exchangeviews with the Bank on any proposalsto modifythe above statement. 4.23 At the end of 1991,ICBC's gross revenuesincreased at an averageof 22 percentper year and reachedY 75,755million and its net incomeincreased at about 11 percentper year,reaching Y 6,339 million. Its administrative expensesaveraged about 0.7 percentof totalassets, which is reasonable.Its liquidityposition has remainedsatisfactory. Its Searingratios have been maintainedat acceptable levels with long-term debt/equity at 8.29 times and total debt/equity ratio of within 20:1 in 1991. ICBC's arrears amount to Y 27,105 million or 3.4 percent of total outstandingportfolio, which is relativelylow. IC8C expectsto maintaina collectionratio of about 95 percent, which shouldbe achievablegiven the short-termnature of most of its portfolio and consequentclose monitoring of the accounts. Accumulatedprovisions for doubtfuldebts were equivalentto 0.32 percentof total loan portfolio,a levelcurrently allowed by the Ministryof Finance(MOP). ICBC has recom- mendedan increasein the provisionsto 3 percentby 1997,which is appropriate and approachesinternational norms.

4.24 1MB would implementICBC's participation under TIDP. At the end of 1991, TMB had total assetsof Y 28,048million ($5,100 million), deposits of Y 15,124million ($2,750 million), total loansof Y 23,180million ($4,215 million)and net incomeof Y 169 million($31 million). The TechnicalInnova- tion CreditDepartment of TMB (TIC/TUB)will be directlyinvolved under TIDP. It has a totalstaff of 222, of which 88 are in the main branch. TIC/TMBis headed by a generalmanager and threevice-managers. Seven peopleare involved in appraisal on a full-time basis, includingthree engineersand two economists. It is guidedby ICBC'smanual of operationsfor TIC and a project anagement and appraisal manual issued in 1986 and patternedafter CIB's appraisalmanual. Subbranchesnormally perform the regularfollow-up with quarterly reporting and TIC/TmB does full supervision up to projectcompletion for all foreignexchange loans (e.g., subloans under TTDP). While TIC has had substantialexperience in term financing,its staffneed to participatein training to be provided under TIDP. 4.25 Bank of Communications (BOCOM)was established in 1908 in Beijing, nationalizedin 1949, and had its operations suspendeduntil it was reestab- lishedin 1986 and relocatedin Shanghai. For all practicalpurposes, BOCOM is a new bank. It has been very innovative in seeking clients and setting up branches at locations with large demand. It is also the first bank to adopt a public shareholding system involving diversified ownership at the branch level. Each branch has a separate legal personality, operational autonomyand financialaccountability. The Head Officeexercises "unified leadership" in - 30 -

the appointmentand removal of principal staff, establishingoperating policies,plans, rules and regulationsand foreignbusiness. 4.26 BOCOMhas 70 branchesand subbranchesin 69 cities,of which 27 are engagedin foreigntransactions, 29 handleinsurance and 38 deal with securities. BOCOM had total assetsof Y 78.5 billionat the end of 1990 and a net profitof Y 1.6 billionduring the year,which gave a returnof 2.1 percenton assets and 24 percent on capital employed. The above rates of return were quitehigh by internationalstandards. 4.27 BOCOM'sTianjin branch was establishedon February28, 1992with a paid-incapital of Y 205 million,of which the Head Officeholds Y 50 million, the TianjinMunicipal Government Y 100 millionand 26 entitiesY 55 million. At present,BOCOM-Tianjin's portfolio is mostlyshort-term commercial loans financedby depositsand sharecapital. It will establisha long-termlending unit,which would consistof mainlyex-CIB staff who are alreadyworking with BOCOM-Tianjin.Furthermore, it is coordinatingclosely with CIB, which has substantialexperience in long-terminvestment financing and will also adopt the latter'sappraisal and supervisionmanuals. BOCOM-Tianjinis preparinga prioritytraining plan in appraisaland supervisiontechniques, which would be implementedby end-1992. It has also adopteda formalStatement of Operating Policiesand Proceduresgoverning its long-terminvestment financing activities. The lattercontains prudential limits relating to exposurein a single enterprise(maximum 20 percent),capital adequacy (minimum 10 percent),debt and interestservice coverage (minimum 1.5 times),debt:equity (maximum 5S1) and collectionstargets (90 percent). Duringnegotiations, assurances were obtainedfrom BOCOM that it will exchangeviews with the Bank on any proposals to modifythe above statement.BOCOM-Tianjin's projected financial performance is expectedto be quite satisfactory;a net profitof Y 25 million (10.9percent return on equityand 2.1 percenton assets)is expectedin 1992. This would increaseto Y 50 millionby 1995 (19.5percent return on equityand 1.8 percenton assets). Duringnegotiations, assurances were obtainedfrom BOCOM-Tianjinthat it wouldmaintain a maximumlong-term debt:equity ratio of 5:1. E. EnvironmentalImpact 4.28 The projectsubsectors are not major pollutants,but theirmanufac- turingprocess will stillhave environmentalimpact. The manufactureof machinetools and constructionequipment entails founding and casting,metal leaf treatment,assembly and painting. The manufactureof auto parts involves metal cutting,heat treatment,stamping, plastic molding, welding, coating and painting. Theseprocesses may lead to air and water pollutionif not controlled. Solidwastes are generallyrecycled and pose less of a problem. The projectenvisages the manufactureof passiveelectronic components which involvethe use of electroplating,ceramics processing, ammonia, caustics, cyanides,heavy metals,chelates, and other bondingmaterials and treating furnaces. The use of thesematerials and processescan causeair and water pollutionand solidwaste problemsif not controlled.However, the volumesof waste materialsinvolved are relativelysmall and can be contained,recycled and disposedat a relativelylow cost. Metal industriesalso causenoise pollution.In addition,workers' safety and hygieneproblems can be a serious issue in the industriesinvolved. The environmentalissues of the project - 31 - would be addressedthrough the followingarrangements which will ensurethat all subprojectsto be financedunder the projectcomply with localas well as 8ank guidelinesfor pollution control. 4.29 The TianjinEnvironmental Protection Bureau (TEPB)has confirmed that all enterprisesof the subsectorsinvolved in the projectmust comply with its guidelines.TEPB must approvetheir renovationand expansionplans and would periodicallymonitor their compliance. Moreover, as part of the investmentapproval process in Tianjin,TEPB would routinelybe involvedin approvingall feasibilityreports for subprojectsunder the loan, i.e.,clear- ance by TEPB is requiredbefore any subprojectcan be financedby PFIs. In particular,TEPB would requirethat all subprojectsin the subsectorsto be financedunder the Bank operationinclude adequate expenditure for controlling environmentalpollution and providingfor workers'safety and hygiene. For each feasibilltyreport, TEPB would reviewthe environmentalprovisions to ensurethat they meet China'senvironmental standards which are adequatefor the subprojects.It would also ensurethat the subproject'ssponsoring factory is in compliancewith thosestandards. 4.30 Duringnegotiations, assurances were obtainedfrom PPI. that they will ensurethat all subprojectswill be approvedby TEPB and be consistent with environmentalstandards satisfactory to the Bank. Furthermore,understandingswere reachedthat appraisalreports and summaryinformation on individualsubprojects to be sent by PPIs to the Bank,will indicatespecifically the equipmentto be procuredfor pollutioncontrol. Duringproject implementationand beforethe Bank'sapproval of individualsubprojects, or the autho- rizationfor withdrawals,Bank staffwill check and ensurethat the necessary equipmentis includedin the list of machineryto be procuredfor each subproject. - 32 -

V. ZD.L=QA

A. Main Featuresof the Loan

5.1 Lendin*and OnlendinaArrangements. The People'sRepublic of China (PRC)will be the borrowerof the proposedBank loan of $150million equivalent. Assuranceswere obtainedduring negotiations that the loan amountwill be onlentby PRC to the Municipalityof Tianjin(Tianjin) for 20 yearswith 5 years of grace and at an interestrate equivalentto the Bank'sstandard variable rate. Tian;jinwould relend(a) the financialassistance component of the loan ($134.5million) to PIle for relendingto eligibleenterprises on a first-come,first-served basis, and (b) $200,000out of the technicalassistance componentfor stafftraining on the same termsand interestrate as that of the Bank loan. Tianjinwould also relendto enterprisesin the five subsectors,out of the technicalassistance component, $6.5 million to develop technicalcenters, $2.5 million to engageconsultants for projectimplementation and $0.7million to train staff,on the same terms and interestrate as thoseof the Bank loan. In order to regulatethe flow of resourcesfrom the PRC to beneficiariesand to set out the respectiveobligations of various entities,the followingagreements will be signed: (a) Loan Agreementbetween the PRC and the Bank; (b) SubsidiaryLoan Agreementbetween Tianjin and PPIs; (c) Project Agreement between the Bank and Tianjint (d) Project Agreement between the Bank and PFIs;and (e) Subloan Agreements between PFIs and enterprises. State Council approval of the Loan Agreement,signing of the Subsid- iary Loan Agreement under (b) above, satisfactory to the Bank, and Tianjin's signingof an agreementwith consultantsfor projectimplementation will be conditionsof effectivenessof the Bank loan (para.4.8).

5.2 All subborrowers of PFIs will carry the variable interest rate risk and foreignexchange risk betweenthe currencypool indexand the Chineseyuan and will pay an interestrate equal to the Bank rate plus a minimumspread of 1.2 percent. The onlendingrate is consistentwith the recentlyapproved IDA Creditfor the TianjinUrban Development and EnvironmentProject (Credit 2387- CHA) and is consideredadequate to cover the associatedadministrative costs and the creditrisk in view of a limitednumber of relativelylarge-sized subloansexpected to be financedunder the loan. The relendingrate to enterprisesand PFIs under the technicalassistance component is also justified consideringthat these fundswill be used for strengtheningmainly R&D-type work and managementand staffcapability. The maximumrepayment period for individualsubloans would be 15 years includinga graceperiod of up to 3 years. The last date for submissionof subloanapplications will be June 30, 1996. Assuranceson the above termsand conditionswere obtainedduring negotiations. The projectcompletiot. -te will be June 30, 1999. The closing date of the loan will be June 30, 2000.

5.3 The onlendingrate to enterpriseswould, over the life of the subloans,be positivein real terms,given projected inflation rates. China's inflationrate (basedon retailindex) was 6 percent in 1986, 7.5 percentin 1987, 18.5 percentin 1988, 17.8 percentin 1989, 2.1 percentin 1990, and 3.0 percentin 1991 and is estimatedto be 6 percentin 1992 and 5 percentin later years. Duringnegotiations, assurances were obtainedthat, from time to time at the requestof any party,the Governmentand PPIs would exchangeviews - 33 -

with the Bank on the interestrates to be chargedby PFIs in their lending operationsin lightof their cost of funds and profitabilityand of movements in interest and inflationrates in Chinaand internationally.

5.4 !r-JeLimit. It is recommendedthat the free limitunder the proposed loan shouldbe set at $4.0 millionwith the exceptionthat the first subprojectunder each subsector,irrespective of the subloanamount, would be treatedas above the free limit,which wouldrequire the Bank'sprior approval. Also, the firstthree subprojectsfrom each PPI will be treatedas above the free limit, irrespective of subsector. It is estimated that 13 percent of the subloans by number and about 10 percent by amout will be below the free limit.

B. Procurementand Disbursements 5.5 Procurement.The Bank'sexperience with procurementunder earlier industrialcredits to CIB and TLIP has been satisfactory.Consequently, pro- curementconditions will be same as for TLIP. The ICB limit for the industrial credit component of TIDP would be $5 million, which is considered appropriate. Local bidders would be granted the standard preference, equivalent to custom/import duties or 15 percent of CII cost, whichever is lower, in the case of ICB. Contracts below $5 million would be awardedafter evaluationand comparison of quotations solicited from at least three qualified suppliers, exceptproprietary equipment which can be procuredby directcontracting. The Bank's standard review and approval procedures (from bidding documents to the contract awards) would be applied to all ICB packages above $5 million. All other procurementcontracts would be subjectto post-reviewby the Bank, and PIs would maintainall relevantdocuments in their recordsfor this purpose. Misewould also be responsiblefor the overallsupervision of procurementby subborrowers.Only about a dozen contractsare expectedto exceed$5 million. (In TLIP,nine contractshave been/wouldbe awardedon the basis of ICB.) The procurementarrangements are summarizedin Table5.1. 5.6 The itemsof equipmentto be procuredby the beneficiaryinstitu- tionsunder the technicalassistance component would be generallyof lesser value (i.e.,procurement packages less than $1 million)and specialized nature,including testing and measuringdevices, prototypes, computers, teaching aids, etc. As the numberof suppliersfor such equipmentis generally limited,procurement will be throughinternational shopping (i.e., at least threebids from qualifiedsuppliers in differentcountries). However, for those itemsof specialequipment, which would have contractsof more than $1 million,procurement will be throughlimited international bidding (LIB), with bids invitedfrom a short list of specialized suppliers to be agreed with the Bank. Furthermore,each contractestimated to cost $500,000or more will be subject to the Bank's prior review. Consultant services required for the project will be engaged in accordance with the "Guidelines for the Use of Consultantsby the WorldBank Borrowers and by the World Bank as Implementing Agency." The above arrangementswere discussedand agreedduring negotiations.

S.7 Disbursements. Disbursementswould be made against: (a) 100 percent of amounts disbursed by PMs under subloans except for interest during constructionwhich would be 90 percentof total;(b) 100 percentof foreign - 34 -

Table 5.1: TIDP - PROCUREMENTARRANGEMENTS ($ million)

Project element Procurement method Total ICB LCB Other cost

Industrialcredit component la 95.0 - 105.0 200.0 (95.0) (39.5) (134.5)

TechnicalAssistance Component Goods and Technical Assistance for Project Implementation - 4.5 12.3 16.8 (4.5) (7.3) (11.8) Other TechnicalAssistance and Training - - 5.2 5.2 (3.7) (3.7) Total Financint 95.0 4.5 122.5 222.0 (95.0) (4.5) (50.5) (150.0)

la Includesinitial raw materialsand spareparts coveredunder incremental working capital. Note: Figures in parentheses are the amountsto be financedby the Bank.

expenditures,100 percent of local expenditures(ex-factory), and 75 percent of local expendituresfor other itemsprocured locally, for goodsunder the TA component;and (c) 100 percent of expenditures for consultant services for the implementationof technicalassistance program and training. Disbursements for contractsof or above $200,000and all consultantservices will be made againstfull documentation.Disbursements for contractsof less than $200,000,interest during construction, and trainingwill be made against Statementsof Expenditure(SOE), with the full documentationheld by the TMG or PFIs, as appropriate,for reviewby the Bank supervisionmissions. Expen- dituresfor stafftraining would be paid from the SpecialAccount against the actualcosts of travel,subsistence and trainingfees. PFIs will submit monthlysummary sheets giving information on amountsof individualsubloans, contracts,amount of payments,purpose of loans,name and addressof machinery suppliers,and the countryof originof machinery. Similarmonthly summary sheetswill be submittedby the TMG on expendituresunder the technicalassistance program. Disbursementsare expectedto be completedby June 30, 2000. The disbursementprojections (given in Annex 17) are based on the disbursement profileof industrialdevelopment and financeoperations in Chinawith adjustment for time neededin the firsttwo years to reorganizesubsectors and create new enterpriseswhich would receivesubloans. In orderto facilitate projectdisbursements, a SpecialAccount to be maintainedin US dollarsand to be operated by TMG would be establishedunder the loan in a bank on terms and conditions satisfactory to the Bank. The Special Account would have an autho- - 35 -

rizedallocation of $8.0 millionwhich is equal to fourmonthe estimated average disbursements.Applications for repleniskmentwill be submittedmonthly or when the amountswithdrawn are equalto 50 percentof the initialdeposit, whichevercomes sooner. 5.8 RetroactiveFinancing. Eligible expenditure under the technical assistancecomponent of the projectup to a totalof $5.0 million(3.5 percent of the loan amount)incurred subsequent to July 31, 1992will be allowedfor financingunder the loan on a retroactivebasis. It will enablethe procurement of some of the urgentlyneeded items of machineryand equipmentof relativelysmall value by supportinstitutions and engagementof consultantsto assistin projectimplementation. C. Reiogtinaand Auditing 5.9 The progressof the reformactions will be reportedby the Tianjin government at six-month intervals and discussed periodically with the Bank. In addition, the Tianjin governmentwill provide: (a) semiannualprogress reports on implementation of various items included in the technical assistance componentof TIDP;and (b) annualaudit reports on (i) the Special Accountand (ii)Statements of Expenditurewith respectto the technical assistancecomponent, prepared by independentauditors acceptable to the Bank. PFIs will submit: (a) semiannualreports on progressof all subprojectsunder implementation;(b) annualreports on all completedsubprojects during the first threeyears of subprojects'operations, providing information on performance of individualsubprojects against anticipated construction and opera- tionaltargets (project cost, time schedule,production, sales, exports, and profitability);reasons for any cost and time overruns,and shortfallsin meetingoriginal targets and actionsbeing takenor proposedto be takenby 'Pus and/orthe projectsponsor to improveperformance; and (c) an annual audit report on (i) PFIs' accounts and (ii) Statements of Expenditureswith respectto the financialassistance component of TIDP auditedby independent auditorsacceptable to the Bank. All auditedaccounts and statementswill be submittedwithin six monthsafter the end of each fiscalyear. Duringnegoti- ations,understandings were reachedon the above reportingrequirements and assuranceswere obtainedon the auditingrequirements. D. Benefitsand Risks 5.10 The accelerationof policyand enterprisereforms in Tianjinwill resultin greaterautonomy and accountabilityfor enterprisemanagement, higherefficiency, and increasedcompetition in the five subsectorsin Tianjin and more rationalresource allocation decisions which increasinglyreflect underlyingfactor costs. The modernizationand restructuringof enterprises in the contextof a suitableoverall restructuring strategy for the individual subsectors is expected to result in significantgains in enterpriseproductiv- ity, more efficient use of energy and raw materialsand an increasein production qualityand exports. The strengtheningof the technologicalinfrastruc- turewill assistthe five subsectorsin designingand implementingnew projects,product development, quality control, and producttesting and will increasetheir exposureto the latesttechnological advances in foreigncountries. - 36 -

5.11 The main projectrisks relate to (a) the itplementationof policy and enterprise reforms by the Tianjingovernment, and (b) the timely completion ot various activities envisaged under the project. Although the government is fully commltted to the economic reform program, the need to ensure macroeconomicstability and the inevitablesensitivities associated with programs of this magnitudewill affectthe pace of its implementation.However, the directionof the reformprocess is not in doubt,and its pace is now being accelerated.Furthermore, the increasingdelegation of greaterauthority to the provinces should allow the Tianjin government to move easily ahead with many of the reforms to which it is committed. 5.12 The complexityof the project,which dealswith five subsectors, three fiuancialintermediaries and severalsupport institutions, could result in implementationdelays. While specificsubcomponents are to some extent independent,in that they are not dependenton the involvementof all project institutionsfor their implementation,overall project activities will require close coordinationand supervisionto ensuretimely and satisfactorycomple- tion of the project. The experiencegained in the implementationof TLIP and the efficientfunctioning of specialproject implementation unit in Tianjin (para.4.14) will be of great help in this regard. - 37 -

VI. AGREEMENTSAID RECOMMENDATION

6.1 Duringnegotiations, assurances were obtainedon the following conditionsof loan effectiveness:

(a) State Councilto approvethe Loan Agreement(para. 5.1); (b) The Municipality of Tianjln and PFITsto sign SubsidiaryLoan Agree- ments satisfactoryto the Bank (para.5.1); and (c) Tianjinto engageconsultants to assistin the implementationof subsectoralrestructuring programs (para. 5.1). 6.2 Assuranceswere obtainedfrom the PRC, THG, and PPIs on the following conditions: (a) PRC to:

(i) make loan proceeds available to Tianjin for 20 yearswith 5 years of grace at the Bank'sstandard variable interest rate (para.5.1); and

(ii) exchangeviews on PPIs' interestrates (para.5.3). (b) TMG tg:

(i) carry out and exchangeviews with the Bank at leastevery six monthson implementationof the developmentprogram and strategy for the five subsectors(Annsx 1) includingeconomic and systemreforms and strategiesfor subsectorrestructuring (para.3.23);

(ii) carry out the technicalassistance program as agreedwith the Bank (para.4.6) and furnishto the Bank for approval,by October31 of each year,a 12-monthtraining program (para. 4.9);

(iii) maintain the project task force and the office with functions and responsibilitiesacceptable to the Bank and with competent staff in adequate numbers to coordinate and monitor the overall implementation of the project (para. 4.14); (iv) onlend$134.5 million out of the industrialcredit component and $0.2million out of the technicalassistance component to PPIs for 20 yearswith 5 years of grace at a variableinterest rate equal to the Bank'srate (paras.5.1-5.2);

(v) onlendto enterprisesin the five subsectors,out of the technical assistancecomponent, $6.5 million to developtechnical centers,$2.5 million to engageconsultants for projectimplementation,and $0.7 millionto train staff,on the same terms and interestrate as thoseof the Bank loan (para.5.1); and - 38 -

(vi) meet auditingrequirements (para. 5.9). (c) PFIs tot (i) ensurethat eligiblesubprojects were consistentwith the TMG's developmentprogram and strategyfor the subsectorconcerned, met PFIs' lendingcriteria including a minimumERR and FRR of 12 percent,were sponsoredby enterprisesestablished pursuant to the organizationalrestructuring of subsectorsand with satisfactoryprojected financialposition, vere approved by TEPB, and were consistentwith environmentalstandards satisfactory to the Bank (paras.4.5 and 4.30):

(ii) carry out staff training in accordancewith a program agreed with the Bank (para. 4.11);

(iii) exchange views with the Bank before making any proposal to modifytheir policy statements (paras. 4.16, 4.22 and 4.27); (iv) maintainsatisfactory debt/equity ratios (paras. 4.18, 4.22 and 4.27);

(v) onlend to subborrowersat a variable interest rate equal to the Bank rate plus a minimum spread of 1.2 percent (para. 5.2);

(vi) exchangeviews with the Bank on interest rates (para. 5.3); and

(vii) meet auditing requirements(para. 5.9).

6.3 Understandingswere reachedwith the TMG and PPIs on the followings

(a) Details of the technicalassistance for support institutionsto be implementedby the TMG (para. 4.7);

(b) Detailed terms of reference and timetable of work to be performedby internationalconsultants for the implementationof subsectoral restructuringprograms (para. 4.8);

(d) Informationto be provided by PPIs in each subprojectappraisal report on the equipment to be procured for pollution control (para. 4.30). 6.4 With the above conditionsand assurances,the proposedproject is suitable for a Bank loan of $150.0 million repayable over 20 years (including 5 years of grace) on standard terms to be made to the People's Republic of China. 39 - ANEX I

CHINA

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

The Statement of the Tianlin Municipal Government on the Development Program and Stratertfor MachineTools. Construction Eguipment. Electronics Comnonents.Automotive Parts and ElectricMotors Subsectors

A. Background 1. Tianjin,the third largestcity in Chinawith a statusof province, has a relativelylarge and diversifiedindustrial base. In 1990,its industrial outputreached Y 71.7 billion(current price) or $15.2billion. The outputgrew at a rate of about 10 percentper annumat constant1980 prices between1980-90. In 1990,Tianjin manufactured 17 percentof China'smedium size tractors,5.3 percentof automobiles,2.5 percentof steel,2 percentof electricmotors, 17 percentof bicyclesand 5.4 percentof televisionsets. Its machinebuilding industry accounts for 4 percentof the total subsector outputvalue of China. Its electronicindustry accounts for 5 percentof the nation'stotal outputvalue. 2. Exportsof goodsfrom Tianjinamounted to $1.8 billionin 1990 and grew at an averageof 1.6 percentper annum in US dollarterms, during 1980- 90. While the leadingexport earners are textile,garments, foodstuff and other light industryproducts, the exportof machinerygrew at 8.2 percentper annum duringthe same period. 3. Despiteits impressivegrowth, Tianjin's industrial sector is con- frontedwith many problems. It is often characterizedby lack of specialization,uneconomic size of operations,and inadequatemanagement systems. Gen- erally,the factorybuildings are old, technologyand equipmentis outdated, plant layoutsare cumbersome,and the consumptionof electricaland thermal energyand raw materialsis high. 4. Since early 1980s,the TianjinMunicipal Government (government) is emphasizingthe developmentof low energyconsuming and technology-intensive industries.During the EighthPlan (1991-95),the governmentplans to make the best use of its localresources--salt and petroleumto undertakelarge chemicalprojects, and to make automotive,machinery equipment and electronics as leadingsectors for the developmentof its industryon a prioritybasis. Subsectorswhere Tianjinhas a comparativeadvantage, including textiles, consumerdurable goods, machinery and equipment,food processing,packaging, chemicalprocessing, plastics and garments,will be restructuredand developed.Some of the above subsectorsare being assistedunder the TianjinLight IndustryProject financed by the World Bank. Otherpriority subsectors, viz., machinetools, construction equipment, automotive parts, electronic components,and electricmotors are to be restructuredwith the assistanceof the World Bank for the proposedTianjin Industrial Development Project (TIDP). 5. The governmentconsiders the industryto be the main engineof growthand expectsto gain a more importantplace in the economyof the coun- - 40 - ANNEX 1

try throughindustrial development. The governmenthas already embarked on a selectiveprogram of industrialrestructuring which includesgradual enterprise reformswithin the nationalframework, strengthening of supportinstitutions (i.e.,R&D centers,training institutes, etc.), technological modernization of enterprisesand improvementsin their organizationand management systems. B. Rntervriseand SubsectorPolicy Reforms 6. The Tianjingovernment has activelypursued enterprise and policy reformsin industryincluding the five subsectorsof the proposedproject. There is now littlemandatory production planning; enterprises are generally subjectto indicativeplanning and marketadjustment. At present,among major productgroups, controlled prices apply to only 35 products,and indicative pricesto 18 products;all otherproducts are subjectto marketprices. As regardsthe five subsectorsto be assistedunder TIDP, about 95 percentof the productionis now outsidethe nationalplan and thereforethe pricesare set by marketconditions. Economic corporations have been establishedfor most of the industrialsubsectorsa these corporationsare responsiblefor the profits and lossesof enterprisesin their jurisdiction. 7. Untilmid-1992, direct export rights were given to enterprises which,inter alia, couldexport or had potentialto exportat least$3 million value per annum. This limithas now been reducedto $1 millionfor machinery and electronicproducts with high technologycontent, and $2 millionfor products of the same categorywith low technologycontent. Most productsof TIDP willhave a $1 millionlimit. This would promotedirect contact between the manufacturersand foreignbuyers and thus resultin technologytransfer, promptmarket response and efficientproduction planning by the Chineseenter- prises. The governmentis also encouragingthe use of FTCs as exportagencies wherebyenterprises have directcontact with buyersand pay a commissionto 'TCs for theirmarketing services. This arrangementalso entitlesthe enter- prisesto retainmost of the foreignexchange earned through exports. Many productsof the project'sfive subsectors,e.g., graders, automotive parts, and coil springsare alreadyexported by enterprisesusing FTCs as an agency. 8. Foreignexchange retention schemes have been abolishedfor enterprises which export through FTCs (nonagency basis). They must now purchase their foreignexchange at foreignexchange adjustment centers (PEACs), If the enterprises were benefitingfrom directexport rights, they can keep 80 percent of their foreign exchange earnings. 9. Almost all enterprises in Tianjin are now subject to the contract responsibilitysystem. Tax payments are includedin all contracts. During the EighthFive-Year Plan period,the enterprisesare being submittedto more performance targets than just the profitlevel. Yearlyloan repaymentsare also specifiedand new contracts have a duration of three to five years, instead of two or three years in the past. New workers in enterprises are governed by labor contracts. 10. The growth of financial institutions, including the arrival of the Bank of Communications in Tianjin, and the expansion of bank branches and subbranches has provided flexibility to enterprises in the choice of banks for - 41 - ANNEX 1

deposit and credit operations. Some competitionnow existsamong financial intermediaries which results in better service to enterprises. A few foreign banks have been approvedto set up branchesand theywould soon becomeopera- tional. 11. As one of the key measuresto addressthe issueof surpluslabor and lack of labormobility, arising from the enterprises'social obligation of providing houses to employees, the government has prepared a city-wide housing reform plan which is beginning to be implemented in 1992. The plan provides for a compulsoryhousing savings program for 80 percentof cityworkers, housing bonds acquisitionfor allocationof new rentalhousing, gradual increase of rent to "fullcost" level to year 2000, and the sale of about 20 percentof housingover 10 years at a high discount. In addition,the governmenthas decided to establish and support housing rental companies)cooperative societies to build housing with enterprise and government support; and municipal, enterpriseand individuallevel "housingfunds."

