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 't~~I 11hN A . 1 N NI;U1I.L.TEIT ?h lPN IJ i ., iNi :t l' A,:i6 .,-* 7. f'14AN 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 fol- lows: (i) onlend the industrial credit componeatof $134.5million to participatingfinancial intermediaries (PPis),and (ii)out of the technicalassistance compo- nent 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 compo- nent, 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 strength- ening of institutionalinfrastructure, studies and expert services for the five project subsectors. The project would aim to: (a) expedite policy and enter- prise reforms at the regional level, leading to greater autonomy for and accountability of enterprise manage- ment, 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 techni- cal 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) modern- ize 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 provin- cial 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, institu- tional arrangements made in Tianjinfor projectimple- mentation 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) . ..............................