Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7484-CHA STAFF APPRAISAL REPORT CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK ) PROJECT OCTOBER 22, 1990 Industry and Energy Operations Pivision Country Department III Asia Regional Office This document has a restricted distribution and may be used by recpients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (August 1, 1990) Currency name = Renminbi (RMB) Currency unit = Yuan (Y) = 100 Fen US$1.00 = Y 3.72 (July 5, 1986 December 15, 1989) US$1.00 = Y 4.72 (since December 15, 1989) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China BOC - Bank of China BOF - Bureau of Finance BTVE - Bureau of Township and Village Enterprises CIB - China Investment Bank GDP - Gross Domestic Product GOC - Government of China ICBC - Industrial and Commercial Bank of China IHE - Institute of Higher Education ILO - International Labor Organization ISTIC - Institute of Scientific and Technical Information of China JEDIC - Jilin Province Economic Development Investment Corporatioa JGF - Japanese Grant Facility LCB - Local Competitive Bidding MIS - Management Information System MOF - Ministry of Finance NGO - Nongovernmental Organization PBC - People's Bank of China PCBC - People's Construction Bank of China PRC - People's Republic of China R&D - Research and Development S&T - Science and Technology SEdC - State Education Commission SOE - State Owned Enterprise SPC - State Planning Commission SPO - Spark Program Office SSTC - State Science and Technology Commission STC - Science and Technology Commission STS - Secondary Technical School SVS - Secondary Vocational/Agricultural School SWS - Skilled Worker School TOR - Terms of Reference TFP - Total Factor Productivity TVE - Township and Village Enterprise FOR OFFICIAL USE ONLY ADMINISTRATIVE UNITS China is organized into some thirty provinces, autonomous regions and provincial-level municipalities. References in this report to provinces include provincial-level municipalities, such as Shanghai. The administrative level immediately below the province is generally referred to as the prefec- ture, although in Jiangsu its place is taken by 11 cities of prefectural status (also responsible for surrounding rural areas) and in Jilin the term region has been adopted. The functions performed by this intermediate level are often narrower than those of provinces or counties (though this is less true in Jiangsu). Below the prefecture come counties (with an average popu- lation, nationwide, of half a million people). In rural areas, the level below the county (and the lowest level of formal administration) is the town- ship. Smaller units, such as villages and below-village groups (the forme- production teams), are regarded as community rather than g-ernment entities. Central ministries generally have counterpart bureaus at lower levels. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - i - CHINA RURAL INDUSTRIAL TECHFOLOGY (SPARK) PROJECT Table of Contents Page No. I. BACKGROUND ......................... . 1 A. Introduction ......... .I...* 1 B. Industrial Technology: Policies and Instituti ons ........... 2 - Issues anu Policies ....... . .............. O. .* ......... 2 - Institutional Framework ............................ 5 C. Rural Industry .......................* , 6 II. THE SPARK PROGRAM .................... . ............ , 12 A. Objectives and Design . ................... , | 12 B. Organization and Implementation ....... .... ......... 15 - Organization ............. ................... .... is - Implement-ation .........I................................................ 16 C. Assessment......... . ......... .... . ... . 19 - Setting Program Goals .......... ........ .. ...... ...... 19 - Subproject Priorities, Review and Selec toon .............. 20 - Financing Terms a ndCitions .......n...............s 22 - Management Information Systems ............................ 23 - Diffusion ..................* 24 - Spark Training ...................... .... 24 - Technology Information . ..... . ... . 26 D. Project Rationale and Objectives ............................ 26 III. THE PROJECT.............. ... 27 A. Project Areas and Summary Description ....................... 27 B. Enterprise Modernization Component ...... . ........ 29 - Commercial Credit Subcomponent .......................... 29 - Precomnmercial Credit Subcomponent ............... 30 C. Spark Training Component m p o ne......... ... 31 D. Technology Information Componentm.................... 33 E. Institutional Development Componentm.....S.O...... .....V... 34 F. Impact on Envirenment, Women and Minoritieso................. 35 This report is based on the findings of an appraisal mission which visited China during June/July 1988, comprising Ms. B. Kafka, who led the appraisal and previous missions for the project, and Mr. A. J. Ody, who prepared this report (both Bank), with Ms. M. Hagen-Wood (Consultant), and supported by Mr. D. A. Mead (Legal Department). The report also reflects contributions made at preappraisal by Messrs. J. Chanmugan, M. H. Goldman, R. C. Ng and R. Venkateswaran (Bank) and Ms. L. Druben and Mr. R. Walt (Consultants), and subsequent assistance from Messrs. S.W. Leong, C.J. Maguire, P. Harrold and Ms. H. Chan (Bank). Following appraisal, various members of the preappraisal and appraisal teams held discussions with project entities on a number of occasions between July 1988 and August 1990 and on this basis updated the appraisal report. - ii - Page No. IV. COSTS, FINANCING AND IMPLEMENTATION ............................ 36 A. Costs and Financing .. 36 - Summary of Costs .......................................... 36 - Financing Plan .. 38 - Disbursements .. 39 B. Implementation and Reporting .. 41 - Coordination .. 41 - Procurement .. 41 - Audits and Reporting .. 42 C. Financial Intermediation .. 42 - Intermediaries .. 42 - Final Lending Rates and Spreads .. 45 V. BENEFITS, JUSTIrLCATION AND RISKS .............................. 46 A. Benefits and Justification .. 46 B. Risks ....................................................... 47 VI. AGREEMENTS AND RECOMMENDATION .. 48 Tables in the Text 1.1 Ownership Structure of Chinese Industry, 1971-1988 ............. 