12. The city has also pooled pension and unemployment insurance schemes at the municipal level separately for the government, SOEs, and collective sectors. For healthinsurance, the municipalityis preparingnew measuresto pool major medicalinsurance schemes in severaldistricts. Thesemeasures vill be ready for implementationin 1993. 13. The Tianjingovernment recognizes that despitesignificant progress as mentionedabove, reforms need to be furtiieraccelerated, and it plans to followa continuedstep-by-step approach supported by selectiveexperimenta- tion. The main objectiveof these reformsis to providefurther autonomy to enterprisesand to make them more responsiveto marketsignals. New measures are plannedin all five subsectorsand pace of implementationof certainre- formsis to be acceleratedas describedbelow. 14. Corporatizationand ShareholdinsSystem. In order to promoteexper- imentsin shareholdingtype companies,all beneficiarycorporations under TIDP would have share ownership. The beneficiarycorporations which, on the basis of theirpast two years'consolidated accounts, would have a minimumof 15 percentreturn on equity(net incomebefore taxes as percentageof equity), and a percentageof net income(after taxes) to capitalnot less than a one- year bank depositrate, will become"limited share companies." Whenever they can meet necessarycriteria and condztionsfor this purpose,these corpora- tionswill also be allowedto issueshares to employeesand individualinvestors,according to the new centralgovernment regulations. The sharesof the corporationswould be listedat Shanghai,Shenzhen, or Tianjin(should it have its own stock exchange),and Tianjingovernment will seek centralgovernment approvalfor this purpose. Other beneficiarycorporations will also be shareholdingcompanies but would be classified as "limited liability companies."Their shareholderswould be typicallythe StateAsset Management Bureau,some other corporationslenterprises,and nonbanking financial institutions. 15. Cross-regionalownership can be an appropriatesolution whenever an enterprisein Tianjinneeds anotherenterprise to share the productionof parts and assembly,in order to achieveeconomies of scale throughhigh level of production,reduce coats and improvecompetitive position. However,there - 42 - AME I

are difficultiesin persuadingenterprises in otherregions to investin such enterprise.The governmentwill make its beat effortsto establishinitially at least one corporation(most likely in the constructionmachinery subsector) with cross-regionalshareholding ownership on an experimentalbasis. 16. Pricesand Competition.Measures have been taken in recentyears towardsfreeing enterprises and productionfrom mandatoryand indicativeplanning in the five subsectors.However, further measures will be taken to removeby 1995 indicativepricing and what remainsof mandatoryplanning in the five subsectors. 17. Investmentand Technolony.The Tianjingovernment has now the authorityto approveinvestments below Y 30 millionin all subsectors.In the area of technologytransfer, the five subsectorswill use effectivelythe servicesof the TianjinInternational Science and TechnologyConsulting Com- pany, TianjinForeign Investment Advisory Center and other similarspecialized agencies,to obtaininformation and seek suitableforeign partners. Further- more, the enterpriseswill be encouragedto establishlong-term technology sharingexperiments with leadingforeign manufacturers and the governmentwill simplifyits proceduresto facilitatesuch collaboration. 18. ForcionTrade. With the new lowerlimit for directexport rights, most of the enterprisesin the five subsectorswould be able to undertake directexports. All otherenterprises would be allowedto use FTCs on an agencybasis which would make possibledirect contacts with foreignbuyers and retention of 80 percentof earnedforeign exchange by these enterprises. 19. Taxes and ContractResponsibilitv System. The contractresponsibil- ity system (CRS) has several performance indicators (whichmay include production,productivity, sales, employment, profits, taxes, etc.) and it, thus, becomesdifficult for the enterprisemanagement to maximizeefficiency and profitability.In orcir to obtaingreater benefits from CRS, the government will streamlinethe contractobligations by reducingthe numberof targetsin new contractsto a few essentialones (viz.,profits and debt-servicing),and the contractswill not be revisedduring implementation.

20. LaborMobility. About 10,000workers are expectedto becomesurplus as a resultof restructuringof the five subsectors.The governmentwill addressthis issueby developingthe existingemployment centers, improving unemployment insurance facilities in Tianjin,and creatingemployment opportunities. It will also take the followingsteps in 1993-95: (i) surplusworkers will be identifiedand released(at least20 percentin 1993 and 40 percent each in 1994 and 1995)from the five subsectors;(ii) the employment centers(including Tianjin Labor ServiceCompany) would activelysupport the releasedworkers in identifyingjob opportunitiesin otherenterprises/subsectors;and (iii)financial support and trainingwould be assuredfor the workers to be redeployed.The governmentwill also take necessarysteps to strengthenthe role of the employmentcenters and to improvethe training facilities for labor redeployment and will use the TA component of TIDP for this purpose.

21. Housina. The Tianjin government is making the maximumuse of the facilitiesprovided by the recentreforms undertaken in this area to promote - 43 - AUXI

individualhousing transactionsand to separate the supply of housing services from the enterpriseactivities. With these objectives,and withlvnthe framework of the municipal housing reforms, the governmentwill introduceexperiments first in the five subsectorsunder the project. The reformswould includetransferring housing assets of enterprises,or theirhousing management rights,to the TianjinHousing and TrustCompany in chargeof housing, and offeringto workersin the five subsectorsreal opportunitiesto purchase dwellings.Substantial progress in this regardwill be accomplishedby 1995. C. PhysicalRestructurinx of Fiye Subsectors Main Issuesand Anproaches

22. Structureof Subsectors.Most enterprisesin the five subsectors are smallin size in comparisonto internationalstandards and have fragmented productionwhich inhibitsefficiency, quality and competitiveness.The organizationalstructure of the subsectorswill thereforebe revampedto allowthe consolidationof physicalassets and manpower,and closureof nonviableactiv- ities. This would help to achieveeffective management control of the con- stituententerprises, and createa largecritical mass for investmentand operationalefficiency.

23. Productand MarketConcentration. For historicalreasons, capital and resourceallocation decisions have been made by the governmentas a part of planningprocess with focuson higherproduction. This has led to manufacture of a wide rangeof productswith low volumesand inadequatecoverage of marketsboth domesticand export. In future,Tianjin would concentratecapital and otherresources on thoseindustrial activities where it has potential comparativeadvantage and the marketviability of productsis clearlyestablished. In addition,it will builda strongposition in domesticmarket as a criticalfirst step towardsuccess in exportmarkets. Furthermore,the five subsectorswill strengthenmarketing, sales, distribution and servicecapabilities.

24. Develonmentand Absorptionof Technoloat.Most enterpriseshave reliedheavily on centralizedR&D institutesand, recently,on licensing agreementsfor more sophisticatedproducts. However,the enterpriseshave not been able to developcapabilities for internalproduct development or full utilizationof importedtechnologies. In future,the subsectorswill be more selectivein acquiringmodern technologies and will seek greatercommitment from foreignpartners to sharenew technologyover the long term. The internal organizationand expertisevill also be developedto adapt,absorb and commercializetechnologies in Tianjin.

25. PlantFacilities and Layout. Most of the plantequipment is obsolete or outdated. Furthermore,plant facilitiesare, to a largeextent, not well-organizedwith inappropriateproduction layout and flow. Theseproblems will be resolvedto bring operationalefficiency and improvequality and, thus,to enlargemarket share.

26. ManagementDevelorment. Modern management skills are underdeveloped. The enterpriseshave lack of understandingof strategicplanning and need to adoptmore flexibleand innovativeapproaches to respondto market - 44 - AMU I

signals and to make prompt adjustments in operations. In future, appropriate management functions will be established at all levels aud managers will need more intensive training in are"sof product and market development, cost control,production planning, quality control, etc. Also, enterprise management informationsystems will be strengthenedto enable improved enterprisemanagement.

Restructurine Strategies 27. MachineTools. The restructuring strategy for this subsector focuseson further development of hydraulic proesesin which Tianjin has a strongposition. Developmentof gear cuttingequipment and machiningcenters would be undertakenonly in technologycollaboration relationships with foreign manufacturersto upgradetechnologies, to provideTianjin access to exportmarkets and to ensureeconomies of scale. Uneconomicalproducts such as verticalspindle and floortype surface grinders, boring and radialdrill- ing machinesand large latheswould be discontinuedno laterthan December 1994. Nonrelatedproducts such as valves,pumps, and micromotorshave been alreadymoved outsidethe subsectoras recomaendedby the consultants.The manufactureof relatedaccessories such as work tables,lead screws,etc., would be maintained under a separate corporation, the Tianjin MachineTool Accessories Corporation. 28. With respect to the manufacture of horizontal spindle surface grinders with creep control and CNC, and two spindle vertical grinders for the automobile industry, the production of these products would be maintained and reviewed for continuation or further expansion by December 1994. 29* The present subsector organization which now includes nine state- owned enterprises managed by TMIBwould be restructured into two independent shareholding corporations--the Tianjin Machine Tool Corporation and the TianjinMachine Tool AccessoriesCorporation (to which referencehas already been made under para. 27). The MachineTool Corporationwould compriseof separateproduct divisions, viz., the hydraulicpress division,the machine centerdivision, the surfacegrinder division and the gear cutterdivision. The corporationwould have certaincommon manufacturing facilities for fabrication,precision machining, assembly and testingequipment for use by the proposedproduct divisions. Hydraulic Press GeneralWorks Number1 and Number 2 would be mergedand form the new HydraulicPress ProductDivision; Number 4 MachineTool Works and the GrinderGeneral Works would ceaseto operate no laterthan December1994 and the facilitiesin Nhmber 1 MachineTool Works expandedfor the manufactureof gear cuttingmachines, machining centers and surfacegrinder products specifically listed in para. 28. 30. The enterpriseswithin the proposedsubsector corporations would not have separatelegal status. The respectiveproduct divisions would be the new profitcenters for managementaccounting and the manufacturingfacilities would constitutecost centers. 31. ConstructionEquipment. TianJinis well-positionedgeographically and industriallyto expandits constructionequipment subsector. Tianjin would concentrateon thoseproducts in which it alreadyhas a comparative advantageand strengthenits marketingposition through cooperative arrange- -45 - ANNEX 1 ments and mutually complementary relationships with other national manufactur- ore. To achieveeconomies of scale,it is proposed to adopt a manufacturing strategywherein commonproduction facilities are provided in specialized workshops for plate preparation, fabrication of components and machining for the proposed range of construction equipment products. The product lines would be broadened and strengthened through foreign technology transfer agreements. Under the construction equipment division the manufacture of crawler dozers and motor graders would be expanded wvhreas the manufacture of wheel loaders would be maintained and further investment would be made only if domestic and foreign partners can be found. The manufacture of concrete mix- ers would be discontinued latest by December 1994. 32. The expansion of forklift truck production will take place only with the participation of a leading international manufacturer preferably as a joint venture shareholder or alternatively under a long-term technology transfer agreement. The manufacture of forklift truck axles would continue; however, the manufactureof other productssuch as freightelevators, heat exchangers,hoists, lifts and gear box repairswould be discontinuedlatest by December1994. 33. The manufactureof existingmodels of dieselengines for off-highway applicationswould be maintainedand new models would be introduced, provided a suitable joint venture partner under a shareholding or long-term technology transfer agreement can be located. The manufacture of hydraulic torque converters would be maintained. 34. The grey iron foundrywhich providescastings for dieselengines and otherconstruction equipment would be upgraded,whereas the foundryfor steel castingswould be phasedout by December1994.

35. A new corporationwould be formedto replacethe present11 enterprisesin the subsector.This corporationwould have four productdivisions-- constructionequipment; industrial equipment (forklifts); components (diesel enginesand hydraulictorque converters); and foundry. The corporationwould enter into marketing collaboration arrangements with selected domestic manu- facturersof complementaryproducts so as to be in a positionto offer to its potentialcustomers a full rangeof constructionequipment. The separate legal statusof all enterprisesIncluded under the variousproduct divisions of this corporationwould coasewith its formation.This structurewould allow greater productivity, lower manufacturing costs, greater flexibility in production planning and scheduling, improved product quality and better foreign market prospects. Its integrated structure would attract suitable foreign partnerswho could strengthenTianjin's position in the construction equipmentsubsector. 36. ElectronicComponents. The futuredevelopment program and strategy of this subsectorfocuses on passivecomponents. Within the passivecomponents,Tianjin would concentrateon aluminumelectrolytic (AS) capacitorsand thin film resistors.At the same time, it is proposedto initiate development work on the manufacture of surface mounted technology (SHT)chip components. - 46 - ANNE

37. To realize economiesof scale in manufacturinghigh quality passive components,the expansionof AE capacitorsand thin film resistorswould be carried out only under joint venture shareholdingarrangements with internationally reputed foreignmanufacturers. Two separate corporations--acapaci- tor corporationand a resistor corporationwould be formed for this purpose. These arrangementswould enable Tianjin to increase its market share in the growing domestic market and exports through the marketing organizationof the foreign partner.

38. The two enterprisesmanufacturing AE capacitors--TianjinRadio Com- ponent Factory No. 1 and No. 14 would be merged into the proposed joint venture capacitorcorporation. Carbon film resistorsmanufactured by Tianjin Radio Component Factory No. 9 would be produced by the proposed joint venture resistor corporation,and thereafterthe Factory No. 9 would be closed. The Tianjin Xin Tong Resistor Corporationwould, however, continue to operate independently.

39. Tianjin Radio Component Factory No. 2 which manufacturesvariable capacitors,No. 3 which manufacturerstransformers for TV sets, No. 6 which manufacturersdelay lines, and No. 10 which manufacturespotentiometers would operate directly under TECIC, and would maintain the manufacture of these products. Tianjin Radio Component factoriesNos. 12 and 20 which manufacture AS capacitors and ceramic disc capacitors,respectively, would be closed down latest by December 1994. Tianjin Radio ComponentFactory No. 16 which manufactures capacitorsfor power factor correctionwould be moved outside the subsector. The monolithic capacitorproduction in Radio ComponentWorks No. 15 would be transferredto the proposed SMT laboratory.

40. In order to promote the developmentof SMT for chip-typecapacitors and resistors, it is proposed to initiate steps for technology absorptionand process developmentin a technicalcenter to be set up for this purpose. Commercial production of SMT products would be considered only under a shareholding joint venture with a leading internationalcompany and subject to economies of scale, market justificationand techno-economicviability of manufacturingthese SMT products being clearly established.

41. Automotive Parts. In order to improve the performanceof this subsector, an innovativerestructuring approach and strategy has been developed. The subsectorwould be restructuredinto 13 automotiveparts subsystems rather than along individualproduct lines as at present. The restructuringof two of these subsystemswhere Tianjin has a high potential comparativeadvantage-- the drive train and the auto--electricalproducts would be taken up on a priority basis. The subsystemswould be developedto provide Tianjinwith the capabilityto supply automotiveparts at the national level and to leverage the expanded domestic position in foreignmarkets. Emphasis would be placed on developing componentswhich would meet world standardsof quality for potential exports and gain a strong position in the China market. Foreign technical relationshipswill be developed for new product and process technologies, to enhance quality, to raise output volumes, and to increase efficiency. - 47 - ANNEX 1

42. Within the subsystems,products which do not have potential for comparativeadvantage would not be manufacturedin Tianjin and OEMs would procure them from other national/internationalsuppliers.

43. The manufactureof propeller shafts would be phased out. Also, the manufacture of CV joints would not be pursued, except under a joint shareholding and technologytransfer arrangement. The manufactureof regulators and distributorswould be phased out. In the engine parts subsystem,the manufacture of rings, piston pins, valves and connectingrods would be phased out. The manufacture of radiators in the enterprise under the Civil Affairs Bureau is of doubtful viability, but it is proposed to be maintained on the consideration that over 40 percent of its employees are handicappedpersons. The manufacture of hand-brake line would also be phased out. All phase out activities would be completedand the concerned enterprisesclosed latest by December 1994.

44. The manufacture of automotiveparts subsystemswould be delinked from the direct administrativecontrol and supervisionof TAIC. Under the new structure, independentcorporations would be created for each subsystem and will include only those enterpriseswhich are viable. These enterpriseswill lose their legal status and function as product divisionsof the subsystem corporations. The drive train subsystemcorporation will have two product divisions--theAuto Gear Division and the Axle Division. The Tianjin Auto Axle Works and the Bus and Van Axle Works would be merged into the proposed Axle Division. Likewise, some of the independententerprises manufacturing electric motors within the auto electric parts subsystemwould be merged. These new organizationstructures would induce econmAiesof scale in all functions. Each subsystemwould develop through its product and excellence,recognition in the OEM and after-marketparts.

45. Electric Motors. Although the subsectorincludes four enterprises, it consists basically of one large enterprises,Daming Electric Motor Corpora- tion (DEMC). The other three enterprisesare very small production facilities and are operatingas collectives. DEMC has realized growth in sales and exports of electric motors in the past five years (though its exports have declined in the last two years), but its present manufacturingfacilities and product designs are not suitable for efficientproduct expansionand need to be upgraded and modernized. Consequently,DEMC's restructuringwould be undertaken only with the participationof a foreign joint venture shareholding partner who should be a leading electric motor manufacturer. A strong joint venture partner would provide leadership to DEMC to improve its financial, technical and market performancein both domestic and foreignmarkets. The proposed joint venture would need to build new plant facilitiesat the present site and would make use of the existing foundrieswithin and outside the subsector. With the establishmentof such a joint venture, DEMC in its present form would cease to operate.

46. General. In all the above subsectors,factory office and buildings, plant, equipmentand other fixed assets which are rendered surplus as a consequence of rationalization,merger and closure of enterpriseswould be sold, scraped or otherwise disposed of.

D. Developmentof TechnologicalInfrastructure - 48- ANNE 1

47. The designand researchinstitutes and the vocationaltraining instituteswithin the five subsectorscannot provide adequate technical support services. They lack computerhardware and software,testing equipment and teachingaid facilities.They have limited contacts with similarinstitutions in developedcountries and thereforecannot keep up vith the latest technologicaldevelopments abroad. Subsectorenterprises have also not given sufficientattention to the importanceof R&D. The linkagesbetween national and regionalR&D institutesand enterprisesare wesk. 48. In orderto strengthenthe technologicalsupport system, it is proposed to establishone technicalcenter within each subsectorunder TIDP. However,in case of subsectors/subsectorcorporations, such as electric motors,resistor and capacitorcorporations, which are proposedto b. developed only in conjunctionwith foreignjoint venture partners on a shareholding basis,the functionsof technicalcenter would be providedby the foreaign jointventure partner. In such cases,it is not necessaryto createsuch a technicalcenter using World Bank loan proceedsfor TIDP. 49. Tianjinhas a numberof vocationaltraining Institutions which are associatedwith the subsectorenterprises. These institutionswould be strengthenedon a selectivebasis throughthe provisionof modernteaching aids, trainingmaterials and equipment,books, etc., to enablethem to better meet the needs of restructuredsubsector corporations. - 49 - AM 2

TIAMJIl IUDUSTRIALDVKLOPMRT PRJC

Economic and EnterDriseReforms ln the Five Subsectorsin Tianjlin

1. An extensive range of economic and enterprisereforms have been implementedin Tianjin in the five subsectors. These reforms relate to domestic competition,foreign trade, production and investmentpolicies, enterprise reforms, financialsector and labor mobility, includinghousing and social security. Many of these reforms have been initiatedat the national level and applied to Tianjin, as well as other major cities selected for experimentation.

Price and Market Reforms

2. Most of the production in the five subsectorsis now outside the national Plan. Prices are thereforeset by enterprisesaccording to market conditions. Only prices of some products, and that too for small quantities, are controlledby the central or the municipal government.11 Prices in machine tools and the constructionequipment subsectorsare determined by negotiationbetween enterpriseand clients, particularlyat the time of annual national conventions.

3. Since the early 1980s, the national market of the electric motors subsectorhas been completely liberalized. The market, however, reains quite regionalized. The majority of the sales of Tianjin electric motor subsector is in Tianjin, and the same applies to other provinces. The regional protec- tive policies to prevent the entry of products from other parts of the country have been removed, but the segmentedmarket structurestill exists because of past relationshipbetween buyers and sellers.

J1 For a very few types of constructionequipment, machine tools, ceramic capacitors, aluminum capacitors, potentiometer, fixed resistors and medium-sized electric motors (about 20 hp) prices are set by the central government (Central Price Commission and respective supervisoryminis- tries). The state referenceprices are set in relation to the unit cost of the product, a mark-up of 8 percent and the demand. However, these prices can vary slightly from one region to another for the same product. Higher unit costs will tend to generate higher prices, but the mark-up will be in general lower. Also, the enterprise can change these reference prices within a range of 10-30 percents 10 percent for auto parts, and 15 percent for machine tools. In general, prices of new products are not brought under administrativecontrol during the first three years following the creation of the product. Prices of raw materials used in the five subsectors,such as steel, copper, pig iron and coke are set by the central government for only the small proportion of production which is still under the plan target. - 50- ANNEX 2

4. Enterprisesin the electroniccomponents subsector (capacitors and resistors)are also free to produceand sell accordingto marketrequirements. Annualproduction plans are stillsent to the bureau,but only for information. The sellingprice are determinedthrough negotiations between the buyer and the enterprise.The Ministryof Machineryand ElectronicIndustries (MMII)issues price guidelinesfor key products. However,the contracting partiesare not compelledany more to followthem. The guidelinesare used as an overallmarket information background. S. In the automotiveparts subsector,the pricesare not controlledand the TianjinAutomobile Industry Corporation (TAIC) is left relativelyfree to respondto changinglocal and nationalmarket conditions. For cars,prices are nationallyfixed by the centralgovernment. An enterprisecan proposeand obtainlocal modifications of the nationalreference price if it can show that the changesare neededto providea betterresponse to its own marketand improve its sales performance. The prices of trucks and other vehicles have been fully liberalized. InvestmentReforms 6. Presently,for capitalconstruction and technicalrenovation investments in the five subsectors,the StatePlanning Commission (SPC) must approve medium-and large-sizeprojects. Scale is measuredby productioncapacity criteria. Total cost criteriaare also applied. Technicalrenovation projects costingless than Y 30 million(total cost) for light industryand Y 50 millionfor heavy industryare approvedby TianjinPlanning Commission. Largerprojects are sent to SPC or the StateCouncil for approval. Until recentlythe automotivesubsector was submittedto a more stringentinvestment authorizationrule. Now, the subsectoris subjectto the generalregulation. ForeianTrade Reforms 7. A largeproportion of exportingenterprises in the five subsectorin Tianjinhave been sellingtheir productsin local currencyto FTCs which resellthem in foreigncurrency to foreignbuyers. Under this purchasingand resellingregime, enterprises are closelyassociated with each major step of the operation: identificationof the productand specifications,marketing, negotiations,and after sales service. Now, in a few cases,FTCs are acting on an agency basis. This new tradingarrangement is developingslowly since enterprises often cannotcollect the foreignexchange proceeds in a relatively short period. 8. Direct exporting has expanded since 1987 from a very smallbase. Direct export rights have now been granted to more than 10 percent of exporting enterprises.FEACs have substantiallyexpanded their activityin recent years. The volumeof transactionsin Tianjinreached $100 million in 1989. However,compared with Tianjinexports of $452million for the same year, this transactionsvolume appears still relativelylow.

9. An FTC is specificallyassigned to each of the five subsectors for importand exporttransactions. FTC8 are mostlyunder the ForeignTrade iureau,but in some cases under the IndustryBureau of the subsector(elec- - 51 - AM= 2 tronics). The transformationof PITCsinto exportsale agenciesis being stronglyencouraged by the ForeignTrade Bureau of TianjinMunicipality. 10. Exportsubsidies to FTCe have been abolished.They are not any more shelteringenterprises from exportingat a loss. It then becomesprogres- sivelyin the interestof the exportingenterprises to use FTCs as a service agency. Moreover,foreign exchange retention schemes have been abolishedfor enterpriseswhich do not exportdirectly but sell to FTCs. They must now purchasetheir foreignexchange in FEACs. 11. Severalenterprises in the five subsectorsexport directly. Until mid-1992,direct export rights were given to enterpriseswhich, inter alia, couldexport or had potentialto exportat least$3 millionvalue per annum. This limithas now been reducedto $1 millionfor machineryand electronics productswith high technologycontent, and $2 millionfor productsof the same categorywith low technology.Except electric motors which will have a $2 millionlimit, all otherproducts of TIDP will have a $1 millionlimit. Already,products like gradersand auto parts are directlyexported by enterprises. In this case, they can retainat least80 percentof their export earnings. 12. Until recently,enterprise exports in the machinetools and con- structionsubsectors have been below $1 million. Therefore,no exportrights have been granted. Exportingenterprises are sellingtheir productsto FTCs whichin turn sell them abroad. However,exports of the gear-cuttingcompany have now reachedthe new $1 millionbencbmark, and the companywould become eligiblefor directexports. The same appliesto the forkliftfactory in the constructionequipment subsector. 13. As regardsthe externaltrade in the electricmotor subsector,the total exportwas $1.7 millionin 1991,and, therefore,the DamingElectric Motor Company(DEVC) does not yet benefitfrom the directexport status. Presently,only one enterprise(Tianjin Middle Circle Capacitor Corporation) in the electroniccomponents subsector benefits from directexport rights. 14. Sinceearly 1991,in the automotivesubsector, TAIC has direct exportrights. The Tianjinbranch of the ChinaNational Auto ImportExport Corporation(CNAIEC), which was also under the supervisionof TAIC,has lost its statusof a branch,2Iand is now exclusivelyunder the supervisionof TAIC. The corporationcan retainalmost 100 percentof its foreignexchange earnings. However, more institution-building is needed to develop exports. Up to now, TAIC's knowledge of foreign markets has been relatively limited, its after sales support abroad minimal, and its access to export channels somewhat inadequate.

21 This means it has lost its authority to mandate exports production and pricing on behalf of the nationalFTC and its ability to receive exports subsidies. - 52 - ANN% 2

Tax. Creditand ProfitDistribution Policies 15. The 1984 incometax law has been fullyimplemented in Tianjin. Before1984, enterprises used to remitprofits to the State. Now stateenter- prisesremit taxes on the basis of 55 percentof theirprofits. The industrial and commercialtax has been replacedsince 1984by a producttax and a value added tax, and finallyby a value added tax alone. The value added tax is fully implementedin the five subsectorsand the averagerate in these sectorsis about 14 percent.

16. Tianjinwas selectedin 1984 as one of the firstcities to implement the CRS reform. Now practicallyall enterprisesin the city are under the CRS. One main aspectof the systemis the link betweenthe growthof production and the growthof totalwage payments. As a result,about Y 1 of bonus has been paid to workersyearly for Y 7 of profitsand taxes. The enterprises have been also providedwith more autonomyin the managementof their employees, throughthe introductionof possiblewage-earning penalties and the employeecontract systems. 17. In the machinetools subsector,the TianjinFinance Bureau signs a contractfor two or threeyears with subsectorcorporations, which in turn sign the contractwith the enterprises.During the EighthPlan period,enterprisesare being subjectedto more performancetargets than just the profit level. Yearlyloan repaymentsand tax paymentstargets have been specified and new contractshave a durationof three to five years.

18. For the time being,the CRS and taxesin the electroniccomponents subsectorare stillhandled at the enterpriselevel rather than by the new corporation,mainly because the enterpriseshave kept their legal entitysta- tus. The CRS includesa profittarget, a tax paymentobligation as a fixed percentageof the profit,and tax rebatesto allow loan repayments. 19. Profitsafter taxesare usuallyallocated among five items: production developmentfund, welfare fund, bonus, reserve fund, and new product development fund. The rule is that the development fund and the reserve fund should not take more than 60 percentin profitallocation. Bonus to the workers in the machinetools subsectorcan be fixed everyyear in the traditional way, i.e.,as a fixed percentage of profit after taxes. More and more, however, it is being merged with wage increases as a reward for better performance. Enterprise Ownership 20. Enterprises in the five subsector have in many cases been established to produce only specific categories of output and the related production system is often too vertically integrated. To gsain economies of scale, the subsectors must be reorganized towards more horizontal integration. Diversified shareholding could be utilized to ensure a good coordination between activities of various categories of enterprises, especially foundries, enterprises producing parts and components, and finished product lines. Diversified shareholding would be a major improvement towards more enterprise autonomy, flexibility, and efficiency. The central government has issued in May and June 1992 regulations which outline a preliminary legal framework for - 53 - ANNEX 2 shareholding.These regulationsinclude standards for settingup: (i) 3lim- lted liabilitycompanies" whose shareholderscould be the State Asset Mbnage- ment Bureau,other enterprises, and nonbankingfinancial institutions, and (ii) "limitedshare companies" which can also include employees and foreign investorsas shareholders.

LaborMobilitv 21. CurrentT,abor SuRplv Policies. In orderto provideemployment to a growingnumber of personsentering the labor forceand to adjustto sectoral changesin labordemand, three categories of policiesare being implemented. First,new job opportunitiesare offeredthrough the developmentof small- scale serviceindustries: for example,the establishmentof food servicesand small-scalehospitals is encouraged.Second, concerned industrial bureaus and the laborbureau work out a solutionto reallocatethe workersacross subsectors. Third,employees are left free to find a new job by themselveseither in the ssamesubsector or outside. To help implementthese policies industrial bureaussubmit every year to the Labor Bureaua list of new employmentvacan- cies. If the requiredqualifications differ from the availableskills, the workersare givenadditional training in one of the 19 trainingcenters under the laborbureau. 22. CurrentVocational Training Policies. A numberof institutionsare responsiblefor providingand upgradingskills of workers. (a) The TianjinLabor Bureauand the Bureausin the industrialsubsectors have theirown trainingfacilities, mostly for new workers enteringin the subsectors. (b) The enterprisesin each subsectorhave theirown trainingcapabili- ties to impartskills to new workersas well as upgradethe skills of existingworkers. (c) Technologyschools have been establishedin the five subsectors. (d) Specialprograms are gearedto sendworkers for trainingin other provincesand even abroad. When a workerneeds to acquirenew skillsas a resultof a restructuring arrangement, one of the following arrangements are made: (i) the worker is sent to the Tianjin Branch of the China/Germany higher-level training center; (ii) the worker is oriented to the high technologytraining center of a voca- tionalschool; (iii) the workeris sent to the trainingcenter of the bureau of the subsector activity requiring new skills snd knowledge. 23. Restructurint Issues. The workers identified as surplus in an enterprise must apply to the supervising bureau who will transfer them to employment-deficit areas in the same subsector. If the subsectorcannot absorbmore workers,employment search beyond the subsectorwill be handledin collaborationwith the municipallabor bureau. When a bureautransfers an employeefrom one factoryto snother,it verifiesthat the employeehas the requiredskills for the new job. If not, the employingcompany will have to train the new workers. In spiteof thesemeasures, the processof workers' - 54 - ANNX 2

reallocationremains uncertainand ratherlimited. First,reallocation is generallywithin and not acrosssubsectors. Second, the trainingto redeploy the existingworkers is to be providedby the hiringenterprise. This enter- prisemay find more costlyto upgradethe skillsof an existingworker than to hire a newly qualifiedworker. 24. Manpowerredeployment is a very complexissue and has many dimensions: informationon labor surplusesand deficits,matching overall labor supplyand demandat the municipallevel through the supportof an employment centerand unemploymentinsurance. Some reformsin the area of labormobility have been alreadyinitiated in Tianjinfor specificcategories of labor. A municipalemployment center (Tianjin Labor ServiceCompany) and an unemployment insurancescheme have been operatingfor severalyears in Tianjin. How- ever, theirrole is stillquite limited.

