Chongqing Innovation and Human Capital Development Project (RRP PRC 50222) ECONOMIC ANALYSIS A. Macroeconomic and Sector Context 1. Chongqing is a centrally administered municipality at the upper reaches of the Yangtze River, with a total land area of 82,400 square kilometers and a population of over 30 million. Environmental degradation and pollution started to become an issue from the beginning of the 21st century. Despite the open-door policy of the People’s Republic of China (PRC) in the late 1970s, which allows enterprises to work with foreign companies, development in the inland region is lagging. Heavy industries’ share in Chongqing’s economy is high, and its production is inefficient. Many residents have migrated to the PRC’s coastal regions for employment because economic development in Chongqing has been progressing below its potential, with significant social and environmental costs. 2. In line with the plan on the Yangtze River Economic Belt (YREB) development, in its Thirteenth Five-Year Plan, 2016–2020, the Chongqing Municipal Government (CMG) set innovation as the key approach and priority in promoting inclusive and sustainable development.1 In the plan, the CMG outlined a new development strategy that will shift away from reliance on traditional heavily polluting industries to innovation-driven industries across all economic sectors. The plan also envisaged Chongqing to play a leading role as a core city of the Chengdu–Chongqing city cluster to promote sustainable and inclusive development in the less developed southwestern PRC. B. Chongqing Innovation and Human Capital Development Project 3. Economic rationale. Chongqing needs to shift from a low-value and polluting economy to a high-value, clean, knowledge-based, and diversified economy. It should retain its workforce and teach them skills or refresh existing skills to match the various skills and technical knowledge required for upgrading traditional industries, developing new industries, and creating an enabling “innovation ecosystem” that will make Chongqing’s society and economy sustainable and resilient. Chongqing’s innovation level was ranked 19th out of 20 major PRC cities.2 The majority of venture capital investments made in the PRC in new technologies, including eco-friendly technologies, are in the PRC’s eastern coastal region, and Chongqing is lagging. Investing in relevant human capital development is crucial to support the shift to a more environmentally friendly and efficient economy, and to promote stronger linkages between relevant skills and rapidly evolving industry demands. 4. Project design. The project aims to achieve the following outputs during 2020–2025: (i) relevance and quality of higher education and vocational training strengthened, (ii) supporting mechanisms for innovation and entrepreneurship established, and (iii) institutional and project management capacity enhanced. By the end of the project, these outputs will result in the following outcome: employment opportunities and people’s capacity for innovation in Chongqing 1 The YREB development plan, 2016–2030 envisages the establishment of an innovative and modern industrial system in the YREB, making it a strategic economic region for national economic and social development by 2030. The YREB covers the provinces and municipalities of Anhui, Chongqing, Guizhou, Hubei, Hunan, Jiangsu, Jiangxi, Shanghai, Sichuan, Yunnan, and Zhejiang. and. Government of the PRC. 2016. Outline of the Yangtze River Economic Belt Development Plan, 2016–2030. Beijing. 2 Evaluation of China Innovation Cities Research Group. 2016. Report on Evaluation of China Innovation Cities, 2016–2017. Beijing (in Chinese). 2 strengthened. The project will have the following impact: sustainable and inclusive economic transformation in the YREB achieved.3 5. Project’s value addition. The project will build local capacities to support the development of new sustainable and competitive industries in Chongqing toward upgrading Chongqing’s economy into a sustainable, modern economy. It will create job opportunities by supporting innovation and business incubation platforms, acceleration centers, and demonstration testbeds. It will catalyze investments to create and support an enabling innovation ecosystem. The project will provide (i) increased employment opportunities generated from the newly created enabling environment for innovation and entrepreneurship, (ii) a higher-quality labor force resulting from (a) improved mind-sets and attitudes toward innovation and entrepreneurship at higher education institutions (HEIs) and (b) closer links between the HEIs and enterprises in the project areas, and (iii) city–industry integration. The project will have a demonstration effect on other cities and regions