7 4.1 Summary of Project Costs ....................................... 37 4.2 Financing Plan ................................................. 39 ANNEXES IN MAIN REPORT 1. Project Areas: Economic Structure, TVE Development, Science and Technology Infrastructure and Spark Program Strategies 2. Bank Group Strategy for Industry and Finance in China 3. Organization Charts: State Science and Technology Commission (SSTC) Jiangsu Science and Technology Commission Jilin Science and Technology Commission Shanghai Science and Technology Commission 4. Gross Value of Industrial Output by Subsector 5. National Spark Subproject Financing (1985-88) 6. Project Provinces: Historical Spark Subproject Approvals, Financing and Implementation 7. National Policy Statement for the Spark Program 8. Agreed Subproject Eligibility Criteria and Requirements 9. Risk Sharing Terms for Precommercial Loans 10. Summary of Project Costs (Non-credit Components) 11. Derivation of IBRD/IDA and JGF Financing 12. Estimated Disbursements 13. Jilin Province Economic Development Investment Corporation (JEDIC) 14. Monitorable Indicators of Project Implementation Map: IBRD 21063 - iii - SUPPLEMENTARY VOLUME FOR PROJECT IMPLEMENTATION 1/ SI. Spark Training Component Terms of Reference for Consultants Cost Estimates S2. Study of Spark Training Program Development Requirements Terms of Reference S3. Technology Information Component Overview of Cur.ent Activities Terms of Reference for Consultants Cost Estimates S4. Institutional Development Component Management Information System: Terms of Reference for System and for Consultants Training in Industrial Technology Evaluation: Terms of Reference Cost Estimates 55. Agricultural Bank of China (ABC) S6. China Investment Bank (CIB) 1/ Available in the Project File. - iv - CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Credit/Loan and Project Summary Borrower: The People's Republic of China. Beneficiariess Jiangsu and Jilln Provinces and Shanghai Municipality China Investment Bank (CIB) Agricultural Bank of China (ABC) Jilin Province Economic Development Investment Corporation (JEDIC). Credit Amounts SDR 45.1 million (US$64.3 million equivalent). Loan Amount: US$50.0 million equivalent. Terms of Credit: 35-year repayment, including 10 years of grace, on standard IDA terms. Terms of Loans Twenty years, including five years' grace, at the Bank's standard variable interest rate. Onlending Terms: The Government would relend US$114.3 million equivalent to Jiangsu and Jilin provinces and Shanghai municipality on tsrms and conditions acceptable to the Bank Group. The commercial credit subcomponent, which is equivalent to 902 of the above amount, would be onlent to the financial intermediaries for 15 years, including 5 years of grace. As regards the precommercial credit subcompo- nent (US$3.3 million equivalent) in Jiangsu, CIB and ABC, acting on an agency basis for the Province, would pass on funds to enterprises according to a risk-sharing formula. Satisfactory agreements have been reached on relending terms (including foreign exchange risk) to be applied to loan/credit proceeds. Project The project would support GOC's ongoing Spark Program, Description: which seeks to upgrade standards of technology and man- agement in China's rapidly growing rural non-State enterprise sector, until recently largely ignored by support services and still suffering from inadequate access to technology, qualified staff and business- oriented information. In three representative areas, the project would support demonstration enterprise modernization subprojects in rural industries, upgrade the "Spark training program" for rural enterprise staff and help an existing technology information system reorient its focus to small enterprises. It would also strengthen the staffing and management of the Spark Program at national and lower levels. Benefits and Risks: Rural non-State enterprises are China's most dynamic sector, but standards of production technology and prod- uct quality are often low, reflecting their staffing constraints and technological isolation. The Spark Pro- gram, launched in 1985, is based on accurate diagnosis of sectoral problems, and has made an effective start in addressing them. However, its institutional basis is weak, and many specific subcomponents currently operate below potential. Bank Group involvement will assist in the transfer of evaluation, financing, training and information management techniques new to the program. Subproject review and supervision procedures will address risks involved in the adoption of new technology and marketing of new products. Risks associated with implementation of technical assistance will be minimized through contractual provisions for coordination. While the recent austerity program has included measures by the Central Government to tighten credit controls and other forms of regulation of non-State industries, China's leadership recognizes that the vitality of the rural industrial sector remains essential to meeting overall targets for growth and employment. Spark goals of improving efficiency, product quality and environmental standards thus continue to enjoy strong support at both national and lower levels. - vi - Estimated Costs: Local Foreign Total ------------(US$ million)----------- Enterprise Modernization Commercial credit 144.5 53.5 198.0 Precommercial credit 4.9 1.8 6.7 Subtotal 149.4 55.3 204.7 Spark Training, Technology Information and Institutional Development Civil works 3.7 0.5 4.2 Equipment/furniture 4.0 3.9 7.9 Technical assistance/training 0.8 1.7 2.5 Program support 1.1 - 1.1 Subtotal 9.6 6.0 15.7 Total Base Costs 159.0 61.4 220.4 Physical and price contingencies 1.0 0.7 1.7 Total Project Cost 160.0 62.1 222.1 Financing Plan Local Foreign Total -----(US$ million)----------- IBRD/IDA 53.9 60.4 114.3 Central Government 1.0 - 1.0 Provincial Governments 8.3 - 8.3 Financial Intermediaries 35.4 - 35.4 Enterprises 61.4 - 61.4 JGF - 1.7 1.7 Total 160.0 62.1 222.1 Estimated Disbursements FY91 FY92 FY93 FY94 FY95 FY96 -S-------------(us$ million)----------------- Annual 6.0 6.1 31.4 32.4 22.8 15.6 Cumulative 