25. EmillovmentContract. The employm-ntcontract system has been appliedto newlyhired workerssince 1983. As a consequence,the numberof employeesunder the contractsystem amounts to 7 percentof the laborforce in Tianjin,and to about 11 percentof the labor forcein the five subsectors. The principlesguiding the contractare the following: (i) the workersare selectedaccording to the adequacyof theirprofessional and technicalquali- fications;(ii) the enterprisedirector can dismissthe workerat the end of the contract;(iii) during the interimperiod between two employmento,the vorkerreceives unemployment insurance benefits. By contrast,the permanent worker La "permanently"employed and does not receiveunemployment insurance. HousingReforms 26. Most of housingand welfarebenefits are enterpriserelated. They do not representin principlean obstacleto labormobility, because all enterprisesgrant the same benefits. In practice,however, differences in the qualityof the benefitsare to be expected. The enterprisebuys housing facilitiesfor its workersand rents these facilitiesat a low fixedrate. Moreover,enterprises contribute to buildingup the retirementfund of a workerand the Stateprovides the remainder.Health and socialwelfare benefits are directlyprovided by the hiringenterprise and are the same across enterprises. 27. Considerableefforts have been made by TMG to reformthe housing deliverysystem. Recentdevelopments include the creationof a specialpublic fund for housingconstruction, a plan for a step-by-stepincrease of rents, the individualhousing acquisition scheme, housing bonds acquisitionfor new renters,and the creationof cooperativesfor housingconstruction.

FinancialSector 28. Financialsector reform experiments were introducedfirst in Tianjin and in a few other cities. Implementationof the reformprogram began in April 1987 and has been successfulup to now. Segmentationof the financial marketis being progressivelyremoved by allowingsector specialized financial institutionsto developtheir business with clientsfrom all sectors. Recip- rocallyan enterprisecan chose a specializedbank from a differentsector. For example, an agricultural bank can make a loan to an urban enterprise. -55- ANNEX2

However,construction activities still have to be financedby construction banks. Second,more bankscan now acceptdeposits. Third,interest rates on depositsand long term loansare fixed,but interestrates on workingcapital can fluctuatein the proportionof 20 percentof the levelestablished. Fourth,state enterprisescan issuenegotiable bonds with the authorizationof the relevantbureau. 29. More than 30 new financialinstitutions have been set up. They are dividedinto threecategoriess (i) subsidiariesof statebanks; (ii) collective bankswhich are owned by city districts;(iii) leasing companies which can lease importedequipment; they can be eithercollectives or state-owned. 30. The growthof financialintermediaries, including the arrivalof Bank of Communicationsin Tianjin,and the expansionof bank branchesand subbrancheshas provideda littlemore freedomto enterprisesin the choiceof banks for depositand creditoperations. As a result,some competitiondoes existsamong financial intermediaries. - 56- ANNEX-3

CHINA TIANJININDUSTRIAL DEveLoPMERT PROJECT

InstiltutionalStrengthenina for Workers'Retrainina and Redeulomuentin Tianiin

Background 1. Employmentof workersby enterprisesin Chinahas been mainlyon "permanent"(i.e., lifetime) basis. The most importantstep towardschanging this practicehas been the introductionof a fixed-termcontract system in 1983. It facilitatesthe hiringof new workersfor a fixed term at the end of which their servicescan be terminated.However, only a smallproportion of the labor force is coveredby this system(7 percentin Tianjin,10-12 percent for TIDP'sfive subsectors).In addition,T1G is pursuinga numberof dif- ferentapproaches to promotethe creationof new jobst (a) promotionof serviceindustries (e.g., restaurants) as Subsidiariesof state-ownedenterprises (SOEs)to absorbsome of their own surpluslabor, (b) assistingin retraining and the redeploymentof surpluslabor across the industrialsector with the supportof TianjinLabor ServiceCorporation (TLSC) and TrainingCenters and (c) encouragingthe rapid developmentof the servicesector as a whole as one of the main outletsfor employmentgrowth in the mediumto long term. 2. The above effortsneed to be furtherstreamlined and improvedto reducethe burdenof surpluslabor on SOEs. The main objectiveof the restructuring of five industrial subsecturs under TIDP is to improvetheir efficiencyand competitiveness.This would require,inter alia,olosure of inefficientand uncompetitiveenterprises resulting in displacementof large numberof workersand reductionof surpluslabor in other enterprises.Simi- lar restructuringprograms in other industrialsubsectors would also necessi- tate redeploymentof labor. It is recognizedthat this will createa major socialchallenge to the TianjinGovernment. 3. TLSC is in operationas a divisionof the TianjinLabor Bureau(TLB) and it is recognizedas the EmploymentDivision of TLB. It has five predomi- nant functions: (a) to establishemployment procedures for the "Da Yie" youngsters(those who have neverbeen employed);(b) provideemployment intro- ductionservices and employmentopportunity marketing services for "Da Yie"; (c) collect employment insurance from joint ventures, private enterprises and collectively owned enterprises for contractworkers and depositit with the Tianjin Finance Bureau; (d) manage labor resources and coordinate training programs; and (e) investigateemployment opportunities for unemployedworkers (thosewho are in betweenjobs). Althoughthe currentfocus of the Labor ServiceCompany is "Da Yie," it is planningto pay greaterattention to the needs of unemployedworkers.

4. Tianjin has traiuing facilities for preemployment and on-the-job training. The Labor Bureau, Personnel Bureau and other administrative bureaus - 57 - ANNE

providevocational and technicaltraining to workersand cadres(vhite collar workers). The EconomicCodission coordinatesmanagement training in Tianjin. Obscetiveof the TechnicalAssistance (TA) 5. The purposeof this TA componentis to help strengthenthe existing institutionalframework for the redeploymentof laborin the industrialsector in Tianjinand to enhanceits capabilityto meet the increasingdemand. There are severalsuccessful models in the US, Canada,Europe and otherdeveloping countriesthat can be followed. As a result,Tianjin institutions will improvetheir capability to, interalia, centrally compile a list of laid-off workers,forecast future worker displacement, and counsel,retrain and redeploy them in gainfulemployment. The consultantsto be engagedunder TA, will suggesthow the presentinstitutions for job placementneed to be reorganized, rationalizedand strengthened.In addition,TA will providefor procurement of computerequipment to developand maintaina data base and foreigntraining of selectedstaff in TLB and TLSC.

8coPe of the Consultants'Work

Task I: The consultantswill outlinethe detailedprocedures to prepareand maintain a comprehensivelist of displacedworkers who require retraining and redeployment in coordinationwith the LaborBureau and administrativebureaus responsible for the industrialsubsectors.

Task 2: The consultantswill determinehow a strategic planning approach can be employedto forecastthe possibilityand probabilityof futureworker dis- placementas a resultof enterpriseclosing or structuraladjustment of Tianjin'sindustrial base, especiallySOEs. Task 3: Basedon the aboveinformation, the consultantswill designa system to forecastthe educational,technical and skillscategories that will become redundantand will requireretraining and redeployment.

Task 4: The consultantswill also suggestas to how a list of existingand futurejob openingssuitable for the displacedworkers will be compiledand regularlyupdated. This will requirecontinual collection and analysisof economic,planning, technological and marketdata and its translationinto job opportunities for the displaced workers. This information will be more readily available once the recommendeddata base and informationsystem is established.It will also require close coordination with the central and municipalbureaus and commissionsresponsible for planning,approval of capital projectsand job creation. Basedon this information,a systemwill be designedby which futurejob openingsbroken down by education,technical and skillslevel categories will be regularlycompiled and used for placement of laid-offworkers. It will also be used to plan trainingcourses to focuson present and forecast needs of skills and expertise. Task 5s The successof creatingnew job opportunitiesin tertiaryand ser- vicesindustries in Tianjin will also be evaluated and recommendations made as to how these should be completely delinked from enterprises that no longer requirethese workers. - 58 - AM 3

Task 6s Based on a review of the present training and redeployment programs under the different bureaus, commissions, corporations and enterprises; the studywill determinetheir effectivenessand successin redeployinglaid-off workers. A schemefor rationalizingthem will be prepared.

Task 7: The consultants will recommend measures for the institutional strengthening of TLSC to undertake all the above tasks, including organizational arrangements under the TMG. The consultants will recommend as to how this institution can be kept lean, flexible and unbureaucratic. Task 8: This task will cover the organization structure, personnel, budget for the first five years and mandate of TLSC. It will also review and recommend whether this institution should be under one bureau or commission or managedby representativesof a smallnumber of concernedbureaus and commis- sionswho will manage it as a Board of Directors. The consultants will also review and recommend whether the enterprises laying off workers and those employingthem shouldpay a fee to TSLC for its servicesand how this fee shouldbe determined.

6. It is envisaged that a consulting team of two expatriate consultants for a totalperiod of eightmonths, supported by three localconsultants will be requiredfor this assignment.The expatriates will include a specialist in labor redeployment/job creation specialist, and one trainingspecialist (each for four months). Local specialistwith experiencein training,worker rede- ploymentand computerusage will be requiredfor a total periodof eight months. 7. The TA componentof $300,000would be utilizedas follows: consultants--$240,000,computer equipment--$15,000 and foreigntraining--$45,000. -59 - ANNEX4

CHINA

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

MachineTools Subsector

Backgroundand Organization

1. Chinahas over 800 factoriesproducing 2,200 differenttypes of metalcutting, metal formingand othermachine tools with a totaloutput value of $1.4 billionin 1990 accountingfor about3 percent of worldmarket share. From 1977 to 1988 annualconsumption of machinetools in China increasedby 10.4 percentin nominalterms and 4.4 percentin constantterms. China's presentmachine tool populationof over 3.2 millionmachines is one of the largestin the world. However,90 percentof the machineswere builtwith the technologyof the 1950sor 1960s. Only 10 percentreflect the latesttechnol- ogy. It is estimatedthat 55 percentof the machinesinstalled are of more than 15 years of vintagereflecting technological obsolescence. The proportion of modernmachines integrating numerical control systems in the product spectrumof manufacturinglines in China is less than 1 percentin comparison with 50 percentin the UnitedStates which indicatesthe extentof technology lag in this industry.Around 90 percentof the machinetools manufactured in China are sold in the domesticmarket. Twentypercent of totalsales are at indicativeprices and the rest via commercialchannels, indicating largely market-orientedapproach in this subsector. 2. Tianjin'smachine tool industryconsists of 16 enterprisesand about 15,300employees with total salesof Y 245 million($45 million) in 1990 or about 4 percentof China'stotal market. It has six main productsegments with the shareof metal cuttingmachines at 34.3 percentand metal forming machinesat 22.9 percent,the balancebeing accessoriesand tools for machine toolsand miscellaneousworking machines plus a marginalshare of automatic controlmachines. In termsof value,five metal cuttingmachine tools (gear cuttingmachines, surface grinders, large lathes, radial drilling and machining centers)represented 29.1 percentof the totalmachine tools production, two metal formingmachines (large and small hydraulicpresses) comprised 22.9 percentand four equipmentand parts (electriccontrol panels, pumps, high pressurepump valvesand miscellaneousmachine tool components)equalled 22.1 percentof the subsectorproduction value. Tianjinhas a virtualmonopoly in Chinain gear cuttingmachines and key positionin the manufactureof surfacegrinders, hydraulic presses and large lathes. Theseare also Tianjin'smain areasof exports. Tianjinwas not a major producerof machining centersup to 1988but came into prominenceby exporting90 machining centerswithout CNC that year. It is also in the early stagesof technology transferdiscussions for CRC controllers.Among componentsand accessories, electromagneticchucks, optical accessories and grindingwheel dressersare promisingproducts for expansion.Details of Tianjin'smajor machinetool manufacturingenterprises in eachmajor productsegment and theirrelative sizes are given in Attachment1. - 60 - AMNE4

3. Withinthe Tiajin MunicipalGovernment (IMG), the TianjinMachine BuildingBureau 1t responsiblefor overalldevelopment of this subsector. Apart from machinetools, the Bureaualso overseesthe workingof Construction Equipment,power generatingand transmissionequipment, and othermechanically based Industries.In 1991,the Bureaurepresented 320 individualenterprises, approximatelylSI,000 employeesand total salesof Y 3.4 billionof which the shareof machinetool. subsector was 7.6 percent,12.3 percentand 10.9 percent respectively.The MachineTools subsector enterprises are organizedinto five major productgroups.J/ The enterprisesin thesegroups, however, directlyreport to the Bureau. The Bureaualso has a horizontallevel of functionaldeprtments monitoringthe individualmajor businessfunction of the enterprises*.g., quality, production planning, finance, operations, science and technology,e¢t. Since the mid-1980.,a programof industrialand managementrefoms hae been implementedwhich has decentralizedthe decision making process and shifted the focus of management to the enterprise level. However, the decision making responsibility still overlaps between different levels of subsector organization. For Instance, the absence of free prices for some inputs creates a need for an allocation system for these Inputs. For inputs sourced from abroad, the enterprise without independent foreign trade rights is compelled to use a local or national importlexport corporation as an agent In the selection of and payments for the purchases. The autonomy for facility rationalization at the enterprise level is nonexistent as it involves allocation and disposition of productive assets with impact on workers' earnings. The enterprises are characterized by vertical integration, low capital equipment utilizatlon, duplication of facilities, inefficient products and uneconomic level of operations. Engineering and product development talent is not pooled to develop the base of skills necessary to quickly absorb new product and process technologies. Current plans for renovation and reorganization of foundry workshops are quite Inadequate. Without world class foundry facil- itios, Tianjin cannot compete within China or 'n the international market. Low volume purchases by individual enterprises afford them very little leverage with suppliers. As regardsmarketing, international operations require good technical knowledge of products, active marketing support and extensive after-sales service and parts package which are currently lacking or nonexistent. Given these constraints the machine tools subsector in Tianjin needs restructuring to attain competitive strength.

Performance of the Subsector 4. Between 1987 and 1991, while the production of the machine tools in Tianjin increased by 34 percent, its national share marginally declined from 5.7 percent to 5.2 percent. Tables below show (a) trends in overall production and consumption of machine tools for China and Tianjing and (b) trend for specific machine tool segments and major products in Tianjin.

1/ The five major product groups ares First Machine Tool Group, Metal Form- ing Machine Group, Crinding Machinery Group, CNC Machinery Accessories Group and Coc SezvoGroup. - 61 -

Cum MACNI TOOL MART (Y million)

1987 1988 1989 1990 1991 Est.

DomesticProduction 3,368 4,181 4,429 3,919 4,498 Imports 1,839 2,123 2,295 2,568 3,029 Exports 346 488 882 1,181 1,155 Consumption 4,861 5,816 5,842 5,306 6,372 TianjinProduction Valus 192 212 238 199 232 Productionshare (2) 5.7 5.1 5.4 5.1 5.2

Notes In 1990,the numberof Ti1ajin'senterprises decreased from 22 to 16. Source:tTECC estimates.

TIANJIN--PRODUCTIONOF MACHINETOOLS

C million)_Sales CADR la Segment Products 1987 1988 1989 1990 1991 (2)

Metal Gear cuttingmachines 34.35 42.84 36.64 33.37 44.10 6.4 cutting Surfacegrinders 15.83 18.37 19.17 16.00 19.10 5.1 machines Machiningcenters 0.00 0.40 4.95 9.00 23.50 177.0 Rotaryarm drills 6.70 4.75 4.05 4.06 3.18 -15.4 Boring machines 0.64 1.90 n.a. 0.25 n.a. - Large lathes 10.75 13.76 8.44 10.34 12.8 4.5 Metal Hydraulicpresses 43.79 49.43 54.02 62.89 67.42 14.0 forming machines Equipment Magneticchucks 1.88 1.84 1.85 1.83 1.40 -7.2 and parts Opticalaccessories 1.99 2.10 1.33 1.82 4.28 21.1 Grinding whel dressers 6.07 7.01 7.72 7.45 8.86 9.9

l Cumulative annual growth rate.

WhileTianjin was somewhat lagging in keeping pace vith China's overall machine tool produesrs In sustaining its market share, its own production of maehine tools for gear cutting machines, surface grinders, hydraulic presses, large lathes and machining centers shoed significant growth rates. On the -62- AN_EX 4

other hand, Tianjin'sproduction of radial drilling and boring machines showed negative rate of growth.

Market Develoament

5. During 1987-91, the Chinesemachine tool market grew from Y 4,861 million to Y 6,372 million, i.e., an average annual growth of 7 percent per year. During the same period, China's production of machine tools grew at 7.5 percent and exports at 35.2 percent per annum. The Chinese machine tool market is projectedto grow phenomenallyfrom Y 6.4 billion in 1991 to Y 27 billion in the year 2000. Domestic production is projected to grow at much faster pace than in the past, but the net deficit of about Y 1.9 billion ($344 million) in 1991 is estimated to increase to over Y 8 billion ($1.5 billion) by the turn of the century.

6. The world machine tool market has grown from $15 billion in 1977 to $38 billion in 1988. The leading producersare Japan, Germany, USA, USSR, Italy and Switzerland. The major consumersare Japan, USA, Germany, Italy, UK, France, China and South Korea. Machine tool markets in these countries have high import propensity though USA, Germany and Japan are export leaders too with over $3 billion in net exports each. China's imports equaled $227 million in 1988 mainly from Japan, Germany, USA, Switzerlandand Italy. Of China's total exports of $71 million in 1987, 30 percent were to Hongkong and Asia, 33 percent to Eastern Europe, 10 percent to Western Europe, 8 percent to USA and 18 percent to other countries. Tianjin'sexports totalling $9.2 million in 1988 and $14 million in 1989 were mainly to Hongkong and SoutheastAsia followedby Eastern Europe. The export model for Tianjin dif- fers from the rest of China. China's exports are mainly lathes, grinding and milling machines as against hydraulic presses, gear cutting machines and surface grinders from Tianjin. The most significantimporter of Tianjin's machine tools is Eastern Europe. Many of these exports are part of barter trade agreementswhich are under great pressure as a result of changes occur- ring in that region. Tianjin will thereforehave to depend upon its own competitive strength in terms of higher qualitylpriceratio, technical sales network and expertise includingjoint ventures or tie-upswith leadingworld machine tool producers/exporters,product specialization,upgraded production and brand recognition.

Subsector Capabilitiesand Competitiveness

7. The changing trends of Tianjin'smarket share in some of its strong areas and not-so-strongbut potential areas during 1987-91 are summarized in the table below. - 63 - ANNX 4

Item 1987 1988 1989 1990 1991 _------(Y million)------

Surface Grinders China market 67.1 60.6 76.7 75.8 75.7 Tianjin sales 15.4 16.67 14.2 13.9 16.2 Market share (2) 23.0 27.0 18.5 18.4 21.4

fIdraulic Presses China market 227.7 264.6 276.3 257.6 315.0 Tianjin sales 45.2 49.8 57.4 60.5 66.3 Market share (M) 19.8 18.8 20.8 23.5 21.1

Gear CuttinA Machines China market 49.4 39.1 58.0 53.3 53.4 Tianjin sales 27.4 28.0 35.0 28.9 32.1 Market share (Z) 55.6 71.7 60.3 54.3 60.4

Machining Centers China market 42.38 56.84 64.5 117.2 198.9 Tianjin sales 0 0.40 4.9 4.5 18.1 Market share (Z) 0 0.7 7.8 3.8 9.1

CNC Controllers China market 16.0 27.4 n.a. n.a. n.a. Tianjin sales 0 0 0 0 0 Market share (S) 0 0 0 0 0

Servo Motors China market 17.7 17.3 n.a. n.a. n.a. Tianjin sales 0 0 0 0 0 Market share(X) 0 0 0 0 0

8. Tianjin's domestic market share during 1987-91 in machining centers, CNC controllersand servo motors vas negligible. As regards surface grinders, hydraulicpresses and gear cutting machines,Tianjin is a market leader but its share has remained t*nstable. While Tianjin had some export success in recent years, the prospects of sizeable exports in the near future to the free international market are poor because of strong competitionfrom large well- establishedmultinational companies with extensive dealer networks. To achieve significantexport capability in the long term, the basic thrust of achievementof competitivestrength and subsector developmentin the 19908 should be the domestic market place. One of Tianjin'sgreatest obstacles in achievingcompetitiveness in the machine tool subsector is below minimum economic scale of production particularlyin surface grinders and medium size hydraulicpresses which are potentialareas for Tianjin'asmarket share. The present scale of production of Tianjin in both these areas is nearly 50 percent of the minimum economic scale. The financialperformance of the subsec- - 64 - AfhM 4

tor also Indicates underlying weaknesses. Domestic price. of metal cutting and metal-formingmachine tools are below world prices. At the came time, machine tools like spiral levelgear rougherand hydrauliepress earn a negative gross margin at domestic prices. The majority of the products do not seen to be viable in economic terms. RestructurinaNeeds

9. The machinetools subsector suffers from shortfallsin production structure,product and manufacturingtechnologies, production organization and managementsystems. Manufacturingconstraints include technological obsolescence,subscale operations, high verticalintegration, poor equipmentutiliza- tion and maintenance,excessive overheads, antiquated facilities and layout and lack of marketdriven product development. The manufacturing systemis an importantarea of concerndue to inefficientproduction scheduling levels, long productioncycles and largebuffer inventories. Purchases of relatively smallquantities of componentsby individual enterprises (as against large purchasesby strongcommercial corporate groups) afford them very little leveragewith suppliers.The poor quality of control systems in theaeenter- prisesalso weakenstheir competitive position. The managementinformation systemsare inadequateand do not permit decision-making based on accurate and up-to-datedata and analysis. The stafftraining and incentivesystem also needsto be improvedto promotebetter operating skills and performance. Tianjiin'sconstraints also includelack of internationalpricing strategy and insufficientmarketing, technical sales and distribution capabilities for machinetools An intensiverestructuring of the subsector is needed to introducemodern structure and systems,higher technology products, contem- porary manufacturing techniques, and product specialization. These changes will allow the subsector to increase its domestic market share, build up sus- tainable exports and achieve high levels of profitability for future investments. The restructuringprogram for the subsector proposed with the assistanceof internationalconsultants provides for considerablechange in the organizationalstructure, product and marketstrategies and operationalstrategy and is reflectedin Tianjingovernment's development program and strategies for the five subsectors. InvestmentPlan

10. Consultantshave estimatedthat totalinvestment for the subsector restructuring would be about $40 million ($32 million In foreigncurrency and Y 42 million in local currency). - 65 - 4 Attachbent 1

TW_JI IUSTRAL DEVRLOPI T PROJICT

Machine Tool Subsector

Factory Product line 1991 sales Percent cr million)

Natal Cuttina Ratesrise No. I Machin Tool Works Gear cutter 33.8 13.8 Vertical & horizontal uaehine cener 15.7 6.4 Custom gear 10.5 4.3 No. 2 Mahne Tool Works Large lathe 12.8 5.2 1o. 4 Mschine Tool Works Radl*l dill. 2.2 0.9 Vertical machie cutter 7.6 3.1 ENM, etc. 3.0 1.2 no. 9 Machlne Tool Worku Sawing & quenchingmachine 4.6 1.9 Isatrument Machine Tool Works Electric discharge wire cutter 8.6 3.5 Natal Fond= nrteDrise

Bydraulic Press No. 1 General Works Hydraulic press 300-1,000 tOes 77.5 31.7 Hydrauic Press No. 2 General Works Small Press 7.2 2.9 Foundry Works Casting Grinder Factory Foundry Casting GrI*dina Entererise Grinder Machine ain Workshop Surface grinder 20.8 8.5 Accessory Interurise Machine Tools Optical Instrumeat Works Optical measuring tools 4.3 1.8 Electromagnetic Plateu Work. Electromagnetic table 1.4 0.6 Machine Tool Accessory Works Machine cutting tools a clapso 4.2 1.7 Component Jig Works Clamp set 8.9 3.6 Grinding Wheel Work Grindia g wheel 18.2 7.5 Transmissin Works Ball screw 3.5 1.4

Total 244.8 _00.0 - 66 - ANNE S

CHINRA

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

ConstructionMachinery Subsector

Backzround and Organization

1. Since the beginning of China's open door policy in the early 1980s the constructionindustry has undergone a period of substantialchange in size and scope. Large-scaleinfrastructure projects are no longer constructedby mobilizing legions of workers. China is now building high speed roadways, containerizedport facilitiesand internationalairports that require advanced constructiontechniques and equipment. China's constructionequipment industry now has an opportunityto build a manufacturingcapacity to meet its domestic requirementsand further consolidatethe productionbase to develop comparativeadvantage in export markets.

2. Tianjin is one of the ten major regions of China producing construction equipment, and it has a strong base for improving its domestic and international competitiveness. Tianjin'sconstruction equipment subsectoris more productive than the national average as measured by sales per employee IY 17,000 per worker versus Y 13,500 per worker). Also, the average sales per enterprise in Tianjin is much higher (Y 21 million) compared to the national average (Y 6.6 million). The subsectoris representedby 11 enterprises, 10,900 employees,Y 72 million in net fixed assets and Y 290 million in sales (1991 figures) (Attachment1). The enterprisesinclude four major manufacturers, two for earth moving equipment,one for material handling equipmentand one for key parts/components,i.e., diesel engines;which are responsiblefor 79.2 percent of net fixed assets and 86.7 percent of sales of the subsector.l/ A few small producers of components/parts,lifting equipment,building material equipment and service/repairsupport are also included in the subsector.

Performanceof the Subsector

3. During 1987-91,total sales of Tianjin'sconstruction equipment industry increasedat an average annual rate of 9.2 percent. In terms of individualmajor equipments,the growth rates were higher for motor graders (11.0 percent) and forklifts (8.5 percent) and lower for diesel engines (4.4 percent), crawler dozers (-8.3 percent), and wheel loaders (-4.0 percent). (The figures are based on sale by numbers.) A comparisonof Tisnjin's national market share of major products during 1987 and 1991 shows an increase for motor graders, forkliftsand diesel engines, and decline for crawler dozers and wheel loaders. The followingtable shows the relative shift over the period.

1/ The four major enterprisesof the subsector are: Tianjin Engineering Machine Factory (TEMP);Tianjin ConstructionMachine Factory (TCMF); Tianjin Forklift Factory (T?m); and Tianjin Engine Works (TEW). -67 -

TIANJIN CONSTRUCTIONEQUIPMENT SUBSECTOR--TRENDS IN MARKET SHARE OF MAJOREQUIPMENT

Item Total Tianjinsales Tianjin'smarket share (no. of units) (1 1987 1991 1987 1991

Motor graders 102 155 56.0 82.0 Dieselengines 2,644 3,145 7.6 9.0 Forklifttrucks 758 1,050 6.0 8.0 Crawlerdozers 382 270 13.0 9.0 Wheel loaders 47 40 0.7 0.4

The share of Tianjinin China'sexports in 1991was 100 percentfor motor grader.,8 percentfor dieselengines and 5.5 percentfor forklifts.There were no exportsof crawlerdozers and wheel loaders. Tianjinhas a virtual monopolyin China in the manufactureof motor graders. The only otherpoten- tial producer is Changehunwhere one companyhas begun to importSKD kits from German manufacturer (Boukema). Tianjin ranks third in the Chinese market for dieselengines. 4. Tianjin'sconstruction equipment subsector has a strongproduction base. However,its competitivenessand growthof marketshare is constrained by the lack of economiesof scale,vertical integration of productlines, low capitalequipment utilization with resultanthigh productioncosts, inadequate diffusionof importedtechnology, lack of leveragein supplyrelationships to obtaincost and deliveryadvantage in procurementof raw materialsand components,inadequate allocation of resourceswhere Tianjinhas comparativeadvantage and the lack of market-drivenproduct development. The improvementof subsector'scompetitiveness would requirereorientation of productionand marketingstrategies, transformation of subsectororganization to respondto marketsignals efficiently, upgrading technology and equipmentand strengthening of organizationand managementcapabilities. Because of the national characterof the subsector,Tianjin's restructuring and developmentprograms shouldconsider joint relationshipwith othernational manufacturers who have alreadydeveloped technology linkages with reputedforeign manufacturers.

MarketDevelooment 5. The Chineseconstruction equipment industry 21 has grown at 16 percent per year since 1984. The overallgrowth in the manufactureof five principal end productmarkets, has averagedabout 20 percentper annum over

21 This includesexcavating equipment, shovel equipment, hoisting/compact- ing/foundation/buildingrenovation/municipal/military construction equipment, railroadequipment, road surfacingequipment, industrial vehicles and pneumatic tools. - 68- ANNEX

1986-91. Exports have also increased from insignificant levels while imports have remainedstable during the past threeyears. The followingtable shows the product-wiseposition.

CHINESE MAE=T FORMANN CONSTRUCTION EQUIPMENT

Equipmeat Production ExDorts Imports Aunarent market 1991 CAGR (2) 1991 CAGR (2) 1991 CAGR(t) 1991 CAGR (X) (Y M) (1986-91) (Y M) (1986-91) (1 K) (1986-91) (T M) (1986-91)

Bulldozers 1,003 23.2 93 56.8 78 23.8 988 21.3 Diesel engines 770 11.2 35 42.6 8S 18.6 770 10.6 Forklifts 874 11.1 69 48.6 125 27.0 940 11.3 Motor graders 66 32.6 2 26.0 17 12.9 71 26.6 Wheel loaders 1,377 19.2 23 78.1 52 t-)3.0 1,406 17.6

6. The future market size for construction equipment will be influenced by infrastructure development, capital investment at the enterprise level and the overall growth in economy. One of the main users of construction equipment is the roads and highway sector. In the Eighth Five Year Plan, the nationalroad systemis projectedto increaseby 100,000km of which 1,000km will be high speed roadways. The existing roadways to the tune of 30,000 km will also be renovatedand upgraded. Special attentionwill be given to the developmentof mining industrywhich is a large user of constructionequipment. The increase in freight transport should generate greater demand for material handling equipment. With this background,the projected Chinese market growth rates through the year 2000 are 19 percent for motor graders, 9-10 percent for diesel engines, 8-10 percent for forklifts,7 percent for crawler dozers and 6-7 percent for wheel loaders.