with similar economic conditions as the YREB. The design of facilities will give special attention to adopting an economic and ecological design and ensuring a high quality of construction, operation, and management. C. Economic Analysis 6. Economic cost-benefit analysis. The economic analysis indicated that overall, the project and its seven subprojects are economically viable, each with a positive economic net present value (ENPV) ranging from CNY8.8 million to CNY153.4 million (in constant 2019 prices), and with economic internal rates of return (EIRRs) above the minimum required threshold for Asian Development Bank (ADB) social sector projects of 9%.4 Table 1 summarizes the estimated present value of the economic benefits and costs of each of the seven subprojects, and their respective ENPVs and EIRRs. The economic analysis of this project follows the principles described in ADB’s Guidelines for the Economic Analysis of Projects.5 7. To assess the economic viability of the project and its subprojects, the EIRR and ENPV of each of the seven subprojects were calculated using a 9% discount rate. Economic costs and benefits were calculated for the with- and without-project scenarios over a 25-year period between 2020 and 2044. All economic costs and prices are expressed in constant 2019 prices and valued using the domestic price numeraire.6 The economic benefits from the project will mainly flow from the (i) additional job opportunities in research institutions and enterprises, (ii) increased productivity in the project economic and technological development areas (ETDAs), and (iii) increased numbers of technical and vocational education and training (TVET) and university graduates who secure a job sooner (i.e., by 4 to 6 weeks).7 The project is also 3 Government of the PRC. 2016. Outline of the Yangtze River Economic Belt Development Plan, 2016–2030. Beijing. 4 The seven subprojects involve Changshou District, Chongqing Jiaotong University, Chongqing Sanxia Vocational College, Chongqing University of Education, Chongqing University of Science and Technology, Chongqing Vocational Institute of Engineering, and Dianjiang County. 5 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 6 The domestic price numeraire method uses the domestic price level as the common base for aggregating costs and benefits. While leaving non-traded components at domestic prices unadjusted, this method converts the world market prices of traded goods in foreign currency into the national currency using the exchange rate ($1 = CNY6.7121 as of 1 April 2019), and applies a shadow exchange rate factor to convert the financial prices of traded goods to economic prices. 7 Studies show that employment services, such as job placement and job search assistance, can raise the odds of obtaining employment by 2.67 times among job seekers. S. Liu, J.L. Huang, and M. Wang. 2014. Effectiveness of Job Search Interventions: A Meta-Analytic Review. Psychological Bulletin. 140 (4). p. 1009. 3 designed to prevent industrial accidents; generate cost-savings on power, water, and facility maintenance because of the project’s high-quality green design and implementation mechanisms; and generate additional revenue. 8. Project costs include capital and recurrent costs, and exclude price contingencies, taxes, and interest charges. The project’s capital costs, which consist mainly of the costs of facility construction and equipment and curriculum upgrading, will be spent during 2020–2025. The recurrent costs, which will continue beyond the end of project implementation (i.e., from 2026 onwards), include the economic cost of land for additional facilities; the maintenance cost of new facilities and equipment; and the opportunity cost of incremental students attending the training programs. 8 The economic costs of investment exclude taxes, duties, and price contingencies. The average annual wage of unskilled workers and the employment rate serve as the basis for the economic or opportunity cost of training attendance among students. 9. The total estimated ENPV for the project is CNY489.5 million and its overall EIRR is 11.6%, which is above the minimum required threshold for ADB social sector projects (i.e., 9%).9 A positive net present value or an EIRR above the minimum required threshold indicates that the project is economically viable or that the value of the expected economic benefits of the project is above the opportunity cost of the required investment. The full economic benefits of the project are expected to be significantly higher, as some indirect economic and ecological benefits are not easily quantifiable, such as quality improvements, production cost reductions, reduced skill search costs, improved innovation capacity, and improved working