6.0 12.1 43.5 75.9 98.7 114.3 - 1 - CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT I. BACKGROUND A. Introduction 1.1 The Government of the People's Republic of China (GOC) has requested a credit of SDR 45.1 million (US$64.3 million equivalent) and a loan of US$50.0 million equivalent for a Rural Industrial Technology Project to sup- port GOC's Spark Program. The Spark Program was launched by the State Science and Technology Commission (SSTC) in 1985, and is implemented throughout China under the leadership of SSTC and counterpart local Science and Technology Com- missions (STCs). It seeks to harness the resources of China's technology sec- tor to help upgrade technical and managerial standards in the rapidly growing rural non-State industrial sector (and, more selectively, in agriculture), through support for: demonstration subprojects to introduce modern technol- ogy; training of rural enterprise staff in technical and managerial fielt3. ("Spark training"); and provision of improved information services to busi- nesses. Spark takes its name from the adage that 'one small spark can start a prairie fire", a reference to the anticipated catalytic effect of the program on rural enterprise development. 1.2 The project will be implemented in three areas which offer contrasts in economic structure and rural enterprise development: Jiangsu and Jilin provinces and Chongming county in Shanghai municipality (see Annex 1 and map). It will support credit for commercial scale technology upgrading subprojects sponsored by rural industrial enterprises (and an experimental "precommercial" subcomponent in Jiangsu), and components to strengthen Spark training and the business information system. It will also support institutional development of implementing agencies in the project areas and at national level. 1.3 The project would be the first Bank Group-supported operation in China specifically oriented to rural non-State industry. The Bank Group's overall strategy in the industrial and financial sectors in China, together with lending to date, is summarized in Annex 2. Past industrial lending has focused largely on the State enterprise sector, though the industrial compo- nent of the Gansu Provincial Development Project (Ln. 2812-CHA/Cr. 1793-CHA) assists predominantly rural small industries, while agro-industrial operations are among the subprojects that have been supported by three Rural Credit Projects implemented or under implementation by the Agricultural Bank of China (Cr. 1462-CHA; Cr. 1642-CHA and Cr. 1871-CHA). Board papers for a Fourth Rural Credit Project were distributed to the Executive Directors on Octo- ber 11, 1990. A collaborative research program on rural industry has resulted in a recently published book 1/ and a summary Bank report (7267-CHA). 1/ China's Rural Industry: Structure, Development and Reform, W.A. Byrd and Lin Qingsong, eds. (1990). - 2 - 1.4 This report is structured into six chapters. The balance of Chapter 1 provides background on the framework for industrial technology development in China and on the rural industrial sector. Chapter 2 discusses the objec- tives and implementation to date of the Spark Program and provides an assess- ment of its strengths and weaknesses. A detailed description of the project is provided in Chapter 3: project costs, financing and implementation arrange- ments are discussed in Chapter 4. Chapter 5 discusses the project's benefiLs and risks, and Chapter 6 concludes with a summary of agreements reached. Sub- stantial supplemental information is provided in a series of annexes in the main report as well as in the supplementary volume. B. Industrial Technology: Policies and Institutions Issues and Policies 1.5 Symptoms. Industry and science and technology (S&T) are two of the "four modernizations" to which China's leadership is committed. This reflects both a sense of the contribution technological change has made to growth internationally and an awareness that China itself long failed to take advan- tage of technology's economic potential. A good indicetor of the impact of new k owledge (including both embodied and disembodied techniques as well as managerial and organizational changes) is the growth of total factor produc- tivity (TFP). This measures how far output expands faster than the supply of factors of production (labor and capital stock, appropriately weighted). Increased TFP typically contributed as much to post-war economic expansion in developed countries as factor growth; many such economies sustained TFP growth of 2-32 per annum over extended periods, and some developing countries have at times seen TFP grow at 4% or above. Calculation of TFP in China involves methodological difficulties in valuing output and capital stock. However, several serious studies suggest that, after a burst of dynamism through about 1957, the PRC's industrial TFP entered twenty years of little discernible aggregate improvemenc. 1.6 The picture of technological stagnation through the iate seventies was consistent with observed production techniques in many industries. Fre- quently the technology embodied in the capital stock had not changed in decades. Not only were scrapping rates low, in addition, one Chinese econo- mist remarked, some capital goods industries had become 'reproducers of antiques", continuing to produce to outmoded designs (in some cases, those acquired from .he Soviet Union in the 1950s, which in turn often embodied Western technology from the 1930s). Product design and specifications also exhibited little innovation. Serious observers recognized that China, with an abundant labor force and capital scarcity, should not uncritically mimic tech- niques from advanced economies. But this difference did not explain why Chinese industry frequently wasted scarce energy or raw materials, why prod- ucts and components were of unsatisfactory or inconsistent quality, or why expensive equipment was often seriously underutilized by international stan- dards. Nor could it account for the limited diffusion of improvements suc- cessfully adopted by more dynamic enterprises. 