7. The global market size for the major constructionequipment exceeds $38 billion, comprisingof approximately$8.8 billion for crawler dozers, $7.4 billion for motor graders, $6.5 billion for wheel loaders, $6.6 billion for forklifts and $4.7 billion for diesel engines. The market is dominatedby two major companies,Caterpillar and Komatsu,with a combined share of nearly 70 percent which is expected to increase to about 80 percent by 1995. During the decade of the 1980s, a wave of bankruptcies,consolidation and joint ventures swept the world constructionequipment industry In which only six major competitorsremained in competitiveposition which apart from Caterpillarand Komatsu includeJohn Deere, Case, Champion and Fiat Allis. Strategic alliances among industry participantshave contributedto the globalizationpro- cess. These alliancesprovide for horizontalintegration of products, full scale merger or sharing of resources,more effectivemarket coverage, greater value added for end users and reinforcedfinancial strength for manufacturing enterprises. With global overcapacityand fierce competition,only companies with versatile product range, high quality product lines and economic production scales supportedby extensive dealer network and after sales support are able to compete in the internationalmarket. The two major manufacturers, viz. Caterpillarand Komatsu, have comprehensivemarketing plans to pose a challenge to Chinese manufacturersin their own market. Both corporations have developedlocal sales and service networks and extensive technology transfer relationships with key Chinese manufacturers. A strategy similar to - 69 - ANNEX 5 the foregoingwould have to be adoptedby Tianjinto face competitionand improveits positionin the constructionequipment subsector. SubsectorCatabilities and Comuetitiveness 8. The world leadingproducers of constructionequipment have product development,manufacturing, marketing and distributionat a very large scale. Consequently,the developmentof this industryin Chinahas to achieveecono- mic levelof operationthrough product specialization and Tianjin'sefforts in this area shouldbe directedat interregionalcollaboration. 9. An analysisof Tianjin'ssubsector capabilities and competitiveness indicateslack of productfocus; satiquated product and processtechnologies for the majorityof products;suboptimal domestic and exportpricing; inade- quateprofessional marketing, distribution and aftersales support; limited productdevelopment capabilities; low productionscales (well below economic levels);inefficient subsector organization; excessive costs particularly related to inventories and material scraps; narrow technical relationships and inefficient absorption, adaptation and commercialization of technologies. For instancein motor graderproduction where Tianjinholds virtualmonopoly in China, the technology imported from Orenstein and Koppel of Germany about six years back has not yet been properlyabsorbed and commercialized.The present manufacturing scale is also not economical. Development of other product lines such as crawler dozers, wheel loadetrs, diesel engines and forklifts wouldnecessitate additional technology transfer/joint collaboration c-upled with sharing of productionwith local partners. Special emphasis needs to be given to decreasingscrap ratesin productionshops, lowering inventories and increasingoverall resource utilization. Tianjin should also seek less expen- sive suppliesof materialsand betterleverage with suppliersof compo- uentslpartssuch as heavy duty castings,hydraulic sub-assemblies, etc. Pric- ing policiesmust take into accountthe true cost of resourcesto the economy.

Restructuring peeds 10. Despitethe constraintsunder which Tianjin's construction equipment subsectorhas been operating,it has a strongbase for improvingits position. Tianjincurrently enjoys a leadingposition in motorgraders; a significant positionin dieselengines; foreign technical relationships for motor graders, crawlerdozers and forklifts;proximity to researchinstitutes and infrastructure for manufacturing.The subsector,however, faces many constraints (paras.4 and 9) which have resultedin: (a) decliningmarket share for three of the five major productsof the subsector;(b) insufficientfunds for future investments;(c) poor productdevelopment 31; and (d) low exportcapabil- ity. An intensiverestructuring of the subsectoris neededto introducean integratednational subsector encompassing strategic alliances at regional levelo,modern corporate structure and systems,upgraded technology, productivityand productquality, lower manufacturing costs and bettermarket prospects. These changes will allow the subsector to regain and enhance its

I/ Majorityof the new productsPY 250 and F seriesmotor graders,245 engine,D60 and D65 crawlerdozer., etc., have not progressedbeyond trialproduction stage). - 70 - MME domeosticmarket share,build up sustainableexports and achievehigh levelsof profitability.A comprehensiverestructuring plan thereforehas been developed for the subsectorby the TianjinMachinery Industry Bureau and the TianjinPlanning Commission with the assistanceof internationalconsultants. The plan consistsof changesin the organizationalstructure, product and marketstrategies and operationalstrategy and is reflectedin Tianjingovern- ment'sdevelopment program and strategiesfor the five subsectors.

InvestmentPlan 11. Consultantshave estimatedthat total Investmentfor the subsector restructuringwould be about $135million ($71 million in foreigncurrency and Y 350 millionin local currency). -71 -AE 5 Attacbment 1

IANJIN LI IL DIEVELOPMETPROJECT

ConstructonBadplunnt Subsector

S of 1991 Groups Products sales EZterprises

Construction equipsent Crawler dozer 22.51 TJ Construction Machinery factory (TCMF) Motor grader Wheel loader 16.00 TJ Engineering Machinery Factory (TEOF)

Concrete omxer 1.84 TJ Mixer Works Subtotal 40 35 Industrial equIpment Forklift 15.90 TJ Forklift Factory (TFP) Freight elevator 3.59 Jlnxiang Machinery Works Hoist and lift 1.76 TJ Hoist Works Subtotal 21.25 components Diesel engines & generators 32.80 TJ En8ine Works (TlW) Forklift axle 0.79 Nanjiao Universal Machinery Works

Hydraulic torque converter 1.47 TJ Hydraulic Macbinery Works Subtotal 35.06

Others Foundries _ Gearbox repair 0.47 No. 2 Gear Repair Works Radiator 2.87 Heat Exchange Equipment Works Subtotal 3.34 Subsector total 100.00 - 72 - ANNEX6

IIANJI INDUSTRIALDEm LOPMENTPROJECT

AutomotiveParts Subsector

Subooctorand its Performance

1. The Tianjinautomotive parts subsector is comprisedof two groupsof enterprises.The firstgroup consists of 39 enterprisesproducing a wide range of automotive partsand componentsunder the TianjinAutomotive Industry Corporation(TAIC). Outsidethe supervisionof TAIC thereis anothergroup of 17 smalland cottageenterprises which also produceautomotive parts. TAIC is a bureau-levelcorporation administered directly by the TianjinMunicipal Governmentand acts as an independenteconomic entity. In additionto automotive partsproduction, TAIC has five OEM vehicleassembly operations. The partsand componentsof TAIC enterprisesinclude electricals, instruments, axles,transmissions, mechanical assemblies, etc. The secondgroup of 17 automotiveenterprises is controlledindividually by the TianjinMunicipal Government through its different bureaus. These enterprises are engaged in machinery, seving/stitching of seats, reworking rejects, and manufacturing ancillary products for automotive part enterprises under TIAC. The subsector contributes 48 percent of the total sales of the Tianjin automotive industry and employs 35,000 persons and accounts for 12 percent of total employment in the automotive parts subsector of China. Thus, Tianjin accounts for a significant portionof the nationalautomotive parts and componentssubsector. AttachmentI providesthe basic data of TAIC plantsin the subsector. 2. The Tianjinautomotive industry has experiencedsteady growth of about 16 percent duringthe 1980s. This high growthis due to largeexpansion of vehicleoutput. In 1989,TAIC total vehicle outputexceeded 46,000 units. Vehicleoutput drives automotive parts output. Thus, the totalproduction value of automotiveparts components has increasedsharply. In 1991,TAIC producedY 964 million($175 million) in automotiveparts, more than twofold increasein productioncompared to 1987. The followingtable demonstratesthe performanceof the Tianjinautomotive parts subsectorsince 1987: - 73 - ANNEX 6

TSANJIN- AUTOMOTIVEPARTS SUBSECTOR PERPORMANCE

Average annual 1987 1988 1989 1990 1991 growth ______--_---(Y million) ------(Z)

AutomotiveParts Output 430 705 767 512 964 22.4 Sales 542 988 1,040 536 956 15.2

Export 6 5 4 6 9 10.7 AutomotiveIndustry Output 950 1,442 1,522 1,703 3,205 35.5

Sales 1,159 2,073 2,127 1,784 3,177 28.7

Export 6 66 10 21 29 48.3

In 1990,Tianjin's automotive industry output value was equivalentto 6.5 percentof the total for China,but the automotiveparts subsector'sshare in total outputvalue of Chinawas 8.7 percent. 3. About two thirdsof componentsmanufactured by TAIC are sold internally. The marketdistribution for two major categoriesof automotiveparts is very distinct. Ninetypercent of the sales of enginesin 1989 took place withinthe automotiveindustry whereas remaining automotive parts accounted for only 35 percent;an additionalsale of 1.5 percentfor enginesand 10 percent for remaining automotive parts. Saleswithin China other than Tianjin made up for 8.5 percent for engines and 50 percent for remaining auto parts. Exportscontributed only 5 percentof sales of automotiveparts excluding engines. Exportvalues for automotiveparts fluctuatedbetween Y 4 millionin 1986 to Y 6 millionin 1987,a year when the value of Tianjinautomotive industryexports, especially of vehicles,reached its peak. Exportof automotive parts in 1989,was directedto Japan (40 percent),US (15 percent)and EasternAsian countries(45 percent).

HarketDeveloiment 4. China'sautomotive industry experienced rapid growth in the Sixth Five-YearPlan (1981-85),but growthflattened out duringthe SeventhFive- Year Plan (1986-90).The grossoutput value of the automotiveindustry grew at an averageannual rate of 30 percent(in constantterms) between 1981 and 1985. However,since 1985 the outputvalue of the industryhas remainedthe same in constantterms. The productionvalue for automotiveparts and compo- - 74 - ANNEX 6 nentsreached Y 7.7 billion($2.1 billion) in 1988. This productionhas been about 20-30percent of the total outputvalue of the automotiveindustry since 1985,indicating vertical integration within the industry,despite its deep fragmentation.Fluctuation in vehicleproduction impacts directly on the automotivecomponents subsector. The marketdevelopment is demonstratedin the followingtable.

CHINA - AUTOMOTIVEPARTS MARKET (Y million in constant 1984 terms)

Average annual 1987 1988 1989 1990 1991 growth ----- (Y million)------(X)

Domesticoutput value 4,727 5,366 11,094 11,306 15,322 34.2 Tmports 1,254 1,079 1,291 2,283 3,152 25.9

Exports 49 88 264 438 636 89.8 Domesticconsumption 5,922 6,257 12,121 13,151 16,808 29.8 Tianjinmarket share 266 487 461 432 819 32.5

Between1984 and 1988,the totalnational demand for automotiveparts increasedby an averageof only 2 percentper year. Growthin automotive partstrade was, nevertheless,vigorous, with importsexpanding at 26 percent per year and exportsat 47 percentper year. However,the high volumeof importedautomotive parts and volattlityin the vehiclemarket combined to yielda 1 percentper year declinein the outputvalue of domesticautomotive pasts subsector. Importsjumped from 6 percentof the automotiveparts markets in 1984 to 17 percentin 1988. 5. There is a tremendousneed to strengthenthe domesticmarket position of the Tianjinautomotive parts subsector. The subsectoris severely undercapitalized.Although the productionof automotiveparts has made possible a high growthrate (20 percent)between 1984-88, its marketshare in terms of productionvalue has increasedfrom 4 percentin 1984 to only 8 percentin 1988. The price structureof Tianjinautomotive parts subsectoris very complex. There are many price tiers for automotivecomponents. Prices for automotiveparts vary widelydepending upon specificproducts. In general,domestic marketprices are oftenhigher than exportprices (for example,coil springs, radiators and horns) due to low productionvolumes and high per unit productioncosts. However,for some componentssuch as gears,ignition coils and automotivebolts, the exportprices are higherthan localmarket prices, indicatinggood exportpotential. As indicatedearlier, about two thirdsof componentsmanufactured in TAIC enterprisesare sold internally,the remaining portionis sold directlyin localmarket. Therefore,TAIC did not see the - 75 - AIMEX 6 need to developa nationalsales, distribution and servicenetwork. In order to specializeits productionand developeconomies of scalein automotive parts,Tianjin automotive parts industrymust developnew marketchannels. Developmentof salesand servicecenters is stillat an early stage and needs to be accelerated. 6. The expansionof the domesticmarket for automotiveparts duringthe 1990.wl be drivenprimarily by growthin OEM vehiclemanufacture. In 1988, the China NationalAutomotive Industry Corporation developed an overallplan for developmentof domesticautomotive production which calls for expansionof currentcapacity from 650,000vehicles in 1988to 1.2 millionvehicles in 1995 and 1.7 millionin the year 2000. The plan also calls for a shift in the programfrom mediumand heavy trucksto lighttrucks and passengercars. This strategy,if implemented, implies growth in OEM automotive parts demand of 9 percent per year between1990 and 2000, significantlyhigher than the 1.6 percentgrowth of componentdemand between 1984 and 1988. It has been estimated that the nationalcomponents market in constant1988 prices would be in the range of Y 13-16billion ($2.8-3.4 billion) in 1995. The key success factorfor Tianjinin the nationalautomotive components market during the 1990swill be the abilityto sell to the largeand growingOEM vehicleassem- blies outsideTianjin through economies of scalo,international quality and competitiveprice levels.

Spbsector CaRabilitiesand Competitiveness 7. As the automotiveparts subsectorin Tianjincompetes in fragmented markets,its productsform only 10 percentof nationaltotal and do not have a strongcompetitive position in Chinamarket. Only limitedautomotive parts such as rear axle gears,brake tubingand coil springsplay a somewhatcompet- itive role in termsof outputvolume. In order to competeefficiently, Tianjinmust expandits productionof high potentialproducts for the domestic marketplace. The main Chinesecompetitors surpass Tianjin's production by a factorof more than two. Withoutincreased production capacity, the subsector vill be unableto decreasecosts sufficientlyto penetratethe major OEMs in the domesticmarket. On the technologyfront, inadequate efforts have been made to developlocal componentsmeeting world standards.As no sigaificant investmentin researchand developmentor in acquisitionof technologyhas been made so far, Tianjinmust rely on foreigntechnical relationships for new productand processtechnologies. Although Tianjin has a licensefor zomplete vehicletechnology through its relationshipwith Daihatsu,none of the automotive parts enterprisesreported a directlicensing arrangement with Daihatsu or any other of its suppliers.Tianjin relationships are just starting. It has recentlyestablished a jointventure to manufacturefilters and few other products,but these investmentscomprise only a fractionof the subsector. Attractingnew foreigninvestment from foreigncomponent manufactures will be difficultas many domesticcomponents manufactures in China are competingfor foreigncollaborations.

8. Qualityof inputsdirectly affects the cost and qualityof manufac- turedproducts. In this regard,the high proportionof costs allocatedto materialand energy,greater shortages of inputs,and low scale of production add to a low degreeof competitiveness.At present,there are only a few individualproducts, where Tianjincan reacha minimumefficient scale, given - 76 - AM L 6 the projected domestic demand of such products in 1995. In order to broaden its product range with economic scale, Tianjin would have to export a substantial share of its production. Although Tianjin has three automotive technology research institutes,none of them specializes in automotive parts, but on the whole the existing lnfrsstructuresupport can be well developed in the contextof Tianjinautomotive parts development.These weaknesses need to be addressedin a successfulrestructuring progrsm.

Restructurina Need 9. Broadmeasures are necessaryto overcomethe subsector'sweaknesses. These includes competitiveproduct systems; increased capacities to reach minimumeconomic scale; improved efficiency and productivity;imported tech- nologieststrengthened marketing and commercialrelationship; and efficient subsectororganization. 7TG In consultationwith foreignconsultants has developeda restructuring plan which foresees improved subsector competitiveness in domesticand exportmarkets, and high comparativeadvantage of potential products and is reflected in Tianjin Government's development program and strategiesfor the five subsectors.

InvestmentPlan 10. Consultantshave estimatedthat the total investmentfor the subsector restructuringwould be about $71 million($55 million in foreigncurrency and Y 85 millionin local currency). - 77 - hUANNEXL6 Attacbment I

IAIL DDUSIRI4 DEVELOPT PROJECT

Automotive Parts Subsector .~~~C t

S of 1991 1991 Subeyti prduct Enterprise sales sales (Y 1,000)

1. Drive Train 24.57 Axle S differential bhmaing Auto Axle Works 65,500 10.80 for Daita van & truck Gearbox S bevl g"rs Auto Gear Works 46,000 7.59 Axle G ifferetlal housing Du and Van Axle Works 23,600 3.89 for 8afeg m cha. rdo he suport Propeller *haft Auto TransmissionShaft 13,900 2.29 Works

2. Auto glse- 13.72 trical Ignition coil Ignltion Coil Works 19,490 3.21 tvitch a hor, Transportation Equipment 18,707 3.08 Works Wiper & washer Auto Wiper Work. 13,320 2.20 Regulator& distributor Auto ElectricEquipment 11,200 1.85 Works Magneto, fan motor S magnet MagneticMotor Works 11,190 1.85 clutch Startet & generator Englne Electric Machine 9,280 1.53 Works

3. ngine Parts 13.47 Water pump Water Pump Works 30,450 5.02 Radiator RadiatorWorks 17,161 2.83 Piaton PistonWork. 10,250 1.69 Rimg & thermostat Piston RIng Works 7,938 1.31 Oil p_p, bolt & nut InternalCombustion Engine 6,800 31.12 Nut Works Piston pln, valves Internal Combustion Enlgne 6,280 1.00 Attachbent Works Connecting rod Connecting Rod Works 2,860 0.47

4. Interior 11.72 Trim Seating & iterior trm Auto Trim Work. 68,000 11.21 Sunshade board Bo. 4 Auto AccessoryWorks 3,100 0.51

S. rake 8.38 Band brake No. 2 Auto AccessoryWorks 24,700 4.07 Urake cylinders, clutch No. 5 Auto AccessoryWorks 13,600 2.24 Bra"e line Auto Brake loes Works 6,900 1.14 lond brtke line Auto Flexibleshaft Works 5,600 0.93 6. Suspeonson 7.03 Leaf spring Leaf Spring Works 19,734 3.25 Sbocks Auto Shock AbsorberWorks 17,600 2.90 Coil sprig Auto Spring Works 5,308 0.88 7. Wheel Auto vbel Auto Wheel Factory 41,250 6.80 - 78 - ANN 6 Attachment 1

Z of 1991 1991 subsystem Product Enterprise sales sales (Y 1,000)

8. Others 3.36 Auto lock Auto Look Works 11,930 1.97 Iron casting piece Auto Foundry Works 4,700 0.78 Precise casting plece Auto PrecisionFoundry 3,720 0.61 Works 9. Steering 3.13 Steeringgear SteeraingGear Works 10,800 1.78 Steeringvheel Auto Plastic Part Works 8,200 1.35

10. LightIng Auto lamp Auto Lamp Works 15,264 2.52 11. Fuel 2.46 uel pump Fuel Pmp Works 5,800 0.96 Carburetor Auto CarburetorWorks 5,400 0.89 Oil & fuel filter Oil FilterWorks 2,400 0.40 Air filter Auto Air FilterWorks 1,300 0.21 12. Instrument Auto Instrument Auto InstrumentWorks 10,400 1.72 13. Clutch Clutch assembly No. 1 Auto AccessoryWorks 6,780 1.12 14. Body OEM 0 0 15. Chassis OEM 0 0 16. Exhaust OE 0 0 17. Air con- Outsourced 0 0 ditioning 18. Battery Outsourced 0 0 Charging System 19. Audio Sys- Outsourced 0 0 tem Total 606.412 100.00 - 79 - AMEL 7

TNAMEININDUSTRIAL DEVIELOPHENT PROJECT

ElectronicsComponents Subsector

Organization and Performance 1. The electronicscomponents subsector is a part of the electronics industry. It includespassive electronics components J/ but excludesactive electronicscomponents such as transistorsand integratedcircuits, etc., as well as electricalscomponents. The electronicsindustry is managedby the TianjinElectronics and InstrumentsAdministration Bureau which includes198 enterprisesand employsabout 100,000persons. These enterprisesare organized in 40 group companieswhich reportdirectly to the Bureau. The group companieshave overallfinancial and planningcontrol of their enterprises, but the individualenterprises maintain separate management functions and some autonomyin decisionmaking relating to productdevelopment, process technology,personnel, sales and marketing,etc. These group companieshave a strongadministrative relationship with the Bureauwhich has recently made plans to merge them into one corporationwith each of the 40 companies reporting to product-specific business units. 2. The passivecomponents subsector has 12 enterprises which employed 20,000persons in 1991. The subsectorhad a total sale of Y 145 millionin 1991. Attachment1 showsthe main productsand sales of individualenterprises. 3. Tianjin'spassive components subsector is only 3.2 percentof the nationalpassive components industry, measured in termsof outputvalue. Althoughthe industryhas relativelysmall outputshare, it ranks fourthwhen comparedto other citiesin China and ninth,when comparedto otherprovinces. 4. The followingtable showsthe developmentof the subsectorand ite major productgroups:

XI These includes:capacitors, resistors, potentiometers, connectors and switches,control devices, transformers and magneticdevices, speaker and acoustic devices, and crystal devices. - 80 - AMIh 7

TIAWJIN: ELECTRONICPASSIVE COMPONENTS SUSSECTOR

1987 1988 1989 1990 1991

Volumeo'. Production (million pieces) Capacitors 200.2 226.3 189.7 265.6 250.9 Resistors/potentiometers 498.3 602.3 487.4 461.0 603.6 Connectors/switches 40.2 51.4 41.3 42.1 39.4 Control devices 3.0 4.4 n.ea. UO& nae* Transformers/magneticdevices 29.6 43.8 39.5 43.8 59.3 Speakers/acousticdevices 6.6 7.5 4.4 4.1 4.4 Crystaldevices 8.2 10.5 11.7 10.2 12.7

Tianjin'spassive components subsector has experienceda marginalerosion in domesticmarket share (from4 percentin 1988 to about 3.2 percentIn 1991) owing to a fasterpace of expansionof the electronicsIndustry in some other provinces.Tianjin's passive components subsector, although low In output value by world standards,has fairlylarge-sized capacity eompared to the nationallevel.

Market Development 5. The electronics subsector in China consistsof over 3,000 enterprises employing approximately 1.5 million people. The production of passive components in 1991 was valued at about Y 5 billion. Capacitors, acoustic assemblies, and resistors are the three largest segments of the Industrycon- tributing33 percent, 23 percent and 10 percent respectively of the total passive components market. China has a strongdomestic market capability for the passive components. It has developed rapidly and resulted in substantial import substitution and enhanced potential for exports. The national market situation1988 was as follows: CHINA- MARKETFOR SELECTIVEPASSIVE COMPONENTS, 1991 ($ million)

Production Imports Exports

Aluminum electrolytic capacitors 167.8 no&* 48.2 Fixed resistors ) 324.0 nuas 31.1 Potentiometersresistors )

China has been able to develop electronics industry to substantially meet domestic demandfor passive components. However, the Industry suffers from many problems, Including fragmented production, lack of specialization, exces- -8- A 7

sive vertical Integration, low labor productivity, uneven product quality, and low technological capability.

6. While there Is severe fragmentation at the enterprise level, the Chinese market is consolidated in geographical terms. Enterprises in Jiangsu, Guangdong, Shanghai, Beijing and Tianjin produce about 70 percent of the major pas8ive components. Regions such as Jiangsu and Guangdong have grown more rapidly and produe- a selected variety of products at higher production volumes with new equipment and facilities, and have taken the leadership role in productionof major passivecomponents.

7. Globally,the passivecomponent industry has been experiencinga stable,if not declining,market. The largestsegments are connectors,wire and cables,capacitors, transformers and resistors.In the US market,these five componentsrepresent 80 percentof totalpassive component sales. Over the last ten years,new technologiesin resistorsand capacitorshave started penetratingthe globalmarket. Thesetechnologies have alteredthe economics of electronicassembly manufacturing. Industrialized countries have takenthe lead in the productionof thesetechnological products and the globalmarket conditionshave becomehighly competitive. In order to penetrate the export market,China has to make tremendousefforts to developeconomies of scale, bring product quality to International standard, and introduce modern and reliable technologies.

Tianlin's SubsectorCanabilities and Constraints

8. As mentionedabove, Tianjin's passive components subsector has a relativelysmall market share, which has declinedslightly in recentyears. The diversifiedproduct range of Tianjin'spassive component industry does not allowTianjin to play a majorrole in any of the majorproducts except leaded resistorswhere Tianjinoccupies about 7 percentof nationalmarket and is the market leader, thus providing a production volume advantage over other Chinese provinces. Tianjin ranks fourth in capacitors, however, it has the potential to build strongconsolidated production. While restructuring,consolidation, and upgradingof leadedcomponent production is an importantpriority for Tianjin,it shouldstart the developmentof surfacemounted technology (SMT) components which are going to rapidly replace leaded components in world markets. In the globalmarket, Tianjin is poorlypositioned to competeeffec- tively. It has achievedsome exportsuccess in leadedresistors but it has been at relativelylow-volume levels. The relativelylarge size of the domestic marketwould be an importantfactor for Tianjinin determininglong-term exportpotential. It can gain competitiveadvantage from the largesize of domestic leaded components markets, provided it restructuresits industryand increases its domestic market share significantly. Also, the relationship with foreign companies for equipment purchases and technology acquisition needs to be strengthened for products in which Tianjin has strong potential to increaseits competitiveposition, both in domesticand exportmarkets. 9. Tianjinenterprises do not meet world standardsin production scale. For example,Tianjin Radio Components Factory No. 9 produces500 million resistorsannually whereas a typicalresistor plant outside China pro- duces1.5-2 billion pieces annually and largeplants produce as many as 8 billion pieces annually. In additionto technologicallybackward operation - 82 - ANNEX 7

processes,manufacturing is hamperedby poorlymaintained and outdatedprocess equipment.Besides, the subsectorsuffers from inadequatemanagement systems and marketingnetworks. As a resultof the aboveweaknesses, subsector products are not cost effecientand competitive. RestructuringNeeds 10. Despitethe above-mentionedweakness, Tianjin offers strong development potentialfor electronicsbecause of an establishedindustrial base, significantcapital investment in electronicsover the past 10 years,growing interestof foreigninvestors, support from the centraland municipalgovern- ments,and its coastallocation. An efficientrestructuring of the subsector vould introducemodern structures, upgraded and high technologicalproducts and modernmanufacturing techniques. These changeswill allow the subsector to regainand expandits domesticmarket share, build up exports,and achieve profitabilityfor futureinvestments. Consultants have preparedcomprehensive restructuringplans to accelerateTianjin's development of passivecomponents and theseare reflectedin Tianjingovernment's development program and strategies for the five subsectors. InvestmentPlan II. Consultantshave estimatedthat the totalinvestment for the subsector restructuringwould be about $44 million($36 million in foreigncurrency and Y 45 millionin local currency). - 83 - AM 7 Attacbment

TUIJIN IDUSTRIAL DEVELOPMENTPROJEC

Passive Comnonep_tsSubsector

1991 sales 2 of 1991 Product Enterprise (Y'000) sales

1. Capacitor 58,177 40.07 1.1 Alwmnm electrolytic capacitor 32,103 22.11 Ti Radlo Component Works No. 14 22,839 15.76 Ti Radio Component Works No. 1 8,356 5.75 Ti Radio Component Works No. 12 928 0.60

1.2 Variable capacitor Ti Radio Component Works No. 2 18,664 12.88

1.3 Monolithic/ceramic disc capacitor 6.018 4.13 Ti Radio Component Works No. 15 4,803 3.30 XEsTong Resistor Company 1,000 0.69 Ti Radio Component Works No. 20 215 0.14

1.4 Thin film capacitor Ti Radio Component Works No. 16 1,392 0.95

2. Delay llne TJ Radio Component Works No. 6 28,862 19.90

3. Film resistor 19,119 13.18 TJ Radio Component Works No. 9 14,317 9.87 XinTong Resistor Company 4,802 3.31

4. Potentiomerer TJ Radio Component Works No. 10 14,749 10.17

S. Inductor, transformer TJ Radio Component Works No. 3 12,040 8.31

6. Others Electronic Component Set Sales Company 11,924 8.22

Total 145.035 .00.00 - 84 - ANNEX 8

TIANJIN INDUSTRIALDEVELOPMENT PROJECT

Electric Motors Subsector

Backgroundand Organization

1. China'selectrical machinery industry has a historyof over 70 years. There are more than 900 enterprisesmanufacturing electrical machinery in China. Of these,397 enterprisesincluding 286 electricmotor manufacturing works are underMMEI. These270 enterpriseshad over 200,000employees andfixed assets of Y 2,578million ($507 million) in 1991. The nationaloutput of AC motors in 1988was 34,000MW and increasedat the rate of 9 percent per year from 1985 to 1988. Small-and medium-sizedAC motorscontributed to 62 percentof this output. 2. The geographicaldistribution of electricmotors production in China is as follows: Percentof nationaloutput East S0 South-center 29 southwest 12 Northwest 9 3. The Tianjin electrical machinery industry is over 40 years old. It began with a number of small repair shops engaged in the rewinding of electric motors,and graduallydeveloped into an electricmotor manufacturingindustry. In 1991,the industryemployed 3,000 workers and had sales revenuesof Y 75 million($19 million), with fixedassets of Y 50 million($8 million). Its totaloutput was 540 MW. 4. Withinthe electricmotor subsector, there are four enterprises,of which the largestis DamingElectrical Machinery Corporation (DEMC). The otherthree enterprisesare operatingas collectives.DEEC has over 80 percentof the subsector'soutput and 68 percentof its employees.Further discussionon this subsectorwould be limitedto DEMC. Performance

S. DEMC was establishedin 1952 and produceselectric motors from 0.5 kW to 18.5 kW. DEEC'ssales revenues grew at an averageannual rate of over 13 percentfrom 1987 to 1991. In 1991,DEMC's sales were Y 52 million ($9 million)and fixed assetsY 23 million($5 million),with 1,768employees. DEMC'sexports grew rapidlyfrom 1985 and reacheda level of $2.7 millionin 1989,representing 40 percentof its outputin physicalterms (152MW out of a total productionof 382 MW). In the past two years,however, exports have -85 - ANM a

declined. In 1986, DEMCwas recognized as an exportingenterprise and permit- ted to retain a obareof its foreign exchange earnings. 6. The domesticmarket for electricmotors in the 0.5-18.5kW range is served by a large number of manufacturers. Although the primary focus of thesemanufacturers is to meet the requirementsof their regional markets, they are increasingly serving marketsbeyond their own region. Due to the very large numberof enterprisesengaged in this field, and the resulting fragmentedmarket structure, none of the electricmotor manufacturers has a dominantmarket share. It is evidentfrom Table 1, which representsthe overall marketshares in the domesticmarket of China'sleading electric motor manufacturers. Table It DOMESTICMARRET SHARES 01 ELECTRIC MOTORMANUFACTURERS

Name of enterprise Percentmarket share

DalianMotor Factory 5.60 BeijingMotor Factory 4.72 Xian Motor Factory 3.20 ShanghaiYuejin Motor Factory 2.20 BachanMotor Factory 2.10 Hebei Motor Factory 1.80 Daming Electric Motor Factory(DEMC) 1.65

DBMC is not in a position to meet the total requirements of motors in Tianjin due to its limitedproduction capacity.

7. DEMC's manufacturing equipment and product technology lag considerably behindcurrent international standards. Some domesticmanufacturers such as Shanghai Yuejin Motor Factory have entered into technology-transfer agreements with foreign manufacturers (Yuejin with ABB), and have betterdesigns and productionfacilities. DEMC's capacity of around400 motorsper day placesit at the lower end of the economicscale for manufacturingmotors of 0.5-18.5kW size.

Market Develoiment 8. The global market for electric motors increased at an annualrate .-f 3 percentduring the 1980s. The growthrate in Chinawas much higherwith an annualgrowth of over 8 percent. In lin with the projected growth in industrial development in China, a similar growth rate is projected for the next decade. China leads Japan In total outputof electricmotors.

9. Global imports of electric motors of all sizes is over $7 billion, with the European Community accounting for over 30 percentof the total. For Chinese manufacturers, Hong Kong, which accounts for 2 percent of the world trade in electricmotors ($140 million), currently provides the largestpoten- tial market. Hong Kong'simports of motorsfrom China representednearly -86 - ANNEX8

40 percentof all its imports($59 million). Of this, importof electric motorsof smallersizes from China to Hong Kong was $9 million. DENC exported $2.7 millionof these smallmotors to Hong Kong in 1989. 10. BesidesHong Kong, the four SoutheastAsian countries--Singapore, Malaysia,Thailand and Philippines--arelarge importersof electricmotors with importsaveraging over $200 millionannually. Thus, the electricmotor industryin China has a good potentialfor continuedgrowth to meet the requirementsof the rapidlygrowing domestic market and for exports,particularly to SoutheastAsian countries. DEMC'sCavabilities and Compoetitiveness 11. DEMC manufacturesthe Y-seriesAC motors. The ChineseY-series motor is a unifieddesign developed by the ShanghaiElectric Science Research Institute.The motor conformsto IEC standardsand its performancein terms of efficiency and power factors compares favorably vith European designs. However, its design is nearly 30 to 40 percent heavier than the comparable designsof world leadersin this industry. It is also slightlymore noisy in operation. 12. To increaseits potentialfor exportsin marketsother than South- east Asia, DEMC needs to manufacturenot only motorsof updateddesigns, but also to NEMA standardsand suitablefor 60 Hertz applications(for North Americanmarkets). The presentinsulation in the motorsrestricts their use to applicationsin which the temperaturerise is less than 45°C and needs to be upgraded.

13. DEMC'smanufacturing technology dates to the early1960.. It is characterizedby the use of strip stock to make laminationsin single-stroke presses;general-purpose machine tools; labor-intensive operations; simplistic productionand inventorycontrols; and inadequatequality control. Its current scale of operationsis on the low side. Plantmanagement is weak in some key areas. 14. DEMC has been able to exportits productsby accepting20 to 30 percent lowerprices than the better-qualitymotors of similarspecifications. DEMC'sprices in the domesticmarket are competitive.

15. Due to its outdatedmanufacturing facilities, DEMC has a 5 percent higherratio of manufacturingcost to salesrevenue compared with competitors such as ShanghaiYuejin. The low salesrealization and highermanufacturing costshave had an adverseimpact on DEMC'sfinancial performance. RestructurinANeeds 16. Almostall the input resourcesrequired for the manufactureof electricmotors are availablefrom domesticsources. With the right designs,productionfacilities and manpower,the manufactureof motorsof small size,due to their relatively low international price, should provide a potential for comparative advantage to China. This arises from the very low costs incurred in personnel expenses in China. - 87 - ANNEX 8

17. The projectedgrowth rates ln the domesticand exportmarkets provide an opportunityfor DEMC for profitableexpansion of its operations.How- ever, thiswould be possibleonly throudhan intensiverestructuring of the enterprise.A completerevamping of productionfacilities, product designs and managerialstructure is consideredessential for successfulrestructuring. These factors point to the need for associating a strong joint-venturepartner who would not only bring in the investment,but would providethe management, productdesigns and manufacturingtechnology and equipments,as well as access to globalmarkets. The latteris necessaryif DEMC is to operateat an economic level. The proposedrestructuring plan for DEMC preparedby consultants takes the above factorsinto accountand is reflectedin Tianjingovernment's developmentprogram and strategyfor the five subsectors. lnvestmentPlan 18. Consultantshave estimatedthe total investmentfor restructuringat about $19 million($16 million in foreigncurrency and Y 16 millionlocal currency). - 88 - ANNEXM4

TIANJIN INDUSTRIALDKVELOPNENT PROJECT

Institutlonal Infrastuguture and its Develooment Program

A. Backaround l. In additionto the assistanceto be provided by TIDP for the overall restructuring of the five subsectors,the projectwill assistin the development of supportinstitutions throughthe establishmentof TechnicalCenters in new corporations and the strengthening of Vocational Training Institutions in selected subsectors. 2. The establishmentof TechnicalCenters will strengthen the ability of the subsectors to absorbforeign technology and would lay the foundation for self-sustainingtechnological growth. In addition, these centers would assist the top managementof the subsectors'corporations in the development and implementation of related engineering and management systems, which would enhance their operational performance and internationalcompetitiveness. The goal is to create"centers of excellence'which act as catalyticagents to facilitatethe managementof manychanges associated with restructuringopera- tions. In order to give due recognition to the importance of the role of the TechnicalCenter, the Read of the TechnicalCenter would be responsibleto the Presidentof the Corporation. 3. Tianjinis well-endowedin terms of vocationaltraining at the pre- employmentstage and on-the-jobtraining. There is, however,need for ratio- nalizationand strengtheningof these institutionsrather than the settingup of new trainingfacilities.

4. The recommendations relating to the design of Technical Centers and the strengthening of Vocational TrainingInstitutions have been developed jointly by the subsectors and the consultants, and revieved by Bank staff.

B. Concent of Technical Centers 5. The principalfunction of TechnicalCenters is to providesupport servicesin the followingareas: * technologyabsorption, product engineering and development

e processand systemsdevelopment

* information and planning systems 6. Technologv Absorption. Product Eniineerins and Development_. The primaryobjective is to acceleratethe absorptionand applicationof technologies acquired under technology transfer and joint-venture agreements and to keep abreast of new technical developments in subsectoral products. Research staff and technical specialists at the centers vould provide services in areas - 89 - ANX 9

such as stressanalysis, modeling, dynamices and vibration,tribology and wear, hydraulics,fatigue systems, materials and metallurgy,etc., as may be relevant to the designof the subsector'sproducts.

7. The Head of the TechnicalCenter would establishstrong linkages and rapportwith nationaland regionalresearch institutes, especially those in the Tianjin-Beijingarea. He/shewould ensurethat the servicesand facilities availableat theseinstitutes are appropriatelyutilized, thus avoiding duplicationand achievingcost-effectiveness.

8. The existingdesign institutes within the subsectorenterprises would continueto operateat theirpresent locations. At present,these designinstitutes are mainlyengaged in productperformance and test work. Some of the laboratoryequipment proposed to be acquiredby a TochnicalCenter may be physicallylocated within the enterprisedesign institutes if such locationwould lead to more effectiveutilization of this equipment.To ensurecoordination of productdevelopment activities, the Head of the enterprisedesign institute would reporton a functionalbasis to the Head of the TechnicalCenter.

9. Processand SystemsDevelonment. The TechnicalCenter would assume responsibility for the development of following systems: * developing CAD/CAEcapability including computer software for design applications

- developcapability for adaptationof CNC systems for machine tools maufacturedby the subsector

* establish product standards * establish quality assurance systems

* set up computer-aided machining and manufacturing process laboratory to improve productivity of CNCmachining, metal cutting, welding, etc. * establish data banks and data basesfor keepingtrack of technology developments 10. Manatement Information and Planning Systems. The TechnicalCenter will assist top management in the development of corporate strategies and operational plans. It will institute management and cost-accounting systems, keep track of competition and long-term trends and forecasts of domestic and global demands for the subsector'sproducts and collectmarket intelligence.

11. The precise range of services and activities of the respective Tech- nical Centers would be established during project implementation and would be tailor-made to the needs of each subsector corporation. 12. Technical Centers would be supported under TIDP for the machine tool, construction equipment, and auto-parts subsector corporations. In the case of electricmotors and passiveresistor and capacitorcomponents, techni- -90 - AML 9

cal centersare not being includedbecause the concernedcorporations would be establishedas jointventures with leadinginternational foreign companies. Foreignpartners normally provide the requisiteinstitutional framework for technologyabsorption and managementinformation systems. 13. TechnicalCenter Staff. The staff for the TechnicalCenter would be carefullyselected from among the best talentavailable within the subsector enterprises,regional and nationalinstitutes, and from enterprisesoutside the fivo subsectors.Rey staffmembers would be providedwith suitabletrain- ing to enablethem to performtheir functionsefficiently. 14. Investment.The projectedinvestment in TechnicalCenters is $11.50 millionin foreigncurrency and Y 25.07million in localcurrency. Detailsof theseinvestments are providedin Attachment1 to this annex. C. VocationalTraining Institutions 15. Based on the analysisof the t.ainingfacilities existing in Tianjin and withinthe enterprises,it has been concludedthat there is no need for establishingnew traininginstitutions. However, there is need for strengthening the existing training institutions. 16. It is proposed to provide equipment, teaching aids, video, slide and overheadprojectors; computer hardware and software,etc.; and books and peri- odicalsto the followingtraining institutes: * TianjinMechanical and ElectricInstitute

* MachineTools - TechnicalWorkers School - Construction Equipment - TechnicalWorkers School * ElectricMotors - Technical Workers Schooland SecondTechnical School 17. The projectedinvestment in vocationaltraining is estimatedat $300,000In foreigncurrency and Y 2.1 millionin local currency. Detailsof this estimate are providedin Attachment2 of this annex.

18. Charge-Back System for Services Rendered by TechnicalCenters and Vocational Trainint Institutes. Services provided by the above institutions would be on the basisof chargingthe beneficiariesfor the servicesrendered. The systemof appropriatecharges for respectiveservices would be established duringthe projectimplementation stage. - 91 - ANLA Attachment 1

TIANJIN INDUSTRIALDEVELOFNENT PROJECT

Develonmentof SuiDportInstitutions

A. MachineTools Subsector

1. Baketround.The nationaland regionalresearch institutions sup- portingthe machinetools subsectorare the following:

* Tianjin Gear CuttingMachine Tools Research Institute c TianjinHydraulic Press Research Institute * TianjinPrecision Grinder Research Institute * Beijing Machine Tool ResearchInstitute * Jinan Casting and Forging MachineryResearch Institute * xian MicroelectricMotor ResearchInstitute 2. Entergrise-BasedDesisn Institutes. There are four enterprise-based designinstitutes with the followingstructure:

2zistinginstitutes Location Space (M2) Staff Capability

Gear CuttingMachine Tool NO. I MT 2,700 125 * Testins and design ResearchInstitute * Computerfor cal. culationonly BranchLaboratory Beijing No. 4 MT 120 18 * Testing and design Machinery Tool Research Institute HydraulicPress Research HydraulicPress 2,100 53 * Testingand design Institute * Computerfor cal- culationonly PrecisionGriuder Research Grinder Works 550 33 * Testing and design lastitute

These institutesare mostlyengaged in designand some prototypeand modeling activities.Considering the limitedtools and facilitiesthese institutes possess,they have made some usefulcontributions in terms of new designsand developments.The Gear CuttingInstitute is designingCNC bevel-geargenera- tors and new high-speedgear shapers. In the case of hydraulicpress, the Institutehas designedlarger-size, new PC and CNC pressesfor specialappli- cationsfor powdermetal and grindingwheel applications.The BranchLabora- tory of the BeijingMachine Tool ResearchInstitute undertakes the core design of the machiningcenters produced by the No. 4 MachineTool Works,in close coordinationwith its headquartersin Beijing. In the case of grinders,the Institutewill be phasedout in linewith the productstrategy for this product. - 92 - ANNEX 9 Attachment 1

3. tachie Tool TechnicalGenter. A new technicalsupport center would be set up for the machinetools subsector and will be part of the Tianjin Machine Tools Corporation. One of the primary tasks of this center will be new product development, while the design functions will remain with divi sionalresearch institutes (such as Sear cutting,machine centers, hydraulic press and surfacegrinders).

4. The centerwill have several functions including performance testing, technical library maintenance, design optimizatiou, material testtng, engineering and manufacturing software application and development, precision measurement,certification sensing and metrology,CICIDNC and Servo application,meetings and seminar,etc. This will be a centerfor technologyabsorption,digestion and disseminationof machinetool research,design and devel- opmentandlor metal processingadvancement. It would have a staff of 60-70 pet'sons. 5. ProvosedInvestment. Details of the laboratoryequipment and other facilitiesare as followsz

$ mln Y min $ min (equiv.)

Land. EnaineeringBuildlna. Plant and Layout Land: this will be erectedin the site belongingto the vacated No. 4 MachineTool sitewhich will be eventually the site for the Machine Center Division - - - Buildings(1,000 m2) - 0.70 0.13 LaboratoryEcmuiment (Hardware) Machinetools pesformance laboratory Lab interferometerfor positionerror 0.08 High-precision(0.001-0.0001 mm) electricaland mechanical dial gauge 0.02 Electroniclevel 0.01 Vibration,acoustic tester 0.04 Generatingpath tester 0.03 Gear trainaccuracy tester 0.08 Frequencyanalyzer and variouskinds of sensor,etc. 0.10 Thermaldeformation testing system 0.15 Technical library Computer information retrieval system 0.05 Video system 0*05 Design analysis and design optimization lab Workstation 0.02 Computer for computer software development 6 sets of 80386/80486 0.12 Workstations(CAD FM,, etc.) 0.02 93 - AM1119 Attachment 1

$ mln Y mln $ miln (equiv.)

Metallurgicaland materiallab Metagraphic 0.10 Spectrometer(share with university) Precisionmeasurement, metrology and standard Laser equipment 0.08 Conventional 0.10 3D CME 0.50 CECDNCI,servo and autoemtion component application lab (thislab will only do benchmark testing. The complete machine tool application testing will be performed in the main MaehineTool Performance Lab) conventional 0 10 Test rig 0.10

Subtotal 0.45 1.30 0.69 Computer Utilization. Technical Assistance. Porelmn Technoloer. Trainina Needs Computer software (hardware Included in the equipment list 0.15 0.50 Technicalpublicatioas, trainuig software, books, subscriptions, etc. 0.20 International manufacturing society, long-term member- ship, etc* 0 20 Subtotal 0.55 0.50 0.64 Total 1.00 2.50 0.46 Contingencies 0.15 0.38 0.07 Total Investmnt 1_15 0853

S. Construction Eaui_ment Subsector 6. Background.The national and regional research Institutions sup- porting the construction oquipment subsector are the following: * Tianjin Engineering Mechinery Research Institute * Changsha Construction Equipment Research Institute * Transport Equipment Research Institute - Forklift Branch * Shanghai Internal Construction Engine Research Institute * Tianjin Forklift Research Institute * Tianjin Machine TechnologyInformation Institute - 94 - MM 9 Attachment1

* TianjinResearch Institute of ConstructionMachinery (TRICM)

7. Enterprise-BasedDesian Institute. At present, crawlers,graders and forkliftsin Tianjinhave their own designand developmentfacilities, with the followingstructures

Research Entineerint institute m Staff m! Staff Capability

Graderiloader 900 97 Design,prototype, hydraulics Crawler 900 85 Power train tests,design, hydraulics Forklift 600 46 400 58 Power train tests,test ground Dieselengine 3,700 135 Design,test lab, design(2) 386

The engineeringcapability of each of these equipmentdivisions is limitedto designand testingfunctions, based on importedproduct technology. They have some "re-engineering"capability in applyingthe importedtechnology to the extendedproduct line. The producttechnology comes from Komatsu,Balkancar, Faun,etc. Their new dieseldesign 115 seriesis influencedby John Deere and Ricardo. The TianjinForklift Research Institute is a regionalinstitute locatedat the Forkliftfactory. It is functioningas a designoffice for the Balksncar.

8. Construction EcuiDment Technical Center. The Technical Center will be set up in the ConstructionEquipment Corporation and will serve all its divisionsin the areas of engineering,manufacturing, management, marketing, cost accounting,productivity and qualitytechnologies. A commondatabase will be sharedby all unitswithin the corporation.It will form a strong (contractual)linkage with the NationalResearch Institute of Construction Machinery,and share its engineeringand laboratoryresources to the maximum extentpossible. It would have a staff of 80-90 persons. 9. The main functionsof the centerwould include: (a) Settingup a TechnicalInformation Center including market statistics and disseminatingcurrent information to the divisionsin a systematicand timelymanner. (b) DevelopingCADICAE capability including computer drawing, computer bill of materials,with commondatabase throughout the corporation. - 95 - ANN 9 Attachment1

Also, developingdesign optimization and designanalysis software for all divisions. (i) Settingup a materialdatabase and a metallurgicallab.

(ii) Setting up a corporate-widemanagement resource planning system and implementit step by step for every division. (iii) Settingup a computer-aidedmachining and processing(metal cutting,welding, etc.) lab to improvemachine productivity and productquality, especially for the new CNC machines. This softwaremodule will be eventuallyadded to the HRP II software for machineloading and scheduling. (iv) Settingup a job ".counting/productline accountingsystem; it will be addedto the ManagementInformation System to be established in all divisions step by step. (v) Settingup a corporate-widetechnology forecasting and marketing analysisfunction to assistdivisions' marketing and sales function.

(t) Working,on a contractbasis, with TianJin'sNational Research Instituteof ConstructionMachinery (TRICH) on new equipmentand components(hydraulic transmission, torque converter, electronic controls,etc.). (d) Workingwith TianjinUniversity's National Combustion Engine ResearchInstitute in the area of fuel economy,combustion development and exhaustemission reduction. (e) Providingseminar, training facilities and conferencerooms suitable for meetingwith internationalguests and advisors. - 96 - ARM 9 Attachment 1

10. ProoosedInvestment.

$ ml lnU $ Uln (equiv.)

Building (1,000 in) - 0.70 0.13 LaboratoryEquipment Test facilityfor the TechnicalCenter 0.70 0.60 0.11

Computerand softwaredevelopment laboratory TechnicalInformation Center, Workstation Software Development,testing and measuring, etc. 0.87 2.30 0.42 Technologytransfer and training 0.30 0.30 0.06

Subtotal 1.87 3.9 0.72 contingency 0.28 0.60 0.11

Total 241 4.S 0.83

C. Auto Parts Subsector 11. Backeround.The auto parts subsectoris supportedby the following national and regional institutions: * TAIC Aut motive Research Intitute. It is the R&Dcenter for the TAIC OEMcompanies. It is being consolidated and expanded. * China Automobile Technolonr Research Center. It deals with planning, tecbnology development aud manufacturing facility. TALChas used this organization for some of its production planning. The center does not conduct any product research nor any auto parts development.It reportsto local sectoralbureaus.

* Tian1in Combustion Enaine Research Institute. It is a national combustion research laboratory located at TiiijinUniversity. The lab conducts diesel combustion research, not related to TAlC or its auto parts business. * TAIC Automotive Research Institute. The present TAIC Research Institute has not been active in the development of auto parts. It has a total staff of 350 amployees with an engineering staff of 175- 180. A major expansion is being planned with an investment of Y 45 million. The Institute serves primrily the 03K. under TAIC and is unlikely to be of much support to the auto parts subsector. - 97 - AMNE Attachment1

12. TeehnicalCenters. The subsystemcorporations, in particularthe two drive train and the auto electricsubsystem corporations, would establish TechnicalCenters to facilitateproduct design and processand systemdevelop- ment.

DriveTral- TechnicalCenter 13. The technicalcapability of the presententerprises in the drive train subsystemis limitedto producingparts based on drawingsreceived from Daihatsu or from TAIC design office. R&Dcapability is limited to reengineer- ing and manufacturing based on sample parts. It is supported by TAIC's "Auto- o'bile R&DCenter." aowever, there is little evidence that this "center" is serving the auto parts subsector. 14. The proposed Technical Center will provide advanced technology and Information support needed for product R&D,manufacturing productivity, product quality, cost reduction,market forecasting, cost accounting, manufacturing input planning, integrated management information systems,etc. It will be the center for technology absorption, digestion and dissemination. It will provide multifunctional services including new product development, perfor- mnce (includingnoise) testing, life-cycle testing, process optimization, gear designsoftware development, process improvements, in-process quality controland diagnostics,etc. The major requirementof the drive train subsystemis the capability of developing quality gear box and differentials with a low sound level (86 dB), and coming close to the international standard. 15. The main functions of the center would include: (a) Providing a solid link with the National Qeav Research Institute, National Mechanical Research Institute (located in Zhenzhou) and the Gear Research Laboratory of Chongqing and Xian Jiao-Tung Universi- ties.

(b) NEtablishing a technical information center on gear design, gear processing and testing and a library on current domestic and international documents on engineering advancement and on marketing statistics. (c) Conducting product R&Dfunctions based on technical forecasts and market demand. (d) Applying CAD, structured bill of material, commonengineering and manufacturing database to all divisions of the Drive Train Corpora- tion. (e) Applying computer-aided parts processing and machine loading, product costing techniques, mmaufacturing resource planning, and management information systems uniformly and step by step to all the divisions. (f) Setting up a small material, metallurgical lab and a precision measurement, aetrology, standard lab. - 98 - AMDL9 Attacbaent1

(g) Settingup a gear box and axle test lab includingendurance, sound leveland paver losses. 16. ProoosedInvestment

$ mln Y mln $ mln (equiv.)

Buildingand location(1,000 m2) 0.70 0.13

Equipment Drive traindyno (teststand) 0.60 Torquemeter, etc. 0.10 Sound level and vibrator measurement 0.02 Materialtesting 0.11 Alignment equipment 0.08 Subtotal 0.23 0.68 0.12

Computer and software 6 sets of 80386180486 and CADsoftware 0.08 0.12 MRPII, MIS software, etc. and a workstation 0.30

Subtotal 0.08 0.42 0.08 Technical support and trainin8 needs 0.20 - 0.20 Total 0.49 1.80 0.33 Contingencies 0.06 0.25 0.05 Total 0.55 2.05 0,38

Auto-Electric Technical Center 17. Backfround. The present subsystem engineering and R&Dcapability consists mainly of making parts according to TAIC drawings or samples. Some enterprises have re-engineering capability. TAIC's R&DCenter provides very little assistance to the auto parts enterprises. 18. Technical Center. The overall functions of the Auto-Electric Tech- nical Center are similar to those described under the Drive Train Technical Center with special emphasis on the development needs of auto-electric products. Its focuswill be on the followingactivities: * product R&Dto meet market demand - 99 -M 9 Att&achment1

* absorbingand disseminatingup-to-date management, marketing, engineering,manufacturing technologies

* applyingNRP, MIS, cost accountingsystems uniformlyand step by step in the divisionsof the corporation * conductingperformance test, life cycletest, etc.

* developingdesign analysis optimization software o upgradingproduction process for productivityand quality 19. ProposedInvestment.

$ mln Y mln $ mln (equiv.)

Now building (1,000m 2) 0.70 0.13 Equipment 1.50 1.00 0.18 Computer hardware and software (6 sets of 80386180486) 0.20 Technology transfer and training 0.60 Subtotal 2.30 1.70 0.31 Contingencies 0.35 0.'5 0.05

Total 2.65 1.95 0.36

D. ElectronicComponent Subsector 20. Backaround.The electroniccomponents subsector has the following support institutions: * Copy Technology Research Institute (Tianjin) * Capacitor Research Institute (Beijing) * Chip-TypeComponent Research Institute (Guangzhou) * ComponentProduction Equipment Research Institute (Chengdu)

21. The presentstructure of subsectorenterprise-based R&D institutions is as follows: _ 100 - AttachlMenI

Existing institutes Location Space (o) Staff Capability

No. 6 Research Institute No. 6 200 35 * Delay line sensor * Ceramie Material Development Ceramic Material Ltd. No. 15 50 10 * Ceramic Research * Chip Material Tech4ical Departmeat All other * Product and Pro- euterprises cess Developnent

22. StrStegy for Future Develogment. The restructuring of this subsector is built aroundtwo subsectorcorporations, one for capacitors and t}:e other for resistors.These corporations would be establishedas shareholding jointventures with reputedinternational manufacturers. It is expectedthat the foreignpartners would assumeresponsibility for providingand updating know-howand systems productsand manufacturingprocesses, organization systems, etc., and thereforethe provisionof a new TechnicalCenter under TIDP for the above purpose would not be necessary.

23. Technical Center for Surface-Mounted Technologa (SMT). The proposed Technical Center for SMT would enable the electronicsstibsector to continue limited development work and technology assimilation in SMT components, i.e., chip capacitors and resistors. It would help to develop technologies that can be used? throughout the subsector. It would also reduce duplication and mini- mize investmentthrough centralized chemical properties measurement and ana- lytical and testingfacilities. 24. The monolithiccapacitor production in RadioComponents Pactory No. 15 would be transferredto the TeecnicalCenter for SlT and also new equipmentwill be added. The pilotoperation would requirea completeprocess line with one piece of equipmentfor each process. The initialequipment for the technical center to be financed under the proposed TA can be classified into laboratories (general and special service group) and pilot operations (chip capacitors and resistors) as detailed below: (a) Laboratories.Surface-mounted assembly equipment (laboratory size), particlesize measuringequipment, surface-mounted measurement equipment,and powdercharacterization equipment. (b) Chip Ca2acitor.Cutter, binder burnout oven, controlleriprogrammer/ furnace(kiln), termination equipment, termination firing belt furnace, platingequipment, electrical sorting and characterization equipment(capacitance, loss tangent,insulation resistance, break- down voltage),temperature chamber, tape on reel equipmentfor chip capacitors,screen-making equipment for screenprinting, and clean- ing equipment. (c) Chip Resistors.Automatic screen printer, drying furnace, sintering furnace(kiln), laser tunerfor resistance,chip breakingequipment, laser cutter, printer for markers, termination equipment, termina- ' 101 - AINEIL Attaehmant I

tion firingbelt furnace,plating equipment, tape on reel equipment for chip resistors,and electricaltesting equipment. 25. The total new lvestment In this Technical Center is estimated as followst

$ ln Y mln $ mln (equiv.)

Buildings 4.00 0.73 Equipment 3.25 5.40 0.99 Purniture& officeequipment - 2.50 0.46 Organization& technologymanagement 0.15 Data bass systemfor technicaland marketresearch 0.15 Training 0.20 Technologyacquisition 0.50 Total 4.25 11.90 2.18 Contingency 0.75 2.10 0.39

Total 5.00 14.00 2.57

E. lectricMotors Subsector 26. Bagktround.On an organisationalbasis, the DamingResearch and DevelopmentInstitute (Darnig R&D) is part of the Tianjin DamingElectric MachineCorporation (Daning). While DaningR&D derivescome financialsupport from Daminag, it operateslargely independently of Daning. Daming R&Dis located in Tianjin in a multilevel building of about 1,600 m' in an area which is physically remote from the Dadnig plant.

27. Daming R&Dengages prinarily in applications type research through five primary research areas which includes (a) Electric Motor Division, which is working in the area of onargy- savingmotors and variable-speedmotors. (b) ComputerNumeric Control Application and ResearchDivision, which is workingin the area of numericcontrol technology and applications. (c) IndustrialDrive SystemDivision, which is workingin the area of motor controlsystems and servomotor development. (d) Motor Test Division,which Is a government-eertifiedtesting facility performingmotor testingfor Damingand others. - 102 - AMNE9 AttachmentI

(a) ComputerDivision, which is workingon computer-basedtesting and equipmentcontrol applications.

28. DamingR&D has the capabilityto make mall electricaland mechanical prototypes and samples. It alsowrites software to supportongoing worv DasnigR&D employs180 persons,of which 10 are seniorengineers, 20 are engineers and 70 are technicians.The remainingpersonnel are employedIn other enterprises,which are eitherowned or supportedby DamingR&D. 29. The ongoingwork at DamingR&D is originaland creativeand has applicabilityto Daming'soperations. Closer goal-setting, focus, and cooperation between Daming and Daming R&Dwould be mutually .ieneficial to both organizations.Specifically, work on some of the metallurgicalproblems confront- ing Damingwould be most beneficial.Daming R&D shouldalso be utilizedby electromechanical parts producers in the automotive subsector. 30. FutureStrateav. As it is proposed to establish a shareholding joint venture with a reputed international manufacturer of electric motors, it is expectedthat the foreignpartner would providethe necessaryproduct, manufacturingand systemsknow-how. A new TechnicalCenter is therefore not being proposedfor this subsectorunder TIDP.