1.7 Diagnosis. While poor performance from the late 1950s to the early 1970s could in part be attributed to internal disruption and international political and economic isolation, current reforms are based upon an analysis that also blames deeper systemic factors: (a) organizational and incentive constraints to enterprises' adoption of new technology; (b) organizational and incentive constraints to generation of new know- ledge through Research and Development (R&D); and (c) barriers to information flows. 1.8 Deep-seated obstacles to innovation followed from the traditional incentive structure for (mostly State-owned) industrial enterprises. Central planning treated the firm as a production unit, not a significant decision- maker, and government allocation rather than markets guided production and resource use. Firms were judged largely against physical production targets, with only secondary attention to cost containment, economic use of raw materi- als or basic minimum product quality. Prices were essentially fixed, with no premium for higher quality standards, and often had little rational basis. They were in any case of limited relevance to enterprises, as profits were appropriated by the State (and losses made good through subsidies). For most items, producers bore little responsibility for marketing, which was handled by separate agencies. In addition, with pervasive shortages, almost anything produced could be sold. Finally, within the enterprise, little if any rela- tionship existed between performance (beyond basic physical quotas) and mana- gers' or workers' remuneration. 1.9 The PRC's initial adoption of the Soviet model for research placed scientific resources mostly in centralized, free-standing academies and insti- tutes. Funding came largely from central budgets, and appropriation proce- dures frequently failed to reflect effectiveness or relevance. As knowledge was regarded as a free good, there were inadequate mechanisms to reward insti- tutes for diffusing information to enterprises. Incentives for individual researchers also did little to stimulate work on pressing practical problems. Technical excellence was further blunted by the disruption of the educational system during the Cultural Revolution period. Scientific expertise in many areas fell behind the outside world, and many technical achievements that were made failed to be adequately applied. One Chinese source estimated that only 1CZ of China's R&D achievements were utilized, as against a comparable figure of 50-60% cited for Western Europe. 1.10 Flows of technological information were hampered by the underdevelop- ment of print and electronic media and the limited mobility of technical per- sonnel, either geographically or between employers. Institutional arrange- ments emphasized vertJcal communication between the enterprise and its con- trolling sectoral ministry, while inhibiting horizontal communication between enterprises (or ministries). Emphasis on self-sufficiency rather than spe- cialization (e.g. enterprises each forming their own, often drastically under- utilized, machine shops) in part originated from this vertical organization, though it was also an adaptation to the "shortage economy" in which reliance on suppliers was risky. There was thus little development of "intermediaries" such as consulting firms, specialized project design and implementation groups or component suppliers, which in other economies perform informal technology - 4 - transfer. International transfer of knowledge was obstructed by a bureaucra- tic "air lock" distancing Chinese firms from potential foreign purchasers of products or suppliers of technology. 1.11 Reforms. Since the late 1970s, changes have been introduced which attempt systematically to remove the constraints to industrial technology moderniization discussed above. The pace of change has varied, and moves in the direction of decentralization have recently been subject to the overriding pressure to re-establish macroeconomic stability, which led to the Govern- ment's imposition of an austerity program involving some increase in adminis- trative controls. Nevertheless, reforms in the productive sectors have sought over time to transform the enterprise into a meaningful decision-making unit and to replace centralized physical planning by markets. The number of commo- dities covered by mandatory planning has been progressively reduced. A pro- portion of State-owned Enterprise (SOE) output is now sold through market channels, while over 952 of the rapidly growing output of non-State enter- prises (para. 1.22) falls entirely outside the Plan. Firms are increasingly involved in product marketing, domestically and internationally. Many prices have been entirely decontrolled, while others vary within bands which allow for the influence of supply and demand as well as product quality, though sig- nificant distortions remain in relative prices (and between controlled and market prices). SOEs now retain at least part of their profits, and there has been some attempt (though with limited results) to replace negotiated profit remittance by explicit profit taxes. Efforts have been made to eliminate the "soft budget constraint" with subsidies provided to loss-making enterprises (e.g. througn bankruptcy laws), though here, too, progress is slow. Various approaches have been taken to increase SOE managers' responsibility for results; workers' bonuses are also beginning to be tied to profitability. China's leaders recognize that industrial reforms are incomplete and have therefore supplemented them by specific incentives for innovation, including temporary tax rebates on products embodying new technology (para 2.5). 