TECHNICALCENTERS - SUMN1ARYOF INVESTMENT ($ million)

Subsector Foreigncost Local cost Total cost

Machine tools 1.15 0.46 1.61 Construetionequipment 2.15 0.83 2.98 Auto parts Drive train subsystem 0.55 0.38 0.93 Auto-electricalsubsystem 2.65 0.36 3.01 TechnicalCenter for SMT 5.00 2.57 7.57

Total 1l.S0 4.60 16.10 - 03 - ANX9

JIN I23pUSMR&LDESELOPM NT PROJECT

Support Institutions- Trainina

PresentS$atug

1. Tianjinis well-endowedin terms of trainingfacilities. The Labor Bureauis the governmentagency responsible for Tianjin'straining policy, guidanceand supportfor trainingof blue-collarworkers. Trainingcourses are conductedby threebureaus: labor,personnel and economiccommission. Trainingis also carriedout by the administrativebureau responsible for differentsubsectors, e.g., Machine Building Bureau, TAIC and Electronicsand InstrumentationBureau. 2. Based on analysisof the trainingirstitutes, it has been concluded thats (a) There is an adequatenumber of traininginstitutions in Tianjin. (b) There is a need for rationalizationrather than settingup of new institutions. (c) There are no traininginstitutions dedicated to the auto parts and electronicssubsectors. sd) The existingtraining institutions for the three subsectorsunder the MachineryBuilding Bureau need to be strengthenedin lire with the productand marketstrategies for the restructuredsubsectors. (e) Insteadof settingup new institutionsfor the auto parts and electronicscomponents subsectors, they shouldutilize the servicesof the existinginstitutions in the bureau. TAIC and Electronicsand InstrumentationBureaus should realign the focus of one of the existinginstitutions toward the needs of restructuredauto parts and electronicscomponents subsectors.

(f) The investmentin trainingfacilities would be restrictedto the traininginstitutions directly related to the three subsectors;viz. MachineTools, Construction Equipment and ElectricMotors. 3. In line with the above,and based on consultants'recomendations, it has been agreedto strengthenthe followingtraining institutions by pro- vidingequipment to undertaketraining; teaching aids (video,slide and overhead projectors,computer hardware and software,blackboards, flip charts, etc.);and books and periodicals: 104 - a= 9 Attachment2

* Machine Toole - TechAScalWorkers School * Construction Equipment - ToehnicalWorker# School * ElectricMotors - Technical Worker. School and Second Technical School * TianjinMechanical and ElectricInstitute. Detailsof the recommendedinvestments in theselnstitutions are given in the follovsngparagraphs.

4. MachineSools. TianjinTechnical Worker School * LEtablishedin July 1961 * 60 teachers * Current enrollmonet 496 students * Purposet train techanical workers in lathes and machine centers * Presentequipment includess 33 lathesand 10 other auxiliaryequip- ment PrconsedDevalonmewt Plan. .Y S equiv.

Building(500 i!) 150,000 27,522 Numeralcontrolled teaching equipments 11 sets 55,600 76,800 14,091 Contingency 8,400 29,600 5,431

Iotal 64.000 256.400 47.044 S. ConstructionEcuilment. Tianjin Technical Worker School

* Established in September1964 - 82 teachers,I professorand 17 lecturers * Currentenrollment: 262 students * Purposes trainingof internediate-leveltechnical workers * Degrees offered: electrician, welding, milling, lathe * Presentequipment: 23 lathes,4 millingmachines and 4 grinding machines

Progosed Dovelopment Plans - Y S eau.iv.

Electrician laboratory - 50,000 9,170 Testinginstruments - 20,000 3,670 Millingmachine - 450,000 82,570 Grinding machine - 210,000 .8,530 Contingency - 134,000 24,590

Totgl ^ 864.000158.530 - 105 - ANWUX Attacbment 2

6. ElectricMotors. ElectricMotor TechnicalWorkers School * Establishedin July 1975 * 92 teachers,2 professorsand 16 lecturers * Currentenrollment: 350 students * Purposes trainingof intermediate-leveltechnical workers for manufactureof electricmotors * Presentequipment includes 19 lathes

ProposedDevelopment Plans S Y S eauiv. Workshopbuilding (500 ma) - 150,000 27,520 Lathes: 10 sets 260,000 47,710 Computers 15,000 Languagelaboratory 15,440 Teachers'training (5 persons) 44,800 8,220 Contingency 4,560 65,200 11,960

Total 35.000 520.000 95.410 TianjinSecond Technical School for ElectricMotor Factory

* Established in May 1979 * 56 teachers * Currentenrollment: 200 students 3 Presentequipment includes: 12 lathes,2 millingmachines, 2 drills and 2 verticaldrills

Proposed Development Plans S Y S equiv. 5 lathest model 6140,36,000/set 180,000 33,270 Displaylathe: I set 17,500 Drills: 5 sets 50,000 9,170 Physicslaboratory 40,000 7,340 Electricianlaboratory 40,000 7,340 Languagelaboratory 17,300 Contingency 5,200 44,000 8,070

Total 40.000 354.000 64.950 7. CommonPacilities. Tianjin Mechanical and ElectricalInstitute

* Establishedin 1981 * 64 teachers,8 professors,26 lecturers * Currentenrollment: 2,700 students * Degrees offered: machine making, industry automation, motor cable and vire, computer,industry statistics, CNC equipment,economics * Presentlaboratories/equipment includes: material laboratory, elec- troniclaboratory, hydraulic press laboratory,material strength laboratory,electric laboratory, computer laboratory 106 - lE= 9 Attachment2

PronosedDevelogment Plans Y S euiv

ComputerCPU486s 5 sets,30,/OOOset 25,000 30,000 5,510 Drawinginstruments: 2 sets, 15,000/set 30,000 5,510 Languagelaboratory 10,000 14,000 2,570 Controlequipment 28,000 5,140 CNC lathe 16,000 2,940 Computert 286, 5 sets 10,000 12,000 2,200 Contingency 10,000 24,000 4,400 Total 55.000 154.000 28.260 8. In additionto the above,the followingimported training equipment will be providedfor commonuse by the Bureausand enterprises:

Computerfacilities 42,000 Teachingaids (includingVCRs, slide 42,000 projectors,overhead projectors) Books,periodicals and technical literature 6,000 Contingency 16,000 Total 106.000

TRAINING CENTERS- SUMMARY OF INVESTHENT ($'000)

Subsector Foreigncost Local cost Total cost

MachineTools 64 47 111 ConstructionEquipment - 158 158 ElectricMotors TecEnicalWorkers School 35 95 130 SecondTechnical School 40 65 105 CommonFacilities TianjinMechanical and Electrical Institute 55 29 84 TrainingAids 106 - 106 Total 300 394 694 - 107 - ANNX10

CHIE TIAIJIN INDUSTRIADEVELOM NT PROJECT

Terms of Reforenceof Studies/ProiectI_mvlementation Work of Consultants

A. In_roduction 1. The TianjinMunicipal Govermoent (?MG) has used the servicesof internationalconsulting firms to preparesubsector specific restructuring programsfor the followingfive industrialsubsectors. (a) MachineTools Subsector (b) ConstructionEquipment Subsector (c) Auto Parts Subsector (d) ElectronicsComponents Subsector (e) ElectricMotors Subsector 2. The consultants,working together with concernedmunicipal bureaus, corporationsand enterprisesin the respectivesubsectors, have submitted their recommendations.The proposedsubsector strategies are aimed at improving the overalUoperational efficiency and effectivenessof the subsectorsto increaseboth domesticand internationalcompetitiveness and developdirect/ indirectexports. These strategicchanges need to be carriedout acrossthe subsector corporations and factories and support institutions and encompass organizationaldevelopment and structure,product/market strategies including developmentof marketingand distributionchannels, appropriate management planning,control and informationsystems, operational effectiveness programs in the manufacturingand technologyfunctions, strategic planning, etc., supportedby appropriatepolicy and institutionalreforms. The consultants' recommendations have been accepted in broad outline by concerned government authorities in China and the program is now ready for implementation. The authorities recognize that the management of this implementation project is an extremely complex task requiring coordination and control of several activities and the activeparticipation and cooperationof numerousindividuals withinmany governmentdepartments and the concernedcorporationsIfactories. TMG proposeto implementthis complexrestructuring project with the assistance of international consultants. As electronic components and electric motorssubsectors would have joint-venturepartners who will bring theirown know-howfor individualenterprises, consultants' role will be limited in thesetwo subsectors. B. Objectives 3. The objectiveof the proposedconsultancy services is to assistthe variousauthorities involved in the implementationof the restructuringpro- grms throughsystematic design endsuccessful implementation of the entire - 108 - AUEX 10 processso as to ensuretimely completion of the project activities with minimal disruption of current operations. The ultimato objective to the success of the businessenterprises in these subsectors in achievitg the goal and objectivesof the industrialrestructuring. As organizationstructures and systemsare closelyrelated and interdependent,they shouldbe compatibleand mutuallyreinforcing. To avoidany organizationaldysfunctioning, these two tasks are, therefore,being integratedand form a part of this consulting assignment. 4. The primaryresponsibility for the implemeutationof the subsector restructuring projects will be that of the TMG, including Tianjin Planning Commission (TPC), Tianjin Economic Comission (TEC), and respective industrial bureaus, assisted by an interagency Tianjin World Bank Loan Office(TWBLO), whichwill monitorthe tasks relatingto the subsectorrestructuring programs, preparedetails of policymeasures for approvalby the authoritiesand monitor the technicalassistance component of the project. The role of the consultants in thesematters is to supportthe concernedofficials through TWBLO in the detaileddesign of projectimplementation tasks, define the human and financialresources that are necessary,assist in the developmentof work plansand activityschedules, implementation of these detailedplans and finally,in effectiveproject monitoring and controlsystems. An important objectiveis to transfer this expertise in projectdesign and implementation to the managementof the subsectorcorporations/factories to enable them to independentlycontinue such functionsin the future. Additionally,the design of factory organization structures and managementsystems requires extensive work and foreignconsultants should utilize to the maximumextent possible, consistentwith the availabilityof suitablelocal consultingskills, the servicesof Chineseconsulting firms. It may also be desirableto use Chinese consultantswhere possibleto facilitatecommunication and effecteconomies in consultingexpenses.

C. Scopeof Services Assistancein Pro1ectManatement Desitn and Imnlementatlon 5. The restructuringproposals focus on a numberof managerialand "software"issues (subsector organization, management systems, operational effectiveness,production technology, product development and technology transfer,etc.) as well as hardwareaspects. Plans for implementationof all thesemultiple interdependent activities will need to be established,detailed tasks identifiedand scheduledas a part of the MasterProject Design. Detailednear-term implementation plans (1-12months) will need to be drawnup to incorporatesome of the implementationsteps which can be initiatedimmedi- ately to ensurethe successof the entiresubsector restructuring program and thosewhich have long lead timesbut involverelatively low levelsof funding and, therefore, can also be initiated promptly. Next, long-term comprehensive Implementationplans will have to be established. The consultants will assist in the projectimplementation and monitoringprocess as frequently as is con- siderednecessary for timelyand successfulcompletion of projectactivities.

6. Besideadvice and activeassistance in projectmanagement, there are criticaltasks forming an essential part of the restructuring program which constitute the core of this consulting assignment. The consultantswill fur- - 109 NAM 10

thor be expected to supplemnt the t-sks with any other activities that may be crucial to the successand effectiveness of these restructuring programs. Thesecritical desgn and Implementation tasks relate to: (i) organization structureand developmnmt; (11)marketing and sales distribution;(iii) opera- tionaleffectivenes program (iv)production technology upgrading; (v) management planning control and informtion systems; (vi) product development and technology trsnsfert and (vil) consolidation of production. The scope of work under each of these h8e ts briefly describedin the followingparagraphs. (a) Or&nixza,toal Structure and Ortanixation Development 7. The consultants will need to assist the subsectors in developing detailed organization structures at the corporate, divisional and factory levels . This work vill Include defining roles and responsibilities, job specifications, optimum manniag, and en assessment of current management personnel to fulfillthe new roles.

8. It is apparentthat the Implementation of the recommended organization structurecannot bc donewithout extensive training at all levelsof management and operationsstaff. This aspect of organization development is crucialto the successof the project. The consultantswill identifythe gaps in managerial and supervisoryskils,, prioritize the trainingneeds and assist in conductingshort training seminars (up to one week) particularlyfor senior management. They will also advis,on the type,venue and cost of in-depth trainingprogras of longerduration which would be necessary for development of the requisite smagerial skills at different levels. The actual conduct of the long duration training courses is, however, outside the scope of this assignment.

(b) MarketUng and Sales Distrlbution 9. The strengthening of the marketing organization and distribution arrangementshas been Identifiedas a prioritytask. Consultants will assist in developingthe organizationstructure and in establishingmarketing policies which are in consonancewith the recommendedproduct/market strategies. They will also assistin locatingand establishingadequate distribution channels, and sales and servicesnetworks for the domesticand targetinterna- tionalmarkets, including likely joint venture partners to facilitateexports. (c) OnerationalIffectiv_nees Protrams

10. Several short-term projects for improving operational effectiveness and aimed at improving productivity, reducing costs, enhancing quality, increasitg capacity utilization, etc., have been recommended. Consultants will design and then a"ssit In implementation of such operational effectiveness measures in the subsector factories. This will include the design and implementation of operational system upgrades including production planning and control, lventory managementp preventive maintenance, quality assurance, etc. Consultauts will also review current plans for capacity expansion through acquisition of fixed assets in light of likely improvementswhich may be realizedthrough these operationaleffectiveness measures. - 110 - ANNIX 10

(d) UporadinaProduction Technology/Manufacturing Processes II. Consultantswill assistin identifyinggaps in productionprocesses as currentlypracticed and recommend/implementsuitable improvements consistent with realizationof optimummanufacturing costs as relatedto the volume of production. (e) ProductDevelo2,ment and TechnoloayManagement 12. Consultantsvill assistin identifyingacquisition of technical expertisefrom appropriatesources for improvingproducts. This also includes assistance in implementation of measures aimed at improving technology absorption, in-house product development, efficient utilization of institutional infrastructure for R&D, and in ensuring that enterprises initiate steps for redesign of key products and acquisition of new technology. (f) Development and Design of Strateaic Planning. Manaxement and Control Systems 13. Based on the organization structures which are to be implemented, consultants will develop and design management information systems for all key mansgement functions including corporate, divisional and factory level operations control, financial accounting, planning and control, cost accounting, materials management (corporate and divisional level), business planning, uarket and sales system, manpower planning, performance evaluation and incentive systems, etc. Some of the other subsystems such as production planning and control, preventive maintenance, quality assurance, stock control, etc. as already referred to in para. 10 as a part of operational effectiveness measures are also to be included. The consultants will determine the adequacy and readiness of the factories to implement these systems manually or with the help of computers.This will also depend on the availability of the required hardware and software in China. However, the design of the systems should be such as to facilitate electronic data processing and integration at a later date. 14. The product/market strategies recommended for the respectivesubsectors are based on the macroeconomic environment in China as foreseen today. It is necessary to institutionalize within enterprises the capability to respond to macroeconomic and business environment changes which will inevita- bly take place in China and the overseas markets even during the implementation of the present project. Consultants will assist in establishing the organization needed for long term business and strategic planning in each subsector to build full-fledged strategic planning capability. The organization of a practicalstrategic planning unit at the corporateand divisional level shouldbe implementedin the near term. (g) Consolidationof Production 15. Consultantswill assistthe respectivecorporations in the drawing up and implementationof plans for rationalizationof productsand consolidation of productionfacilities so as to optimizeutilization of resources through elimination, wherever feasible, of the manufactureof overlapping products or components at more than one production facility. Such rational- - 11l - X 10 izationproposals would involverelocation of physicalassets and manpower from a less efficientto a tore efficientsite. 16. Proposalsfor investmentsin projectsfor expansion/diversification will be consideredonly afterthe impactof implementationof the above con- solidationmeasures have been taken into account. D. Scheduleof the Study and Renortin2 17. The proposedassignment will be carriedout by a consultantteam consistingof expertsin organizationand systemsdesign, management information system,accounting and financialmanagement, marketing, market training, and technologicalaspects of the five subsectors.The assignmentwill be phasedover a periodof threeyears from the date of contractaward. 18. The consultant(s)shall submitthe followingdocuments and reports, to be writtenin English: (a) An InceptionReport within two weeks from the date of contractaward summarizingthe detailedwork program,arrangemints needed for the fieldwork of the study,major issuesto be investigatedin-depth, and more importantly,a detailedlist of information(where necessary, data formatswill be provided)to be preparedby Tianjingov- ernmentand enterprisesin the five subsectorsbefore the startof fieldwork. (b) Appropriateperiodic progress reports on a monthly,quarterly or six-monthlybasis clearlydefining the progressmade undervarious activitiesand includingdesign details of the organizationstructures/managementsystems/operational effectiveness measures proposed and implemented. (c) Interimreport at the end of the first and secondyear of assignment outliningthe progressmade so far at subsector,enterprise and factory level in carrying out the assignment and the specific details of the work to be performed in the remaining period. (d) Draft Final Report,detailing the work performedin accordancewith the Terms of Reference,including detailed findings and recommendations,actions initiated to carryout the recommendations,and further actionsto be taken alongwith a timetable. (e) Final Reportwithin one month after receivingthe commentson the Draft Final Report from Tianjin Government and the World Bank; and (f) Implementation Manuals (as part of the Final Report) for facilitat- ing the introductionand implementationof the recommendationsand new systems,which should includet (i) organizationmanual for enterprises;(ii) manual for marketingand salespromotion; (iii) manualfor installationand maintenanceof HIS for enterprises; (iv) cost accountingmanuals for enterprises,including applications to cost control;and (v) othermanuals to help improveoperational efficiency,e.g., staff training,inventory management, preventive maintennUce, etc. - 112 - I I

TINJIrN IUDUMUTIAL bRVK9kU ZO=J

ProiectImlRMntstinm Sceludule

1993 1994 1995 1996 1997 1998 1999

,Physical !e.*,ucturina of Interstices____ Establisbmeat of corporations I Appointmeut of consultants X Preparatlon of restructurlg plans for enterpriaes/plants Approval of subloans by PPs_

Procurement - - Production start-up gMaaemeLt. -Organization and Systems Systems organizational plans of corporatio, divisions and plants Implementatioa of marketing strategies Development and impl.mntation of MSg Training of enterprise management and staff Dovelovment of $tchnololical Infrastructure Procurement of equipment | = Training Strenathenina of P"s

Staff training - - 113 - mmiIII&

Caft TIANJINIDUSTRIL DEVELOPENT]PROJECT

KeU MonitorinaIndicatgr.

Indicatore TargetDates

A. bWer&Ii Loan effectiveness July 1993

S. Enteririse Reforms Establishment of corporations July 1993 Closure of nonviable plants December1994 C. Policy Reforms Removalof all price controls December 1995 Removal of all surplus labor December 1995 D. Utilization of Industrial Credit Component by PMIs

Last date for subprojectsubmission June 1996 Last date for loanwithdrawal December1999

E. Impl1Mentationof Tehnical Aesistance Comoonent Developmentof InastitutionalInfrastructure

Selection of suppliers March 1994 Completion of civil vorks June 1994 Start of use of new equipment January 1995 Commencementof staff training January 1994 Completion of staff training December 1995

P. M a' Staff Training Commencement January 1993 Completion December 1995 - 114 -AN 13

'IAN IUlDUSTRIALD--LOPflKNT PROJECT

Pro1ect Umolementation Task and SunerviLSIo PlA

1993 1994 1995 1996 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1. Imple=entationTask (AJencv)

A. SubsectorReform Stratni_es Establish Corporations (tlG) __ ---- Close Noaviable Plants tTMG) ------Removal of Price Controls (2MG) Redeploy Redundant Labor (TMG-) ______------Reviwe Progress on Reforms (WB) x x x x x B. Credit Comnonent selection of Consultants (I -)------Preparing Restructuring Plans (Cons) __ ------Complete Subproject Appraisals Approve Subloans (WB) ------_-______------

C. Tecbnical Assistance Comnonent 1. Workers Retralnina & Redeuloyment Select Consultants ______Submit ConsultantsReport ------2. Prolect ImLlementationSurnort Organization Restructuring _ ------Production Consolidation __ __ ------NlS/Accounting Systems_ ------._ ___ > Industrial Engintering _--_-__-______-___ ------______> 3. EstablishResearch Institutions & Techic_alCenters (1TMG& EnterDrIseJ) Procure Facilities& Equipment ------Staff Training ------

4. TrainEnterDris. Manatement and Staff (11(0) Prepare Annual Training Plan x x x Select Consultants ------Coamence Seminars ------Commence Overseas Trainitg ------______>

5. Train PFI Staff (Pyle) Select Consultants ------Commence First Course ---- Comuence Second Course ----- Conmence Overseas Training ______------> - 115 - AN1EL11

1993 1994 1995 1996 12 3 4 1 2 3 4 1 2 3 4 1 2 3 4

I. Prolect Sunervision Missions 1. EGIP Implant eubsectoral strategies, review enterprise reform strategies x 2. Fous on Implementation organization and subsectoral strate8r 3. Review progre4s on enterprise restructuring, tech. assistance & training 4. ocus on empeditlag subproject review and procurement x 5. Focus on effectivenessof project Implementation arrangements x 6. In-depthoverall Implementation reviw x - 116 - A

CRIN

TIANJIN INDUSTRA DEVELO_PMETRCT

ChinaInvestment Bank ICIB)

1 CIB, throughits TianjinBranch, will be responsiblefor the appraisaland supervisionof subprojectsto be financedunder the proposed Bank loan. Althoughstaff from the Read Officewill be involvedin the appraisalprocess, the TianjinBranch will preparethe appraisalreports requiredfor each subprojectand forwardthem directlyto the World Bank for review. CIB has alreadygained substantial experience in projectappraisal and is the only financialinstitution in the industrialsector in Chinawhose investment financedecisions are based on generallyaccepted projectappraisal techniquesand procedures.It has received,so far, five creditlines from the Bank Group: CIB I (Loan/Credit2226/1313-CIA) for $70.6million approved on December21, 1982;CIB II (Loan/Credit 2434/1491-CHA)for $175.0million approved on June 5, 1984;CIB III (Loan/Credit2659/1663-CHA) for $100.0mil- lion approvedon March 3, 1986;CIB IV (Loan/Credit2783/1763-CHA) for $300.0million approved on Match 3, 1987;and CIS V (Loan3075-CHA) for $300.0 millionapproved on May 30, 1989. CIB is also the finanetalintermediary for TrLIPand one of the Fls for the SPARK.project and the ShanghaiIndustrial Development Project. The Bank has alsc provided considerable support to CIB's institutional development.It has developedsufficient capability to satis- factorilyappraise and supervisesubprojects that will be financedunder TIDP and to take objectiveinvestment financing decisions. The institutional, operational,and financialaspects of CIB are describedbelow.

2. The Institution.CIB commencedits operationsin 1983 as a government-owneddevelopment finance institution. As of December31, 1991,it had paid-in capital of Y 1,845 million ($344 million equivalent). CIB is adminis- trativelyunder the supervisoryresponsibility of MOP. It t1soretains strong links with PCBC, fromwhich most of its staff,both at centraland provincial levels, has been drawn. Its oraanizationconsists of (a) a head officein Beijing which performs an administrative and supervisory role for its entire operation; and (b) provincial branch offices, which have the direct responsibility for screening, appraisal and supervision of projects. The branch offices have expanded from threein 1982 to 31 provincial-level branches and 28 subbranches at the municipal level. CIB has delegated limited loan approval authority to selected branches; decisionson larger loans are taken at the bead office.

3. CIB's33-member Board of Directors has remainedstructurally the same since 1983; it is chairedby the Presidentof PCBCand includesrepresen- tativesof the Governmentdepartments and banks concerned.The Board meets once a year and has delegated most of its operational decision--making authority to a Managing Committee consisting of the Board Chairman, the three Deputy Chairmen(all from PBC) and eightManaging Directors (of vhich four comprise CIB 's seniormanagement, and one representativeeach from SPC, MOF, PBC and the StateAdministration of Exchangecontrol). - 117 - AME 14

4. Cul'smanagement at the bead officeconsists of a Presidentand three Vice-Presidentswho have the responsibilityof supervisingspecific departments. Each branch office is also headed by a President. The total numberof staff at the head officehas incressedfrom 33 in 1984 to 173 as of April 30, 1992. The staff includes32 engineersand 83 economists/financial analysts,who are directly involved in project appraisal and supervisionwork. The staff at the brancheshas also increasedfrom 84 to 1,640during the same period. CIB plans to recruitmore staffbefore the end of 1992 to strengthen its projectsupervision capability to cope with the growingloan portfolio. However,many managersand professionalstaff still lack advancedfinancial skillsand experience,and there is thus a continuedneed for training,which is reflectedin the three-yearrolling training plan of CID. 5. CIB'smajor operationaland financialyolicies are outlinedin its PolicyStatement, which was last amendedin April 1989. It permitsCIB to providelocal and foreigncurrency investment as well as workingcapital loans, to develop consulting services and to undertake other financial operations (i.e.,equity investments, lease financing, guarantees, loan syndications,etc.). CIB's totalforeign currency lending to any one projectwould not normally exceed $20 million and total local currency lending would not exceed Y 40 million($8.5 million equivalent); any exceptionto this rule would dependupon agreementbetween CIS and the Bank. 6. Until now, CIB has mainly provided foreign currency loans for capital investmentin lightindustry projects. It has reliedlargely on the Bank Group for foreigncurrency funds and on the Governmentfor local currency funds. To ensureits long-termviability in a more competitiveenvironment, CIB had adopted in April 1989 a revisedDevelopment Strategy Statement which articulatesCIB's plan to: (a) diversifyits portfolioby industrialsubsec- tor and type of clientby seekingout an increasingshare of nonstateenterprises:(b) diversifyits sourcesof fundingparticularly by enhancedcommer- cial borrowingsabroad but also by increaseddomestic resource mobilization; and (c) expandand developnew productlines and servicessuch as free- standingworking capital loans, leasing operations, equity investments and loan syndications.The progressin this regsrdhas, however,been limited.

7. CIB8s projectannraisal is undertakenin accordancewith its Indus- trial ProjectsAppraisal Manual, which was preparedwith Bank Group assistance. The need to improvethe manual,especially in the areas of financial and economicrate-of-return analysis, has been recognizedfor some time. CIB has prepared a substantially enlarged revised version in Chinese, which was reviewed by an ApriL 1992 Bank supervision mission and found to be satisfactory. Since 1991, greater emphasis has been placed on strengtheningproject supervision of projects, In particular for projects facing operational and financial problems. CIB is currently revising its Project Supervision Manual, and the new versionis expectedto be completedbefore the end of 1992. The Bank is also encouragingCIB to get involvedat an earlierstage of subproject preparationso that potentialproblems can be identifiedand avoided. 8. Since its establishmentin 1982,CIB has made considerableprogress in its institutionaldevelopment. It has adoptedeffective lending procedures,recruited a largenumber of well-educatedjunior- and middle-level staff, carried out extensive training in China and abroad, started to diver- sify its funding resources, sad developed an important branch network compris- - 118 - AMEX 14

iog key provincesand municipalities. CIB has implementedvarious institu- tionalstrengthening measures agreed under CIB IV and V and has establisheda separate unit for economic research and reporting and appointeda full-time internalauditor. Nevertheless,much remainsto be done. CIB's currentorga- nizational structureresults in fragmentationof responsibilityin the management of financialresources and financialreporting. This dilutes financial accountability,hinders the capabilityof the Head Office to monitor the performance of the branches and limits access of individualdepartments to financial data generatedby other departments. It is expected that with the recent introductionof a new financialmanagement informationsystem, CIB's internal financialmanagement and reportingwill improve considerably.

9. Operations. A summary of CIB's actual and projected lending operations is given in Attachment 1. The size of CLB's lending increased significantly since its establishmentuntil 1983. Its foreign currency loan approvals in 1988 were $402.0 million, an eightfoldincrease from $49.8 million in 1983. Local currency approvals increasedfrom Y 165.2 million in 1983 to Y 495.5 million in 1988. The sharp increasewas made possible by the continued financial support from the Bank Group and the availabilityof funds from other sources includingADB, KfW, and foreign commercialbanks.

10. Since the beginning of 1989 when the Governmentinitiated the economic austerityprogram, CIB's lending operationshave shown a sharp decrease. During 1989, foreign currency term-loan approvalswere $154.7 million, only 38 percent of the level of the previous year. Local currency term-loan approvalswere also very low at Y 46.0 million. Term-loan approvalsin 1990 increasedto $183 million in foreign exchange and Y 513 million in local currency. CIB's working capital loans increasedsignificantly during 1989/90 because of general liquidityconstraints faced by industrialenterprises. It also reflected a change in CIB's business strategy and plan, as agreed with the Bank under CIB V. At the end of 1990, the total working capital loan approvals reached Y 1.9 billion, consistingof $130 million in foreign currency, and Y 1.3 billion in local currency. CIB's foreign currency term-loan approvals totaled only $130 million in 1991, reflectingthe tight resource situation facing ClB, due mainly to difficultiesin mobilizing additional foreign-exchangeresources. However, local currency loan approvalsincreased to Y 824 million during the same period.

11. CIB's financialforecast for 1992-95 is supply-drivendue to resource constraintssince 1989. CIB's forecast ervisagesan increase in foreign currency loan approvals from $311 million in 1992 to $505 million in 1995, and in local currency loans from Y 1,590 million to Y 2,536 million.

12. Financial Performance. The actual and projected income statements and balance sheets of CIB for 1983-94 are provided in Attachments 2 and 3, respectively. CIB's net pr_,t (afterbusiness and income taxes) was Y 89.0 million (6.2 percent of equity) in 1987 but declined to Y 46.5 million (2.6 percent of equity) in 1990 and Y 45.4 million (2.6 percent of equity) in 1991 due to the expiry of the tax holiday in 1988 and higher bad debt provisions in 1990 and 1991. CIB's administrativeexpenses in 1991 continued to be lower in relation to assets, representing0.08 percent of its average total assets (down from <0.2 percent in 1990). CIB's average interest spread on all foreign and local currency loans decreasedgradually from 4.1 percent in 1985 to 1.4 percent in 1991, mainly because of the higher share of foreign currency - 119 - ANNEX 1A

loans in CIB's total resources,which have relativelylow spread. However, the overall average spread is still satisfactory. CIB's long-term debt to equity ratio was 3.3:1 at the end of 1991, well within the 5:1 limit provided under CIB V. CIB's debt service coverage ratio in 1989 was 2 times, and would remain around 2 times between 1992-94.

13. In 1991, loans in arrears (i.e., overdue over 90 days) amounted to 3.2 percent of total outstandingportfolio, an increase of 28 percent over 1990 when arrears were 2.5 percent of total loan portfolio. This increase is not only due to increasingarrears (up 20.7 percent),but also to a decline in outstandingportfolio (down 7.3 percent). On the other hand, the increase in arrears also reflects a conservativeloan reschedulingpolicy based on the principle that no individualloan can be rescheduledmore than once, and establishingstrict reschedulingcriteria. Although the amount rescheduledin 1990 and 1991 was almost the same (aboutY 300 million), the number of loans rescheduleddeclined sharply from 34 in 1990 to 20 in 1991. No reschedulings were approved up to June 30, 1992, although a number of requests were pending. CIB's overall collectionrate for 1991 was low at 75 percent, (collectiondata are not available for 1990). There was no significantdifference in collection rates between arrears and current repayments,indicative of the existence of a "hard-core"one fourth of the portfolio of difficultcollectibility, and CIB will need to make significantefforts to improve its performance in this area. During negotiations,understandings were reachedwith CIS that before submissionof its first subprojectto the Bank, CIB will: (a) revise its policy statementto include a loan recovery target of 90 percent of loan repaymentsdue; and (b) submit a plan satisfactoryto the Bank for reaching the above target, includingprojected loan recovery percentagesfor 1993-95.

14. In China, levels of provisionsfor bad and doubtful loans are established by MOP for all banks and are not based on asset classification. How- ever, the governmentand CIB agreed to make an exceptionunder CIB V and, accordingly,CIB increasedits provision for bad debt from 0.2 percent in 1988 to 1.9 percent at the end of 1991, and would further increase it to 2.0 percent by December 31, 1992.

15. According to CIB's financial forecast, its financialperformance is expected to remain satisfactoryunder 1992-95. Net income after taxes would decline somewhat in 1992 to Y 40.2 million after allowing for provisions for bad debt of Y 280.1 million, the smount required to raise total provisions to 2 percent of loan portfolio. Subsequently,however, net income would rise to Y 212.8 million in 1993, and to Y 268.5 million in 1994. The average interest spread on CIB loans would remain at between 1.5 and 2.0 percent, and the low spread, coupledwith CIB's low leverage,would result in an average return on equity of about 3 percent in 1992. However, CIB expects to rapidly expand borrowed funds during the period, and its long-termdebt to equity ratio is expected to increase from 3.3:1 at the end of 1991 to about 4.4:1 at year-end 1995. Consequently,the return on equity would double to 6 percent in 1995. During negotiations,agreement was reachedwith CIB that its maximum debt/equityratio will remain at 5:1. The State Audit Administrationperforms an external audit of CIB's accounts and it has been satisfactory.

16. An overall review of CIB indicatesthat, despite significantprogress in institution-buildingand an increase in level of operations,it has many weaknesses. Its managementand staff need further strengthening;the - 120 - AM 14 appraisal quality has to be maintained more uniformly; loan collections have to be improvedsresources have to be diversified;and last but not least important,its long-tormrole has to be definedclearly. At the eame time, it has to minimizeand ultimatelycease its dependenceon the governmentand PCBC for institutionaland fundingsupport. The abovemeasures vill help CID to betterprepare for the emergingcompetition in the financialsector and, more importantly,to find its rightfulplace in the financialsector in China. In the contextof supervisionof CIB I-V, and new operations,including the proposed assistancefor the developmentof financialinstitutions in China,the Bank is engagedin an activedialogue with the governmentand CIB on the latter'sfuture role, operationalstrategy and resources.The government and CIB management are also keenlyinterested in CIB's furtherinstitutional strengtheningand its findinga marketniche in China. 17. Utilizationof Bank Loans/IDACredits. CIB 1-111have been com- pletedsatisfactorily and a ProjectCompletion Report has been issued. Both CIB IV and V are presentlyunder disbursement,and, as of December31, 1991, their statuswas as follows: (a) CIS IV--207subprojects approved for a total amountof $301.5million, the creditline Was 98 percentcommitted and 77 percentdisbursed, and 176 subprojectswere operational;(b) CIB V--176 subprojectsapproved for a totalamount of $231.3 million, the credit component was 77 percentcommitted and 23 percentdisbursed, and 50 subprojects were operational.CIB IV was originally expected to be complete by June 30, 1992,but the closingdate has been extendedby one year due to slower-than- expecteddisbursements resulting from the effectsof the 1988 austerityprogram.

18. CIB TianiinBranh. The CIB Tianjinbranch was one of the first to be establishedand is among the most developedbranches of CIB. It is headed by a full-timePresident, assisted by two Vice-Presidents,and has a total staffof 75, of which 80 percentare professionals.One-third of the staff (25) is directlyinvolved in projectappraisal and supervision,including 21 economistslfinancialanalysts and 3 engineers.Almost all the staffhas receivedtraining after joining CIB. Most of them have attendedshort training programsorganized by the head office. Seven staff have participatedin EDI trainingprograms in China and anothereleven have receivedtraining in foreigncountries. A sum of $50,000was includedin the technicalassistance componentof TLIP for furthertraining. Eight staffhave receivedtraining so far under this component,in Singaporeand the Philippines.The branchstaff has also gainedvaluable knowledge and experienceby participationin the implementationof TLIP and preparationof TIDP. 19. As of December31, 1991,the Tianjinbranch had approved71 subprojects under CIB I-IV for a total loan amountof $72.0million in foreigncurrency and Y 154.0million in localcurrency. Among the 71 subprojects approved,29 are completed(loan repaid), 38 are operatingand are repaying satisfactorily,and 4 are under construction.Under the TLIP, 15 subprojects have been approvedfor $141.2million in foreigncurrency and Y 280 millionin local currency, of which 5 have been completed and are repayingsatisfactorily and 10 are under construction.Overall, the operationaland financialperformance of completedsubprojects has been satisfactory. - 121 - AIN 14 Attgchment 1

OUA

T JI,II IIIDUSTRIALDVELOPMET PROJECT

ChIn Investment Bank

Annl terat ions Performance CY million)

Actual Projected 1991 1992 1993 1994 1995 1996

AI2YElI Local currency 627 1,646 1,707 1,729 1,876 2,050 FolreSf currency 577 1,699 1,800 2,321 2,760 3,232 (US dollar) (108) (311) (329) (424) (505) (591)

Total 31043.345 3.S07 4.050 4.635 5.282

COmaltment oal currency 671 1,609 1,684 1,764 1,917 1,848 loreln currency 868 1,848 1,811 2,162 2,832 3,319 (US dollar) (162) (338) (331) (395) (518) (607) To_tal M1.S 3.457 3.496 3.926 4.748 5.167

Zlsburement ocal currency 690 1,546 1,607 1,729 1,875 2,050 Worelgn currney 1,079 2,000 1,807 2,321 2,760 3,232 (US dollar) (201) (366) (330) (424) (505) (591)

DU&al 1.770 3.546 3.414 4.050 4.635 5.282 Loan lenaent. Local urrency 101 80 100 120 144 173 Joreiga currency 641 586 857 1,125 1,445 1,781 (US dollar) (119) (107) (157) (206) (264) (326) Total 742 666 957 1.245 1.589 1.954 Loan OUtetandiJt Loal currency 5,353 6,403 7,841 11,584 13,642 17,693 lorel4acurrency 5,950 7,274 9,321 10,547 12,332 14,074 (US dollar) (1,110) (1,330) (1,704) (1,924) (2,254) (2,994) 11.303 13.677 17.162 22.131 25.974 31.767 - 122 - AMUhX14 Attachren 2

TIhJIN INDUSTRIALDEVULOPHENT PROJECT

China IMestmen_t Bank

Income Statement (Y million)

Actual Prolected 1991 1992 1993 1994 1995 1996

Income InterestIncome frm Loans Local currency 249.56 672.50 945.39 1,165.81 1,379.18 1,606.68 Poreign currency 444.94 656.77 1,001.41 1,219.70 1,466.95 1,739.05 Jtrest Incomeon Deposit tcal cu-rrency 79.98 129.42 148.76 175.54 204.99 237.39 Foreign currency 80.35 88.76 109.05 129.16 149.28 169.42 Income on aouitvInvestments Local currency 0.29 0.37 2.17 2.53 2.96 3.48 Foreign currency 0.00 2.26 7.18 12.11 19.49 30.57

9thez !Mome Local currency 17.36 19.09 21.00 23.10 25.42 27.96 Foreign currency 9.64 10.82 11.90 13.09 14.40 15.84

Total income 882.12 1.579.99 2.246.88 2.741.04 3.262.67 3.830.39 Ireenses Pfaanial exaenses -Loc currencyinterest 220.85 526.94 771.44 922.12 1,075.47 1,231.77 Foreign currency interest 476.03 624.82 796.58 975.52 1,116.01 1,325.73 Foreign curreney fees 22.09 28.76 37.39 48.60 63.19 82.14 Subtotal 718.96 1180.52 1605.41 1946.25 2254.66 2639.65 AdministratIveand other expenses 12.11 15.34 19.44 24.60 31.32 39.83 Provisionsfor doubtful accounts 5.59 280.13 94.19 104.66 104.49 123.88 Depreciationand amortization 4.59 5.93 7.75 10.08 13.10 17.03 Total xDenses 741.24 1.481.96 1.726.79 2.085.58 24403.57 2.820.39 Profit before taxes 140.88 98.03 520.07 655.46 859.10 1,010.00 (less) Busiuess Tax 24.36 8.82 46.83 58.97 77.30 90.88 Net profit before Income tax 116.52 89.21 473.24 596.49 781.80 919.12 (lese) Income tax 71.08 49.07 260.44 327.96 429.89 505.40 Net income aftertax 45.45 40.15 212.80 268.53 351.91 413.72 - 123 - Attrscent 3

CIA

IMANJININDUSlRIAL DEVELWPNENT }ROJECT

China Investment Bank

Balance Sheet (Y million)

1991 1992 1993 1994 1995 1996

Assets Cash and bank deposit 2,310 2,436 3,127 4,416 4,723 4,288 Accounts receivable 1,055 1,002 1,543 1,466 1,486 1,605 Working capital loans 3,128 3,714 4,912 8,256 10,307 12,986 Others 3 4 4 4 5 6 Total current assets 6.495 7.156 9.586 13,142 16.521 18.885

Long-term assets Loan.s Local currency 2,334 3,079 3,413 3,916 4,028 5,524 Poreign currency 5,950 7,274 9,321 10,547 12,332 14,094 (less) Provisions for doubtful debts (109) (390) (484) (588) (693) (817) Net long-ternloan portfolio 8,175 9,963 12,250 13,875 13,667 18,801 Equity lvestments 27 92 149 233 359 547 Revolving funds 9 9 9 5 5 5 Net fixed assets 28 67 89 116 151 196 Otherassets 6 6 6 3 3 3 Totallonr-term "ssets 8.245 10.137 12.503 14.232 16.185 19.552 Totalassets 14.740 17.293 22.089 27.374 32.706 38.43J Liabilltlesand Euitv Currentliablities Accountspayable 665 605 566 1,051 1,0S59 1,593 Totaldeposits 4,862 5,978 7,617 9,313 11,001 12,489 Currentportion of long-term liabilities 726 693 1,201 1,644 1,920 2,051 Total current liabilities 6.253 7.276 9.384 12.008 13.980 16.133 Lont-term debts Domesticborrowings 668 890 1,090 1,290 1,490 1,690 WorldBank 3,485 4,293 5,035 6,110 7,010 8,196 ADB 338 448 958 941 1,730 1,913 Bonds 0 0 400 1,244 2,248 3,521 Bank loans 2,148 2,165 2,313 2,277 2,066 2,034 Foreign government loans 3 81 184 340 549 811 Totallons-term debt 6.642 .797 9.980 12.202 15.093 18.165 Total liabilities 12.895 15.073 19.364 24.210 29.073 34.29t

Paid-incapital 1,426 1,763 1,891 2,019 2,069 2,119 Retained earnings 420 457 833 1,144 1,564 2,020 Totalequity 1,845 2,220 2,725 3,164 3,633 4,139 Totalllabilities and eaulty 14.740 17.293 22.089 27.374 32.706 38.437 Managedfunds 6,515 16,614 21,299 25,961 31,029 36,322 Long-termdebtsequity ratio 3.6 4.5 4.5 3.9 4.2 4.4 - 124 - ANNEX 1S

TIANJININDUSTRIAL DEVELOPMENT PROJECT

Industrialsnd CommercialBank of China (ICBC)

1. Bskgrgou. By virtueof StateCouncil Decree 146 datedSeptem- ber 17, 1983,ICBC was foundedas a spin-offof the formerSavings Department and the Industrialand Comercial AdministrationDepartment of the People's Bank of China (PBC). ICBC does not have a Board of Directorsbut is headedby its Presidentwho is appointedby the PBC with the approvalof the State Coun- cil. It remainsthe largeststate-owned commercial bank with total assetsof Y 1,117.47billion ($203.18 billion, which is estimatedto be eighthlargest in the world)and net worth of Y 48.0 billion($8.73 billion). Outstanding loans and depositsamounted to Y 797.12billion and Y 640.50billion, respectively,estimated at nearlyhalf of the total loans and depositsof China's financialsector. It is a bankerto about 90 percentof the mediumand large state-ownedenterprises (SOEs) and has the largestnumber of branchnetwork, with over 30,000domestic branches/subbranches including 20,280 savings officesand one representativeoffice in Singapore,208 foreigncorrespondent banks,two subsidiariesand employingover 500,000people. It is governed mainlyby its Articlesof Associationapproved on November15, 1989 and a Statementof Policyapproved in July 1990. 2. ICBC'sShanghai branch is one of four participatingfinancial insti- tutionsunder the Bank'sShanghai Industrial Development Project. In 1991, ICBC obtaineda loan of $100million from the Asian DevelopmentBank for relendingto industrialprojects including a technicalassistance/training componentfor ICBC'saccounting, staff training,audit and managementinforms- tion system. ICBC also raiseslong-term local currency resources through bond issues(up to five years in maturity)which cumulativelyamounted to Y 6.357 billionat the end of 1991. 3. Organization.Manaaement and Staffing. ICBC is headedby its Presi- dent (Ms. ZhangXiao) and four ExecutiveVice-Presidents (EVPs) at its head officein Beijing. The head officehas 20 departmentsdivided among the EVPs and the main groupingsare: creditiloanand accounting;planning/research, audit and internationalbusiness; general administration and subsidiaries;and savingsand personnel. The head officeis involvedmainly in policyformula- tion and overallsupervision of branchoperations. Lending operations are fairlydecontralized in its provincialand regionalbranches (29), city branches(180) down to the prefectural,county, and districtsubbranch level with varyingdelegated authorities. The head officeperforms some banking activities mainly relating to foreign exchange and term loans under its Tech- nical Innovation Credit (TIC) department.

4. In December 1991, ICBC had a total staffof slightlyover 500,000, of which about 19 percentand 65 percent are university and high school gradu- ates respectivelyand about 16 percenthave had somevocationalltecenical training. The head officehas a small complementof about 800 peopleof which two thirdsare professional.While on-the-jobtraining is emphasized,ICBC - 125 - ANNE2_1 has five colleges,43 adultmiddle schools, and 46 trainingcenters. Its trainingincluded the projectappraisal program sponsored by the Bsank'sEDI where some 52 staff of its TIC departmentattended. The ADB technicalassistance component is providing funds for further training, particularlyin loan appraisal, project management and market analysis as well as in the management of foreign exchange business. 5. policies ond Strategies. ICBC intends to expand its operations and to work towardsproviding the full range of banking and financial products and servicesfocussing on mediumand largeindustrial enterprises and export- orientedenterprises. One of ICBC'spriorities is to expandits international businessby increasingthe numberof its brancheshandling foreign transactionsand its networkof correspondentbanks and representativeoffices, by onlendingof creditlines from foreign/internationalinstitutions (e.g., World Bank,ADB, etc.) and raisingresources in the internationalfinancial market throughbond issues. Anothermajor objectiveis to facilitatespecialization and/ormergers (enterprise groupings) in supportof enterprisereforms in China to improve efficiency. It also has prudent financialpolicies which shouldpromote a diversifiedportfolio, e.g., exposure limits on industrial sectors(30 percentof portfolio)and singleborrower (10 percentof its net worth or Y 4.8 billionat 1991year-end); and maximumproject size of up to Y 2 billionsmaximm debtlequityratio (4tl)for project,minimum financial rate of return(15 percent)and positivecurrent ratio and debt servicecover of eligibleprojects. It ensuresthe "matching"of its uses and sourcesof fundsboth in terms of interestrates, maturities, and currencies.Further- more, ICBC has taken steps to bettermanage its liquidityby targetinga reasonable"loan/deposit" ratio of 75 percentin severalof its branches. One of its medium-termobjectives is to fully computerizeand interconnectall its branchesand officesfor which some technicalassistance would be available under the ADB loan. While ICBC does not formallyhave policieson its "gear- ing" ratios,it is committed(under the ADB project)to maintaina maximum total debt/equityof 20 times and net long-termdebts/equity of 10 timeswhich are reasonable.

6. Resultof Ooerationsand Finances. ICBC's actual and projected incomeand balancesheet statementsfor 1987 to 1996 are providedin Attach- ment 1. ICBC'sgross revenuesdoubled from 1987to 1991 to Y 75,755million with an averagegrowth rate of about 22 percentper year. Despitethe interest changesin 1989/90,ICBC has kept its marginover 2 percent. Its net incomegrew at about 11 percentper year reachingY 6,339million for 1991; this is equivalentto 13.35percent return on equity(or 7.35 percentafter inflation).Its administrativeexpenses averaged about 0.7 percentof total assetswhich is reasonable.Its currentratio remainedpositive and averaged slightlyover 1.5 times. However,its capital/loanratio has been declining slightlyfrom a high of 6.98 percentin 1987 to 5.75 percentat the end of 1991. Its gearingratios have been maintainedat reasonablelevels with long- term debt/equityat 8.29 times and total debt/equityratio of within20 * 1 in 1991. Althoughlong-term loans more than doubledfrom 1987 to 1991 to Y 105,508million, ICBC's long-term resources more than tripledmaintaining an appropriate matching of maturities. 7. Arrears and Loan Provisions.At the end of 1991,ICBC's arrears increased by 43 percentto Y 27,105million up from Y 18,900million in 1990. - 126 - ANNEX 15

However, as a percent of total outstandingportfolio, arrears remained at a relatively low level of 3.4 percent. Arrears from short-termiworking capital loans accounted for 98 percent of total arrears and were 3.8 percent of total outstandingworking capital loans; arrears from long-term loans amounted to Y 562 million or 0.53 percent of outstandinglong-term loans. ICBC expects to maintain a collection ratio of about 95 percent which should be achievable given the short-termnature of most of its portfolio and consequent close monitoring of the accounts.

8. Accumulatedprovisions for doubtful debts would amount to about Y 2,590 million (9.6 percent of total arrears) which is equal to 0.32 percent of total loan portfolio, a level currently allowed by the Ministry of Finance (MOP). MOF regulationswould allow this percentage to increase to 1.0 percent of loan portfolioby 1997. However, ICBC is recommendingan increase to 3 percent by 1997 which is appropriateand approaches internationalnorms.

9. ICBC's accounts are externally audited by the State Audit Adminis- tration (SAA) which also audits other World Bank projects and is supportedby the Bank's TA projects to improve its capacity and standards. Under TIDP, ICBC would provide the Bank with its audited financial statements includinga long-form audit and statement from SM on the adequacy of its loan provisions (similarprovision is contained in the ADB agreement). To help implement ICBC's program to modify, upgrade, and modernize its accounting,auditing and MIS, ADB is providing TA funds to finance consultancy/advisoryservices and training.

Tianlin Municilal Branch

10. Backaround. While ICBC head office will be the signatoryof the Project Agreement with the World Bank under the TIDP, its Tianjin Municipal Branch (THB) would be approved and authorized to implement ICBC's participation under the TIDP. THB is one of four municipal/autonomousregional branch of ICBC (Tianjin, Shanghai, Guangxi, and Xinjiang branches). At the end of 1991, TMB had total assets of Y 28,048 million ($5,100 million), deposits of Y 15,124 million ($2,750 million), total loans of Y 23,180 million ($4,215 million) and net income of Y 169 million ($31 million). Compared to other branches, it is estimated that TMB ranks 12th in total assets and total loans, 16th in total deposits, 10th in net income and about 14th in total Technical Innovation Credits (TIC) or long-term loans. It has a total staff of nearly 11,000 of which about 80 percent are considered professional (high school and above education and with substantial experience in banking). TMB has 4 district subbranches, 9 district business offices, 263 savings offices, and 5 county subbranches.

11. Oraanization and Manasement. TMB's organizationalmost mirrors that of the head office with equivalent 20 departments. One major difference is that four departments (internal audit, supervisory,personnel, and trust/ investment agency) appropriately report directly to the president (equivalent to the rank of EVP of head office) while the other departments report to three Vice-Presidents divided basically into administration, lending operations, banking/savings and international operations. Of note are separate department for credit card and a training center. The main branch accounts for about 10 percent of the staff or 1,072 of which 872 are considered professional. - 127 - AM la

12. Policies and StrateRies. TMB's operations are implementedin accordancewith the policies and regulationsadopted by its head office. Under the TIDP, TMB has agreed to adopt some policies specific to its operations as contained in its Statement of Operating and Financial Policies. ICBC and THS have agreed on these policies. ICBC head office would also consider adopting similar policies for its other branches. It is significantthat, for the first time, TMB will adopt and formalizeits policies in many important aspects. For example, THM has a defined a timetableto achieve ICBC's plan to attain a more reasonable loan/depositratio of 75 percent and a capital/loan ratio of 10 percent by 1996. TMB also defines some importantoperational exposure limits as followss (a) long-termloans not to exceed 30 percent of total loan portfolio; (b) maximum of 35 percent of savings deposits to be utilized for long-term loans; (c) exposure to single sector not to exceed 30 percent of TMB's total loan portfolio and 10 percent of TMB$s equity to a single enterpriseor maximum of 70 percent of client enterprise'stotal assets whichever is lower. TNB targets a minimum collection ratio of 90 percent of amounts due which is acceptableand will enforce agreed fixed loan repayment schedules from clients which heretofore,have been flexiblewith emphasis on foreign exchange loans. Furthermore,TMB will closely monitor and supervise its loans ensuring that full leverage on the client is utilized to improve repaymentperformance, e.g., working capital loans to be renewed only for enterprisesnot in arrears on long-termloans. TMB will also require and ensure full collateral coverage on loans and appropriateexternal audit of its clients' financialaccounts and statements. Such operating and financialpolicies would provide TMB appropriateand prudent guidelines for its operations.

13. Technical-Inovation Credit DeDartment. This department (TICITMB) will be directly involved for ICBC's participationunder the TIDP and given the expected size of subprojectsand subloans,would be undertakingthe appraisal of subprojects.It has a total staff of 222 of which 88 are in the main branch. TIC in the main branch is headed by a general manager and three vice-managers. One vice-manageris in charge of 4 divisions involved in project appraisal/supervision:light industry and textile, heavy industry, machinery and electronics,and research and development. This group has four engineers,two economists,one lawyer, and two management engineer background. Seven people are involved in appraisalon full-timebasis including three engineersand two economists. Since 1979, this group has been appraising and approved 132 projects out of a total 214 TIC projects requiringmostly long- term local currency loans. It is guided by ICBC's manual of operations for TIC (full project cycle) and a project management and appraisalmanual issued in 1986 and patterned after the CIB appraisalmanual. For TIC loans, it requires a feasibilitystudy, audited financialstatements, and documents from relevant approving agencies such as the finance and planning bureaus. TIC in the main branch would, as a standardprocedure, require a "credit check" on the applicant'screditworthiness and inputs from a sector specialist from relevant subbranches. Subbranchesnormally perform the regular follow-upwith quarterly reportingand coordinationwith TIC in the main branch which does the full supervisionup to project completion for all foreign exchange loans (e.g., loans under the TIDP). While TIC has had substantialexperience in term financing, its staff needs to participatein the training to be provided under TIDP particularlyin the appraisalof enterprisesrestructuring and market-orientedoperations, analysis of environmentalaspects, and TIDP's procurementprocedures. - 128 - AM 15

14. FinancialPerfogmne, and Condition. A sumaOry of TIMIs income and balancesheet statementsfor 1987 to 1996 are shown in Attachment2. ThE's performanceapproximates that of ICEC as whole in termsof overallgrowth. Grossrevenues more than doubledfrom 1987 to 1991 to Y 6,426million with an averagegrowth rate of about24 percentper year. In 1989190,TMh has also kept its interest margin over 2 percent. However,net incomegrowth showed a lower average growth of about 6 percent year (11 percent for ICBC) reaching Y 135 millionin 1991; TMB'sreturn on equity are almost identical to ICBC as whole, i.e., 13.18percent nominal and 7.13 percent real. Its administrative expensesaveraged about 0.45 percentof total assets which low and 50 percent that of ICBC as a vhole (0.7percent). Its currentratio remainedpositive and averagedslightly over 1.7 times. TME's capital/loanratio was also declining from a high of 7.15 percent in 1987 to 5.84 percentat the end of 1991 which are slightly lower than ICBC as whole due mainlyto the low retention of profitsby the branch. However,1MB's projectionshow that by 1996 its capital/loanratio would be 9.5 percentcompared to a targetof 10 percent. Its gearingratios have been maintainedat reasonablelevels with long- term debt/equityat 6.85 timesin 1991and total debt/equityratio was within 20sl for 1991. TMB like ICBC as wholemaintains more than adequatelong-term resourcesto funds its term loans,i.e. ratioof term sourcesto term loans remainedat almost3:1 by the end of 1991. Total loan/depositratio was high in 1991 at 153 percent. To ensureits liquidityand lower costsof short-term borrowings,TMB plansto exert effortsto mobilizeits own depositsso that such ratiowould be within100 percentby 1996;however, working capital loan/ depositratio would be at 75 percentby 1995.

15. Arrearsand Provislons. At the end of 1991,TMB's arrearsWere reasonablylow and amountedto Y 519 millionor 2.3 percentof outstanding loans. Arrearsfrom short-termworking capital loans accountedfor 91 percent of total arrearsand were 2.39 percentof totaloutstanding working capital loans;arrears from long-term loans amounted to Y 47 millionor 0.2 percentof outstanding long-termloans. ICBC expectsto maintaina minimumcollection ratio of about 90 percentwhich shouldbe achievablegiven the short-term natureof most of its portfolioand consequentclose monitoring of the account. Accumulated provisions for doubtfuldebts would amountto about Y 23.3 million (4.S percent of total arrears)or 0.1 percentof total loan portfolio, a level currently allowed by the Ministry of Finance(MOF). TMB is still projecting to maintain this level of provisions although it would follow head office policies once theseare approvedby MOP, i.e. to increaseaccumu- latedprovisions to 3 percentof outstanding loans. 16. The TianjinAudit Bureau (TAB) conducts regular audits of TMB's operationsbut are currently limitedto accountsrelating to the creditplan, i.e., all accountsexcept profit and loss and agencybusiness. Under the TIDP, SAA would authorizeTAB to prepareaudited financial statements of TMB includingaudits of the projectaccounts, statement of expenditures,and special accounts. These auditreports would be submittedto the Bank withinsix monthsafter end of each fiscalyear, i.e.,by June 30. IaA.twll san DCm%Ifft _ bw Statame

for "ar .uiAd Zeomber 31 IV" iwo, D ogo zsv, lon iTo AMw AMiooa IV9 l 010 Ozjdammud 6 =outh.

bIL.t an Loats 23,433 29.431 37.9I" 60.132 62,974 64,101 36.201 6,S868 7S,89 ruto"to por .(l 19 1.802 2.925 3,371 6,868 790893 84,899 91.217 A640071CO116lotbar337 7,641 8,630 4.828 696 9,336 9,731 10.lit 10.3*4 1,042 904 2.102 1,301 3,004 1.1 If ,244 S,A0 3.784 8.067 4.414 memaL _ 235792 3.419 41.565 69.102 72.916 75.755 36.540 sO.o28 66.249 s24es 8.O013 106.109 ow depots mUUL 9037 11.348 17.260 31.384 34.319 36 147 1s,09 36 S.53 Intuteet ow borrosltu S.21S IO.17U 39491 42.649 46.061 4749.4 6,775 14,69 152 14.439 7,6 s 1.2 153941 16,738 17,373 S1.454 OLp n dBpes". t 1S94 1,943 987 324407 3,638 4.182 143 2372 4S°.0 6,273 7.403 6,733 10.308 294 362 438 S19 610 418 792 9S1 11 41 13569 1.541 . for O bts * 4se9 s 586410 $ 3308224S 61390 2321 7S80667 603 prov. or o el 0 39 3,12 2.2316PS39 937 ass helm... tax * 0 02 0 05 0 0 0 0 0 1,263 14,390 2,061 3,373 378 S 5.33 1,599 S3.8 4,136 44.48 1.147 3233 Total snbtte" IL174 22.334 30-9'6 53.888 _j-j_ 319.614 3.35° 6.7917 569.03 83_758 790524 6J.041 obommaimam I0.863 10.359 ~~8.418 13.214 13.230 15.941 5.503 Lull3 17.0 1865-0 19.4961 Pg-j S Lees. Staff some M Vandlfsr* I"& tonst katp TM SO2 1,087 1,380 2,239 2,394 2,331 1,214 2,606 3.007 3.393 3.73 4,108 400 400 400 400 400 400 200 400 400 400 400 400 2i_o Wf two" Tea 7.175 9.378 8.790 12°373 1049e 12S990 4.091 12582386.77 1S°6S7179 1°B376 17960 Ues tnome tfx 4,249 3.662 58424 2 632 7.397 S.034 2,226 7,92 83 9,2 Add$ DOW*/W*.Mlos.1t. ,321 92247 505 543 462 1,1231 1,365 1403 543 1,343 1,698 3,87 2,034 2,239 W_3 4.059 4.193 6.974 4.2 6.330 2.50 6.417 61 7.512 I&" 9.7 tome taxi. total sese*taf _1.80 1.26 1.02 1.22 Ret £coo.ulw.. total 03 0.63 0.23 0.70 0.8 0.6 0.60 0.33 oeset. 0.81 0.84 0.7 1.03 0.34 0.63 0.22 0.53 0.51 0.31 fkt Inwme.quitp 0.47 0.44 13.0 14.27 12.64 18.3 10.03 13.33 4.91 11.63 12.02 11.60 11.14 10.34 cataIoet 7.00 7.50 16.00 13.00 10.00 5.00 3.00 6.00 so"l tax". 4.08 3.00 3.00 3.00 3.40 6.77 -3.1 3e.37 0.03 7.33 1.91 3.63 7.02 6.00 6.14 3.34 aesets ~~~~~ ~~~~~0.610.62 0.60 0.65 0.74 0.57 0.31 0.65 Income from ... u/Av.. lean portfolio 6.94 .71 0.73 0.73 0.77 7.21 7.9 11.15 O."9 8.39 3.68 7.86 7.7 7.39 7.09 6.81 depoet:. ~~~~~ ~~~~4.064.32 3.12 8.06 7.69 Interest Marfn 6.11 2.76 3.20 3.23 4.99 4.77 4.54 ~~~~~~2.882.89 2.64 3.09 2.20 2.39 0.91 2.55 2.48 2.39 2.32 2.24 votes Op*r*tlqiadninstratles oxempomsIncludes staff boomelwelfare for ratio sanaysts. Industrial and Cainrasl Bnk %*CIns - Bl&nce Sheet.