1.12 Reform of S&T policy gained momentum with the March 1985 issue of a key Central Committee document, emphasizing R&D's primary function of serving the economy and establishing new policy directives. Priorities for R&D are now set in a more explicit manner, with consultation across a broad range of informed opinion leading to publication of sectoral objectives. Research is increasingly organized on a "project" basis, whereby goals are set in advance and implementation is often open to tendering by alternative institutions. Mechanisms for independent review of research results have also been put in place. While basic, theoretical research will continue to be funded from budgetary sources, a freeze will apply for several years. To suppcrt growth in applied research, institutes are being encouraged to seek contract funding from enterprises, and annual targets set to increase the share of their bud- gets covered by this source (and phase out grants). This epitomizes a funda- mental change in the view of technical knowledge from a free good to a produc- tive commodity that may, in certain circumstances, be traded in markets. In 1985, to encourage development of a technology market, the PRC passed its first patent law, and a functioning patent system is now under development. Researchers are being given more opportunity to benefit from their work: awards and prizes have been revived, salaries and promotions are to be related - 5 - to performance, and official sanction has been extended to part-time consulting by researchers. 1.13 Measures have also been initiated to reduce barriers to information flows. A wider range of technical and professional publications now circu- lates, and professional associations, once suspect, are actively promoted. Official statements call for 'encouragement' of skilled labor mobility, though there are still many obstacles. Decentralization of industrial decision- making is reducing the vertical emphasis of communications, and GOC encourages experiments with new forms of horizontal association. A consulting industry is emerging, and so is specialized industrial subcontracting and component supply, helped in part by flexible entry of non-State firms. Finally, prog- ress can be seen in breaking the air lock of communication with the outside world, with Chinese enterprises increasingly authorized to deal directly with foreign buyers and suppliers. Institutional Framework 1.14 Research in China is organized within five 'sectors': (i) the Aca- demy sector (e.g., the Chinese Academy of Sciences); (ii) Institutes of Higher Education (IHE), until recently inactive in research by Western standards; (iii) sectoral ministries, which as the traditional sponsors of SOEs became a major presence in industrial research; (iv) the defense sector; and (v) the now expanding local sector, under provincial and subprovincial governments. Available data on R&D, though much improved, still provide only partial cover- age: annual surveys launched by SSTC in 1985 do not capture R&D within IHEs or enterprises; they also exclude military research. 1.15 The 1988 survey recorded 7,773 R&D institutions, employing 1.082 million people, of whom about 405,000 were university graduates and 218,000 had completed secondary technical school or equivalent; total operational expenditures were Y 14.45 billion (US$3.9 billion). Agencies under the State Council (i.e. primarily sectoral ministries) accounted for about 66? of R&D expenditures (and 58Z of higher level staff), while local government insti- tutes were responsible for 34? of expenditures (and 331 of the scientists and engineers). The average local government institute was much smaller than that under central ministry control (in 1986, 16 university graduates or equivalent per institute, with a budget of Y 0.5 million, versus about 190, and Y 6.5 million, respectively). Industry accounted for expenditures of Y 7.5 billion (US$2.0 billion), or more than one-half of the total expenditure on research, in 1,904 institutes employing 504,000 people (of which 185,000 university graduates or equivalent and 95,000 at secondary technical level). 1.16 In 1958, in an attempt to create a high-level agency capable of over- seeing S&T, GOC established the State Science and Technology Commission (SSTC). Counterpart Science and Technology Commissions (STCs) were formed at provincial level. While SSTC was assigned responsibility for preparing over- all S&T plans, it was never feasible fully to centralize budgetary control for R&D. The separation between the S&T plans (under SSTC) and the economic plans (prepared by the State Planning Commission, SPC) was blamed by some leaders for diluting the economic relevance of R&D: in the early 1980s better inte- gration was sought through formation of a joint SSTC-SPC planning bureau. 1.17 More recently, GOC has acknowledged the limitations of central con- trol over research, and SSTC's role has been progressively transformed tc one of policy formulation. The Commission's influence is now reflected less in budgetary authority than, for example, through participation in the Science and Technology Leading Group, which provides interagency coordination and policy guidance. SSTC has formed an S&T policy "think tank", the National Research Center for Science and Technology for Development, and has recently published two S&T policy "white papers". 1.18 SSTC comprises some 30 departments and affiliates, with about 1,000 staff at central level (Annex 3). The SSTC/STC system retains responsibili- ties for S&T personnel matters (including certifying staff qualifications), assessment of research achievements, and international and domestic informa- tion exchange. SSTC has also launched development programs in priority areas, including initiatives in high technology (computing, remote sensing, biotech- nology and the new "Torch" program to support small high technology firms) and in the rural application of S&T (formation of the National Center for Rural Technology Development and initiation of Spark). C. Rural Industry 1.19 Definition and Growth. Although ownership rights to industrial enterprises and their legal status are not so clearly defined in China as in many other countries, three broad classifications are generally used: (a) State-owned Enterprises (SOEs), defined as enterprises under "ownership by the whole people"; (b) "collective" enterprises; and (c) individual or private enterprises. SOEs are usually located in urban areas, and their output is included in urban industry statistics. They have traditionally been subject to a high degree of government control, exercised by sectoral ministries at either the national or provincial level. Historically, they depended on financing provided by the state budget for all investment, and inputs and outputs were allocated by the materials allocation plan. SOEs were often characterized as being "factories" rather than enterprises. Reforms have been gradually changing this, and, in particular, over 90% of the SOEs now operate under the contract responsibility system. 