Pert jee aede )eoeur 31 L,UO spot Zvi" a WYS LsVJ IWIS Ld'6 L1

qW= Asooto 2.627 2,854 4,014 4,710 5,244 5,696 5,964 6,400 7,10006,00 ,00o1000 _tjt72, 6791,61216960.40190 7237.4 7897458,70200473,7800 927981,38001 1,219,000 h pres 0 50 o 53 207 31,120j7 1.7587 2,o5903s 3.187987 3,7724 t247,00 8 9,342 10,279 10,935 tore Losom 41,876 s30,1t ,S637 64,404 76,543 105,508 116,338 117.700 131,700 147,400 165.300 165,200 ,IVI"h nd sa 41,67 so:I 57 530 71667 7411010.;4j 111,400 124,700 16o9.80 156,eo 7 e80 0 58 325 4366 1,54529 n 0H 57.793 67 n. no not taft-terlLO&e 41.876 s0o188 57.327 63.016 75,674 105.500 116.330 117.700 131.700 147.L00 1.300 13.2009 utessIsnj 4,254 7,042 7,6512 14,46 14,410 46.541 46,84 74,300 6550 9So60 107,300 120.100 Mr& edIwauet 0 0 7,3 32,0 i3,400 42,243 49.027 417,400 53,300 1559.17000 66:600 70.800

1.5551580.sciatien 68a~~~~~~~Go973 '1,32 '1,743 '2.282 .e,:e l.. e n.e: lae. U.n. lktasvta3.686 Pimd 4J.601 5."I &4.45 7.912 10.170 11.279 11.300 12.600 14.100 15.800 17.700 Oter Asse"t. 12,360 .7,331 13,653 8,092 20,536 24,276 18,654 26,000 S3,600 35,100 39,400 44,300 Total Aseets 447.07S 523.212 596,672 736.460 S95.157 1.117.449 1.184.943 1.251,600 1.401.800 1.570.000 1,75.400 1.969.400 UIITW & 1

w1Xt@t 155,143 183,77 206,609 20W,617 245,206 277n366 341,51S 310,700 348,200 390,500 4 o90,00 Foreig raq01,9 ,2 94 .. ne n.e.G nk.e. n 139,r783 1513.81 164,5795 174,216 20,4 217,025 20s,7s5 244,500 274,000 307,300 344.400 CuentV atats I of. 386,300 ldS.tCgS ~~~~~~~O528 0~~~~ 0 0 0 1:0 U.S. U.&. U.e. U.. IL.*. U.*. M.e. .2I~~~enois1bands 1,65~~~~~~~91612 110 1,33 us. u U.1.e. U.S. n.e. U.*. lu.e Al t;ot 11 95w79 53,10&:457§ I'm137u,90 nU.& n.e. n.e. nU.. u.s. n.e. n.e. Tol Currnmt Lbilities 310.564 344.6U 394.581 3S5.20 4572 49211 547.2Q 555.200 622,200 697.00 782.000 877.100

98,572 130,482 149,350 20, 492 272,143 363,117 401,677 406,300 435,400 51, $72,30 642,000 00 1,195 3.021 4,9~~~~~~~f.16926,9107 32,6831 31,900 35,400 40,100 44,900 50,40 0 1,167 2.3~~~~:175109 ,458 6,77 6,19 7,100 7,900 8900 t10,000 120 0 0 .. US. US .. US 08 0° 299. n.U U": n.e. ne U. Total -t Lbilitie 98,572 S11,849 1SS.241 210.921 280,.69 396.384 441.227 445.300 498.700 559.700 627.200 73600 Agency Business 6,301 7,152 7,849 6,24 8,220 71,524 66,422 60,300 90,00 101,000 113,100 126,900 Tenet and 0 0 0 27.490 29.2~~~~~ 3494 ~~~~~~042,904 41,30 44,3 S:9:0052 5,300 r 1 hts 3,93200 9,042 °62256396 f791,056 561,1376 27,441 59 200 64,700$ 4 2 580s 9O,S400 Total LSabilities 420,757 492.659 561.896 495.324 048.219 1,053.481 1,125.264 1.18l.300 1.323.900 1.484.700 L.6g3.800 2,866.300 WtAi ite 18,449 16.449 16,449 16,449 18,449 18,449 16,.449 18,:400 16400 18400 16,400 16,400 at ecin rofits 187,48472 12,41404 16,328 282,680 26,4490 29'5964 37 15.000 42,300 48,200 56,700 64,600 LS,941 5: 6000 17,200 16,70 19,5oo 20 too Total E4uStv 24,321 30.553 34.777 41.137 46.939 48,047 54.176 54.300 60,700 66,600 75n.00 81.000 t Total Liabilities, and Butv 447,078 523.212 596.673 736.461 89S.158 1.117,469 L.184.945 1.31.4,00 1.401.800 I.570.000 1.78.400 1.969.400

m1Wsnt Ratio (times 1.2 1.3 1.3 1.4 . 1.6 1. 7 1.7 1.7I 1.7 1.7 1.7 CalLiAabiziT Rat.eqio (ZineG)6.9 15.99 14.126.90 16.1t4.864.4 6t 18.0m 21 2077 21.7660 21.816.0 22.295.9 22.155.94 22.45.8 Tern z Long-terniTen Loan.8e~~~tlsquity (tines) (tinee) S~.32.98474 4.32324 4.43.28 3.95 4 32 8.294.23 0.14264 8.04.24 622.252 6.44.24 25 0358425, 8464. I

Notet CupSlfWac ratio does not reflect e4hted loan amounts by risk categories.TSre finea includs epity plus long tarn debtel tern l1am memo long-to - 131 - hWSL 1

ItLutAWte an&CMe WnelSA g1 Chia - IncomeStatem

foryg sded Deceuber i t°ie. t Mr 'M 4 A Pr 2t.td

v,nc 2,S72 4,170 6,930 7,294 6,426 6,940 7,496 8,095 6,743 9,442 later soS Oeskt3w5 vliB 91 124 132 142 153 166 17 193 UC.S. tU.O. U.-S. aU.S. U.S. n.e. n.S. *.*. a.e. n.S. Tetel I=9" Ll .4A_228 I.021 Zj_ 6.45 S Zs 7.649 S.26 8.922 9.638 m on deolt 87 37 692 809 723 781 843 911 984 1.063 Inerestoa dttorr e 2,289 3,321 5,799 5.96 5,000 5,400 5,832 6,299 6,803 70347 et as 45 59 69 8S 9 10 119 131 144 £delntoratte.buena.. ~~4 4 9 to1 11 12 13 Or.fer DOubtful Debts 0 15 2 3 4 4 4 4 4 4 ftoa. forhzer nLoee 0 0 0 0 00 0 0 cIbe 49 60 94 106 102 107 113 119 126 133 rew i2663 1L 6.W52 6.9U 5.926 6j99 6 79117.463 8.059 8.703 0peratim LOAM3P46 387 368 J 632 L6_3 23S 2l 84S 932 Leos Staff oi. nd Wolfer.Fund 16 18 26 31 51 61 46 71 77 83 Los,s bDe lpm.ntfund 6 7 11 12 20 24 26 2S 31 33 cMe BeforeIncoug Tax 324 l MLj 427 561 38a 64 99_ I S1J to*$ Ifom tea 23 240 228 29* 392 423 438 495 335 578 letIncome 109 JU In 135 169 In7 IL 220 12 S Uccme toawe. ttSot aertto 0.00 2.11 1.46 1.16 1.25 1.40 1.32 1.29 1.25 1.23 1.20 not 3.melwe. total seete 0.00 0.71 O.75 0.35 0.61 0.65 o.9 0.57 0.56 0.35 0.54 Not incomslsve..9*Ays 0.00 11.91 12.82 9.93 11.73 13.18 11.22 11.65 10.08 8.72 7.96 1fUt. rte 7.00 7.50 I1.00 15.00 10.00 6.00 6.00 5.00 5.00 $.00 5.00 Ree1 tax" .7.00 4.41 -5.1S .5.07 1.73 7.18 6.22 6.45 5.0S 3.72 2.96 Op t. &g_a. mp."n 0. tol cest 0.00 0.33 O." 0.46 0.4 0.54 0.54 0.53 0.52 0.51 0.51 ntcomefrom LoenclIAw.loan portfolio 0.00 21.1S 18.35 26.63 2.53i 17.80 17.17 16.61 16.54 16.41 16.22 VinancalExpeneoolAve. borrowIng. & de:tse 0.00 18.27 16.29 24.2 21.26 15.33 14.71 14.31 14.02 13.83 13.61 InterestMgTSU 0.00 2.91 2.08 2.10 3.27 2.47 2.45 2.50 2.52 2.56 2.61

Notes OperatIftlodInnIstetivs, expanseesIcludes oteff bowsalvelts"e for ratioosnelylo. - 132 - MNEX 15 Attachment 2

tutrl endCNA rmcatl -k ofofin .

for year eaW beeembot 31 ssllc IV Ivs. Iw6esi 4yg pgY&jjA £131 1111" eId IIU3 £1w0 MET!

es4 94 104 94 114 120 10 130 18 2S0 .ewedt etote 1,308 1,348 1,59 2,092 2,440 5,031 3,48 4,480 ,338 4,145 e's l°%sta/ 11,434 1,47. 4.0t,9 1,801 19,775 321253 2.4S0 23.$90 24.360 25.520 Total Currt Aeet 12 14.014 16.6 19.987 IL 24.44I 26.218 2S220 P.87e lI.685 arog.Loan Portfolio 12.811 14.3SS 16.734 20,307 23.180 5.50o 27.75 s0.015 51,899 54,013 Lten WorkuinCapital loane 11,434 12,67 14,889 17,801 19,775 21,253 22,430 23,590 24.360 23,320 L e.. t.rnLoans 1.377 1.48I 1,865 2.306 3.405 4,247 5,525 ,423 7,539 8,493 vbihe yuan 1,343 1,480 1,568 1,896 24604 3,330 4.270 3,210 *,140 7,080 Le-IP *W-0-7 p 34 205 297 410 797 917 1.035 1.213 1,599 1.613 Laos*. vsai 0 13 16 19 23 27 31 35 39 43 Vat Loon-teno tLo 1.377 1.670 1.849 LML &M32 4t-#° LII4 JA90 7.500 8.650 4gc B sUN" 941 900 1,037 1,189 1,327 1,300 1,670 1,800 2,040 2,230 Tr.aatd lusestmouto 0 0 0 0 0 0 0 0 0 0 FledLAssts toast) a.e n., n.e n.e 1.e n., .S. .0. U.e U.e Las *c." eprdcSation n.e U.S n.S U.* n.e n.4 n.e U.S U.a U.& ftPzd A-to 59 94 99 113 146S in J 220 260 28 OtherAstate 277 444 400 437 660 878 1,270 1,830 2,560 3,78 TotalAsgte 13_61 17.144 20.039 jj.21W28.048 31.162 h4.6# A 42SAM 46.628 LThB!LI?I28I ZUIST

Locaem P 4,021 4,293 483U 53,02 6,936 8,100 9.300 11,000 12,600 13,700 Torefgcurrecy U.S. U.S. n.&. U.e. n.e. n.e. n.e. U.S. U.S. U.e. Borrowial:(PlC) 3.532 4,083 4,894 5,639 5,919 *,200 6,500 5,394 3,417 1,826 Ln Star n.e. U.S. Q.&. n.S. n.S. n.S. n.S. U.S. U.e. n.S. iac l d U..S. U.S. U.S. n.S. n.e. U.S. n.S. U.S. ns. aund In transt Ue..e. U.S. U.e. U.S. U.&. n.e. U.S. U.S. .&. Total Current Labilites 133 78 9.277 11.141 12J87L j4J%MA E0 1639" 16-017 1AIB6 -ter M "1101MSw oal T oa 3,323 3,713 5,091 4.684 8,188 9,600 11,400 14,400 17,900 21800 ?oren currency n.'e. n.S. U.'. nk.e. n.S. n.S. n.S. U.S. n.S. U.S. Fi nanil Bonds 101 156 i6i 2536 315 330 580 420 430 $00 L,4-terounRS gYC) 34 1S8 273 58 757 870 1,002 1,136 1,333 1340 auuqpProisions0Lss 0 0 0 0 0 0 0 0 0 Total Loo-ternuSbltiaa 3.660 4.057 5.526 WM52 E 105S00 12-982 16.176 19.683 25.840 A4ecy Busesn 855 906 991 1,149 1,409 1,60 1,700 18S0 1,120 2,350 Tguot and luva.tment 0 0 0 0 0 0 Otber LiblItiles 2,011 2,431 2,788 2,698 2,522 2,517 1,676 890 810 740 Total LiablSitie 14.099 ISMSl 18.383 22331 56.064 2977 12.15e X352 8.630 42.456

-wmcapital 771 771 771 771 771 771 771 871 971 1,171 Retained lamingp 145 314 317 441 381 731 945 1,439 1,774 2,049 Nat operating Profit. 346 387 348 470 $32 468 736 798 843 932 Total tvu S914 985 1.088 1"S2 2M 1.302 1?736 2.310 2.743 3.240 Total Liabilities and Soultv 15.361 17144 20,039 24.2U13 2.048 31.162 51h 38.460 42.238 46-628

Wflante Ratio (time) 1.7 1.7 1.8 1.8 1.7 1.7 1.7 1.7 1.9 2.0 Capital Adagucs Ratio (3) 7.15s 4.87 6.30 5.97 3.84 5.90 4.26 7.71 8.62 9.34 Total Lib tleeloquit (time) 1S.39 16.01 17.00 18.59 19.20 19.29 18.52 15.30 14.07 13.10 Long-tern dahtlequity (tbin.) 4.00 4.12 5.00 6,21 6.85 7.19 7.48 7.00 7.17 7.56 ter finsncelTer Loas (time) 2.66 2.43 2.99 3.02 2.74 2.36 2.45 2.33 2.62 2.76

La Uaudited. notet Cpital aequc ratSo does not reflct wetigtd blen amounts by risk catarle. TeS fince mean. net long-tern lSbil- itisa tar lo.t insn long-tarn l a balance shet. Sourcet IIJC. -133 - ANEX 16

TIAJIN IN TIh DEVELOEN PROJECT

The Bank of Communications (BOCOO)

1. The InstitutIon.BOCOM was first establishedin 1908 in Beijingto providelong-term finan¢e to the transportationand telecommunicationssec- tors. The bank was nationalizedupon the foundingof the PRC in 1949,but its operationswere subsequentlysuspended until 1986,when it was reestablished by the StateCouncil and relocatedin Shanghai. On March 10, 1987,PBC approvedBOCOM's charter to operateas a nationwidecomprehensive bank under its supervision.It may raise fundsand providea full range of commercial banking services in both localand foreigncurrencies, as well as establishing subsidiaries,making equity investment, issuing guarantees, syndicating loans and issuingand tradingsecurities domestically and internationally.It may also investin or form joint ventures with overseas banks, finance companies or enterprises,subject to the approvalof PBC. 2. BOCOM'sbusiness develonm2ent strateay is describedas a "threecom- binations"strategy, combining domestic and international banking business, wholesaleand retailbanking and traditionaland nontraditionaloperations. It has been one of the most innovativefinancial institutions in China,since from its reinceptionit was allowedto selectits own clients,to set up brancheswhere creditdemand was greatestand to accommodatediversified own- ershipat the branchlevel (branchesare separatelegal entities). This strategy has enabled BOCOMto gain the full support of provincial and local governments. 3. BOCOMwas the firstbank to adopt a nublicshareholding system and to extendthis to its branchnetwork. PBC, as representativeof the state, holds 100 percentof the head officeshares, while the head officeholds a minimum of 50 percent of the shares of each branch, with local governments, enterprises and individuals holding the balance. Each branch therefore is a separatelegal entitywith operationalautonomy and financialaccountability. However,the head officeexercises "unified leadership" over the branchesin the appointment and removal of principal staff, establishing operating policies and plans, operating rules and regulations and foreign-related business. 4. BOCOMhas 70 branches and subbranches In 69 cities, of which 27 are engaged in foreign exchange transactions, 29 handle insurance and 38 deal in securities. BOCOM'srecent financial performance has been very satisfactory. At the end of 1990,BOCOW had total assetsof Y 78.5billion, an increaseof 48 percentover 1989. Total loan portfolioincreased at a lowerrate (42 percent),reflective of a lendingslowdown, as the loan-to-depositratio declinedfrom 106 percentat the end of 1989 to 88 percenta year later. Consequently,net profitincreased 41 percent,to Y 1.6 billion,and returnon assetsshowed a smalldecline from 2.2 percentto 2.1 percent. Nevertheless, BOCOC'a return on assets is quite high by international standards, and return on capitalemployed (24 percent)is also very satisfactory. - 134 - ANNEX 16

5. BOCOM's Tianiin branch was establishedon February 28, 1992 with a paid-in share capital of Y 205 million, of which BOCOM's head office holds Y 50 million, Tianjin Municipal Government,Y 100 million and 26 entities (factories,corporations and financialinstitutions) hold the balance of Y 55 million. Other than its share capital, BOCOI-Tianjin'smajor source of funds is deposits (Y 500 million). It will prepare its first annual financial statement at the end of 1992, and it will be audited by the Tianjin Audit Bureau. BOCOM-Tianjinhas received the required authorizationsto carry out foreign transactionsand to become a participatingfinancial intermediary (PFI) under the proposed TIDP.

6. BOCOM-Tianjin'smanaRement consists of a general manager and two deputy generalmanagers. Togetherwith three other senior staff and two representativesof the Tianjin Municipal Government,they form a seven-member managing committeewhich is responsiblefor taking operationaldecisions. BOCOM-Tianjinhas a total staff of 145, of which 50 are professionals. It is organized into 12 departments,with one third of staff in the Credit and InternationalBanking Departments. BOCOM-Tianjinwill be responsiblefor appraisal and supervisionof subprojectsas a PFI for TIDP and will forward each subprojectit finances to the Bank for review. Four professionaland two support staff from the Credit and InternationalBanking Departmentshave been selected to form a long-term lendingunit under the direction of the Deputy Manager of the Credit Department,who would report to the Deputy General Man- ager for InternationalOperations. Several staff are from CIB and have long- term laending experience. BOCOMhas already begun working with CIB and will adopt the same project appraisal and supervisionmanuals developedby CIB for its own staff. Also, BOCOM is placing a great deal of emphasis on rapid ini- tiation of staff training in subprojectappraisal and supervisionand training carried out before loan signing could be financed retroactivelyunder the proposed project. However, BOCOM's participationin the TIDP will be limited by the small size of its own equity and the correspondinglimitation on its cam exposure to any single borrower.

7. BOCOM-Tianjin'smain operatingand financialpolicies have been reviewed by Bank staff. These are now consolidatingin a formal Statement of Operating Policies and Procedureswhich establishesthe basis for investment financingactivities, and provides prudential limits to safeguardits financial condition, such as: (i) exposure in a single enterpriseor group of enterprisesshould not exceed 20 percent of its equity; (ii) the ratio of capital to differentcategories of assets weighed by their respective risk should not be less than 10 percent; (iii) debt service and interest service coverage ratios should be not less than 1.5 times; (iv) the ratio of long-term debt-to-equitywould be limited to a maximum of 5:1; and (v) collections should be not less than 90 percent of total repaymentsdue.

8. BOCOM-Tianjin'sfinancial forecast is supply driven, that is, it is governed by its capital structureand leverage limit rather than potential credit demand. Loan approvalsin foreign exchange are estimated to be quite high ($256 million) in 1992, reflecting sizeable foreign exchange deposits it received following its inception,and would decline to $148 million in 1993 and increase thereafterto $274 million in 1995. Local currency approvals (i.e., expected outstandingamounts under approved credit lines) would increase from Y 2,298 million in 1992 to Y 5,000 million in 1995. This pat- - 135 - ANNEX 16 tern of lending growth is consistentwith BOCOM-Tianjin'scommercial banking orientationand the low leverage base from which it stsrted in 1992.

9. Financial Performance. Projectedbalance sheets and incame statements for NOCON-Tianjinfor 1992-95 are provided in attachmentstwo and three of this annex. A net profit (after business tax) of Y 25 million is projected in 1992 (10.9 percent return on equity and 2.1 percent on assets), rising to Y 50 million in 1995 (19.7 percent return on equity and 1.8 percent on assets). The high return on equity is reflective of low initial leverage,and the overall high returns are also due to the fact that BOCON-Tianjinis not subject to income tax, since under the public shareholdingsystem shareholders pay income tax on their sehareof net profits (66 percent of which is distrib- uted as dividends). BOCOM-Tianjin'sexpected reliance on borrowing to finance growth is reflected in its debt-to-equityratio, which would increase from 4.2:l at year-end 1992 to 10.4:1 at the end of 1995. Long-term debt-to- equity,which would be limited under the TIDP to a 5:l maximum, would increase from 2.1:1 to 4.5sl. Overall, BOCOM-Tianjin'sfinancial performance is expected to be quite satisfactory. - 136 - AML 16 Attachment 1

CHI TIANJIN INDUSTRIALDEmELOPMENT PROJECT

Bank of Communication--Tianlin Branch

ODerations (Y million)

1992 1993 1994 1995 1996

Aprrovals Local currency 2,298 3,223 3,600 1,200 5,000 Foreign currency 256 148 246 252 274 (* million equiv.) (16.8) (27) (45) (16) (50)

Total 2.551 3.371 3.846 4.452 5.271

Commitments Local currency 2,039 2,901 3,559 3,821 4,879 Foreign currency 230 153 230 241 252 ($million equiv.) (12) (28) (42) (44) (46)

Total 2.269 3.057 3.789 4.062 5.131

Disbursement. Local currency 1,835 2,617 3,490 3,508 4,701 Foreign currency 208 137 164 246 274 ($ million equiv.) (38) (25) (30) (45) (50) Total 2.013 2.751 3.654 3 Z54 4.978

Renavments Local currency 1,035 2,242 3,170 3,305 4,452 Foreign currency 16 98 82 131 198 ($ million equiv.) (3) (18) (15) (24) (36)

Total 1.051 2.340 3.252 3.436 4.650

Net Loan Portfolio Local currency 790 1,135 1,451 1,634 1,862 Foreign currency 191 230 312 427 503 ($million equiv.) (35) (42) (57) (78) (92)

Total 981 1.395 1.763 2.061 2.365 - 137 - AMW.N 16 Attacbment 2

TLANJIN INDUSTRIALDEVELOPMENT PROJECT

Bank of Communications--Tianjin Branch

IScome Statement (Y million)

1992 1993 1994 1995 1996

Income

Interest Income from Lendina Local currency 57.9 91.6 119.0 142.0 162.0 Foreigncurrency 8.4 11.6 14.3 20.3 23.3 Subtotal 66.3 103.2 133.3 162.3 185.3 InterestIncome from Deliosits Local currency 5.0 7.0 11.0 13.0 15.0 Foreigncurrency - - - - -

Subtotal 5.0 7.0 11.0 13.0 15.0 Other Incame 3.0 3.2 5.0 5.0 5.0 Total Income 74.3 113.4 149.3 180.3 205.3

Exoenditureg Interest(local) 40.8 66.0 88.0 104.0 115.0 Interest (foreign) - - - - - Fees(foreign) - - - -

Subtotal A0.8 66.0 88.0 104.0 115.0 Managementand other fees 5.1 11.0 13.6 20.0 27.0 Provisions - 1.0 1.0 2.0 2.0 Depreciation 0.4 0.4 1.0 1.0 1.0

Total E,wenditureg 46.3 78.4 103.6 127.0 145.0 Profitbefore tax 28.0 35.0 45.7 53.3 60.3 (les8) Businesstax 3.0 5.0 7.0 8.8 10.0 Net Profit 25.0 30.0 38. 44.5 50.3 - 138 - NNEX 16 AttahmteL_t3

TiAlAN UNMUSTRIALDEVELOPNENT PROJECT

Bank of Communications--TianjinBranch

Bslance Sheet (Y million)

1992 1993 1994 1995 1996

Assets

Current Asset. Cash and bank deposits 90 156 202 233 271 Short-term loans Local currency 690 1,035 1,345 1,548 1,780 Foreign currency 191 219 247 269 284

Subtotal 881 1.254 1.592 1.817 2.064

Long-term loans (current) Local currency - 30 30 33 32 Foreign currency - - 4 20 46

Subtotal - 30 34 53 78

Accounts receivable 75 75 75 75 75

Total current assets 1.046 1.515 1.903 2.178 2,488

Lona-termAssets Loanst Local currency 100 100 106 86 82 Foreign currency - 11 65 158 219 (less) Provision - (1) (1) (2) (2) Net long-term loans 100 110 170 243 299 Equity investment 10 10 10 10 10 Net fixed assets 1 1 2 2 2 Other assets 43 56 55 60 60

Total of lonA-termassets 154 177 237 315 371

Total assets 1.200 1.692 2.140 2,493 2.859 - 139 - ANNEX 16 Attachment 3

1992 1993 1994 1995 1996

Liabilities & Shareholdersequity

Current Liabilities Accounts payable 46 107 166 261 265 Long-term liabilities(current) - 158 227 286 322 Deposits 283 360 467 538 629 Short-term liabilities 48 70 87 100 150

Total current liabilities 377 695 947 1.185 1.366

Long-term liabilities Domestic borrowing 525 671 795 810 919 World Bank - 11 65 158 219 ADB - - Borrowing in other countries - - - - -

Total lon1-term liabilities 525 682 860 968 1.138

Other liabilities 68 80 90 90 100

total liabilities 970 1.457 1.897 2,243 2.604

Shareholders'Eauitv Paid-in capital 205 205 205 205 205 Retained earnings 25 30 43 45 50

total shareholders' equity 230 235 243 250 255

Total liabilitiesand shareholders'eauitv 1.200 1.692 2.140 2.423 2.859 - 140 - AW4EX17

CRINA

TIANJIN INDUSTRIALDEVRElOPI4ENT PROJC

Estimat,ed Dlsbursements La ($ million)

Poft*le ES Year Period Amount Cumulative Sector Project

FY94 July-December 1.50 1.50 - - January-June 3.50 5.00 3 1

FY95 July-December 4.00 9.00 6 3 January-June 5.50 14.50 18 6

FY96 July-December 10.50 25.00 34 13 January-June 18.00 43.00 54 25

FY97 July-December 22.50 65.50 66 40 January-June 30.00 95.50 74 60

PY98 July-December 25.50 121.00 78 78 January-June 10.00 131.00 82 82

FY99 July-Decer-er 8.00 139.00 90 90 January-Ju..e 3.00 142.00 94 94

FY2000 July-December 3.00 145.00 96 96 January-June 5.00 150.00 98 100

FY2001 July-December - - 100 - la Based on a disbursementprofile of industrialdevelopment and finance operations in China with adjustment for time needed in the first two years to create new corporationsand reorganizethe subsectors. - 141 - ANNEX18

TIANJIN INDUSTRIA1 DEVELOPMENTPROJECT

Documents Available in the Prolect File

A-1 Report of Phase I study by AT Kearny on machine tools, construction equipment, auto parts and electrwinicscomponents subsectors

A-2 Report of Phase I study by Electric Design and Research Institute of MMEI on electricmotors subsector

A-3 Report of Phase IT study by InternationalBusiness and Technical Consultants, Inc., InternationalDevelopment Ireland and Tianjin InternationalEngineering Consultants Corporation on machine tools, constructionequipment, auto parts, electronicscomponents and electric motors subsectors

B-1 Charters for corporationsprepared by Tianjin Municipality

B-2 Official Tianjin Municipal Government Statement on developmentprogram and strategies for the five subsectorsof TIDP

B-3 Detailed working papers for TIDP