1.20 The collective and individual classifications raise several issues. First, most Chinese collectives are owned not by their workforce (like collec- tives in many other countries) but in effect by the community as a whole (e.g., township or village). Secondly, as collectives may be established at many different levels, the classification extends from city firms to rural "township and village enterprises" (TVEs), which are active both in industry (the focus of this report) and other sectors. More ambiguous are the county collectives (generally aggregated in urban collective statistics and hence impossible to quantify separately). These are usually located in county seats of government and sponsored by county governments, which typically offers some advantages in access to institutional support compared to TVEs. Thirdly, available statistics on rural industry show considerable variation in coverage (especially of below-village and indlvidual firms). In particular, though urban enterprise data differentiate between collective and individual firms, rural statistics have at times been amalgamated with collectives such essen- tially private operations as cooperatives, partnerships and individual firms. Even on the ground, the distinction between different ownership forms is often far from clear. Nonetheless, the number of privately-owned enterprises in China was estimated at 12.4 million at the end of 1989. 1.21 In 1988, the industrial output value of the non-State sector (i.e., excluding the SOEs) made up 43.22 of the total. Of this, 17.4% was urban and 25.8% was from rural non-State enterprises. This represents a 150% increase in the share of rural industry in total industrial output during the decade of the 1980s, from only 10% in 1980, a major shift in ownership pattern. Detailed statistics are provided in Table 1.1 below. Table 1.1: OWNERSHIP STRUCTURE OF CHINESE INDUSTRY, 1971-88 (% of total industrial output value) 1971 1975 1978 1980 1981 1982 1983 1984 1986 1986 1987 1988 State 86.9 81.2 77.6 76.1 74.3 78.8 72.6 67.8 64.9 62.2 69.7 58.8 Urban collective 10.9 13.7 13.7 14.4 14.1 14.3 ;4.4 16.9 16,6 14.8 14.6 14.8 Urban Individual a/ - - - 0.0 0.0 0.1 0.1 0.2 0.3 0.2 0.4 0.4 Urban other - - - 0.6 0.8 0.7 0.8 1.1 1.2 1.6 2.0 2.7 Rural non-State Z.2 6.1 8.7 10.0 11.0 11.2 12.1 16.2 18.0 21.3 23.3 26.8 Of which: Township 1.6 2.6 4.8 6.4 6.9 6.0 6.3 7.7 8.1 9.3 9.3 10.1 Village { { { { { { { 6.0 6.8 7.5 8.4 9.4 {1.6 (2.6 (3.9 (4.6 (6.1 (6.2 (5.8 Below village { { { { { { { 1.6 3.1 4.6 5.8 8.3 Of which: Individual firms 1.6 2.6 3.3 4.0 g/ Includes partnerships. Source: China - Rural Industry: Overview, Issues and Prospects. Bank Report 7287-CHA (soe original report for detailed notes on methodology and primary soarces); Statistical Yearbook of China, 1989. 1.22 The rise in TVEs' proportionate contribution coincided with rapid growth in total industrial output (approximately 13.7% per annum in real terms over 1980-88). Though issues arise concerning TVE price deflators, Bank Group calculations suggest real annual growth for industrial TVEs of above 20% for the 1980s as a whole. Although capital requirements exclude them from such large-scale operations as petroleum processing, they have developed signifi- cant capacity in machine building, construction materials, textiles, food and timber processing and chemicals (especially plastic processing), and are increasingly important in electrical appliances and electronics. The output structure of TVEs is compared with that of industry as a whole in Annex 4. 1.23 With varied sources of statistics and various definitions, there are wide variations in estimates of the numbers of industrial TVEs and the employ- ment they generate. The best estimate puts the number of industrial TVEs at 1.36 million in 1988, of which about 240,000 were at the township level, 730,000 at the village level and another 390,000 at other levels. Some 225,000 of those were defined as "private enterprises.' Employment in indus- trial TVEs was estimated at 34 million in 1988, compared with a total of only - 8 - 19 million in 1980. Estimates for the total number of nonagricultural workers in the rural sector vary enormously, but were in the region of 86 million at the end of 1988. The total number of rural enterprises--including very large numbers of individual enterprises involved in commerce and construction--was estimated at 18.9 million, compared with 6 million in 1984. In 1987, for the first time, the gross value of rural industrial output exceeded that of agri- cultural output. Further, it is estimated that TVEs generated US$10 billion in exports in 1989, almost 202 of the total, and one third of total manufac- tured exports. 1.24 Economic and Political Environment. In the 1970s, rural nonagricul- tural activity in China was still well below levels in other Asian countries, for a variety of policy and administrative reasons. With the launching of the economic reform programs in 1978, the policy framework for rural industry began to improve, and became very positive after 1984 with the launching of the industrial reform program. Rural industrialization began to be seen as critical both for the success of the urban industrial reforms, and also for the success of China's policy of limiting the growth in the city population. 1.25 Several aspects of the economic environment proved beneficial to TVE growth. Earlier planned development of agriculture and industry, concentrated on grain and heavy industry respectively, allowed unsatisfied demand to develop for specialty foods, consumer articles, services, etc. This was fur- ther fueled by growth in disposable income resulting from agricultural and other reforms in the early 1980s. Market entry was made possible by the eas- ing of state control over distribution channels. China's rapid switch from inward-looking development to an open door policy created similar market opportunities for exports. On the input supply side, productivity gains in agriculture following decollectivization opened up a large new labor supply, while the relaxation of plan control of raw materials removed another bottle- neck. Agricultural diversification created numerous opportunities in food processing, beverages and textiles, including silk and cotton. Funds which had either been accumulated under the commune system, or which were generated by the sharp increase in agricultural incomes as a result of the reforms, provided the seed capital necessary for start-up. Decentralization of admin- istrative matters--such as approvals of new enterprises--and in the financial sector also fostered the development of the TVE sector. Despite this, the policy framework was still largely oriented to the needs of SOEs. The author- ity of local bank branches to extend credit to TVEs has in practice been closely tied to their success in mobilizing additional deposits. Periodic credit squeezes have tended to single out TVEs for relatively restrictive treatment, and the share of TVEs in total formal credit was only 72 in 1988 (TVEs have, however, had access to informal credit). While tax rates for TVEs have been set at very low levels--the formal rate being 20% compared with 30% for collectives and 55% for SOEs--TVEs, being so closely associated with their local governments, have sometimes had onerous ad hoc exactions imposed on - 9 - them. And although TVEs have become significant exporters (para. 1.23), allo- cation of foreign exchange continues, as a whole, to favor SOEs.2/ 1.26 For much of 1989, the government's austerity program had a major impact on TVEs' growth and investment. The annual growth of TVE outpuc fell from the 30% rate of 1987-88 to 15.9% in 1989, and investment fell by some Y 10 billion, with only half the number of new ptojects launched as in the previous few years. There were widespread calls among senior leaders for retrenchment of the TVE sector, particularly those enterprises which consumed high levels of energy, created pollution, or "gained windfalls from unfair competition with SOEs." In December 1988, within the context of overall man- datory credit ceilings under the austerity program, it was announced that there would be zero net growth in nominal credit to TVEs in 1989, which meant an 18% real cut in their level of credit. While it appears that industrial TVEs have fared reasonably well--not least since local governments have sought to protect these enterprises from going bankrupt--it is estimated that about 3 million rural enterprises went out of business in 1989, sending some 8 million workers back to the land. (Notwithstanding the policy framework, a high death rate among TVEs would be a natural consequence of the high birth rate, a pat- tern common worldwide among small enterprises.) The stated policies of the three-year economic "improvement and rectification" program, as reconfirmed in November 1989, sought to strengthen tax regulation over the sector, and skew credit and materials allocation towards the SOEs, the "backbone" sector. 1.27 More recently, however, a distinct improvement in this environment has been seen. TVE growth picked up in the last two months of 1989, after severe contraction in September and October, and the first eight months of 1990 saw a 9X increase in rural industrial output. The Ministry of Agricul- ture has established targets for 1988-91 which provide for a 15% gruwth rate in rural industry; a growth rate of within 20% for TVEs; and annual fixet investment by TVEs of up to Y 20 billion, of which 50% should be financed by owners' funds. With these parameters, the TVE sector will continue to expand its share of total industrial output, and its contribution to employment gen- eration. It is certainly this latter factor which led to a moderation of the stance towards TVEs, since the austerity program caused temporary urban work- ers--particularly those in construction--to return to the rural areas. 1.28 Support Services. As in the case of the policy framework, industrial support services also reflect SOE dominance. As discussed in para. 1.15, State firms can draw on researc;L support from large, specialized institutes financed by sectoral ministries, while local research centers are typically smaller and more diversified. Similar discrimination prevails regarding information networks, established by several sectoral ministries to serve SOEs under their sponsorship. There has been little coordination between the 2/ In general, exporting enterprises share with the provincial government (usually equally) 25Z of the relevant earnings in the form of foreign exchange entitlements. The balance accrues to the center which allocates it e.g. to sectoral ministries (which in turn may pass it on to SOEs). Reforms have increased exporters' share in sele_ted sectors and provinces, and for above-target exports. - 10 - different networks, and their information centers are usually located in larger urban centers. Non-State firms have generally enjoyed second-hand access at best, e.g. through SOEs they serve as subcontractors. While other official networks do exist, such as the technology information system of SSTC's affiliate, the Institute of Scientific and Technical Information of China (ISTIC), their data bases have been largely i,relevant in format and content to TVE needs (ISTIC has mainly served resear1chets) and there has been limited capacity to deliver useful packages to husinesses. In addition, all official networks appear weak in their ability ro acquire, translate and process materials from outside China. Local Bureaus of Township and Village Enterprises (BTVEs), responsible for administrative supervision of TVEs, may help them access data available through official networks, but do not themselves have significant capability to manage irnfoimat ion flows. TVEs have thus relied heavily on their own initiatives, designating staff members to solicit information directly from customers or research centers. 1.29 Nowhere do non-State firms suffer more than in the supply of quali- fied technical, managerial and financial staff. Despite official exhorta- tions, mobility has remained low. In 1988 urban and county collectives (whose output was equivalent to 25% of the level in SOEs) employed only 8% as many engineers as SOEs. Comparable data for TVEs are nut available, but SSTC esti- mates that less than 1% of TVE personnel have completed college, 152 upper secondary school and 42Z lower secondary school tthe latter now a minimum requirement for SOE employment). Half of China's upper secondary training in technical and vocational subjects (typically three-year courses) occurs in Secondary Technical Schools (STSs) and Skilled Worker Schools (SWSs), operated under sectoral ministries or bureaus, which supply 90-952 of their graduates to guaranteed employment in related SOEs.3/ The balance takes place in the Secondary Vocational/Agricultural Schools (SVSs) of the State Education Com- mission (SEdC), about 30% of whose graduates findi work in collectives (includ- ing urban collectives) and 102 in private firms. The SVSs have inferior resources (average recurrent budgets per student are one quarter to one third the level in STSs or SWSs), and with inadequate facilities for industrial training they often concentrate on the service sectoI-s. A Bank Group review described many SVS courses as "prevocational" rather than vocational. Again, the TVEs have had to improvise responses to skill shortages, seeking advice from "Sunday engineers" supplementing their earnings from research institutes or SOEs by part-time consulting, and taking advantage of in-service training opportunities offered e.g. under the Spark training program. 1.30 Efficiency. There is evidence that, within prevailing resource con- straints, non-State firms have been relatively efficient in economic terms. To a much greater degree than SOEs, they operate in competitive markets for both output and inputs. Their managers generally enjoy more autonomy than those in SOEs, which is reflected e.g. in TVEs' gceater readiness to diversify production in response to market opportunities (the specialization of the sectoral ministries tends to lock SOEs in to fairly narrowv fields). Recent research finds the marginal productivity of invpst ment in non-State industry to be markedly higher than in SOEs. This is n' explainable purely by non- 3/ See World Bank Sector Report: Technical/Vocational Education fot China's Development (6789-CHA), 1987. Ststistics quoted mostly relate to the specific provinces reviewed in t,zu- suyiv. - 11 - State firms' greater concentration in light industry, as the non-State/SOE difference is much stronger than that between light and heavy industry. Micro-level studies further suggest that most VEs achieve relatively effi- cient labor force utilization, and payroll data show they have usually been more effective in linking employee compensa-ion to productivity. Their increasing export orientation provides evidence of competitiveness, especially in fields suitable for relatively small-scale, labor-intensive operations. 1.31 The locational efficiency of TVE development is more controversial. Enterprises' close links to specific communities lead to a high degree of geographical dispersion. Some small enterprises clearly survive in spite of poor product quality and production efficiency (e.g. in cement production), thanks to the "natural protection" provided by inadequate transport links. There is anecdotal evidence that Lrovincial governments have taken advantage of their recently increased autonoluly to promote greater industrial self-suffi- ciency, sometimes backed by internal tra,2e barriers. It is less clear that lower level administration- are in a position to control geographically signi- ficant markets, and TVEs are as a rule fairly outward oriented (see Report 7267-CHA). Adverse comment N',ithin China has largely focused on the trend towards a higher degree ci ral: ranaterial processing at source (e.g. of silk), at the expense of traditional (coastal) processing centers, and it does appear, at least, that individual cases may raise legitimate issues concerning the methods used to gain control of supplies (and scale economies in some new processing facilities). 1.32 Generalizations about the technical efficiency and technological level of TVEs must be tempered by recognition of significant geographical (as well as firm-to-firm) variation: coastal areas, for example, are likely to be more closely attuned to international developments in product markets and technologies than those iii the interior. More broadly, technology in TVEs largely reflects a combination of the national technology approaches of the recent past (paras. 1.6-1.10), the specific environment facing the TVEs (paras. 1.24-1.29) and the generally small scale (and limited access to capi- tal) of the enterprises. With their relative isolation from up-to-date infor- mation and restricted supplies of foreign exchange, TVEs have had to rely even more than SOEs on capital goods available from domestic suppliers. Often these are still the 'leproduced antiques" of para. 1.6, embodying 50 year old know-how and produced for an era when incentives for product quality or effi- cient use of energy and law materials were largely non-existent. Added to this, the weak human capital resources and support services available to TVEs (paras. 1.28-1.29) mean that they frequently achieve only a basic operational mastery of the technology supplied to them. Many thus lack the capability or confidence to make the iicremenital, in-house modifications which international research suggests cani have a 07owerful cumulative impact on efficiency. 1.33 Both process arnd manutacturing industries experience problems of poor product quality. This is becoming an increasingly serious issue as domestic pockets of unsatisfie( demanld are filled and TVEs seek further to incr2ase their export orientation. Precess industries specifically suffer from plant designs w}.ich are wast _fu1 oif waterials and energy; they can also be signifi- cant local sources (if pollut ion. Despite widespread anecdotal evidence, it is not entirely clear whietbev, in aggregate, TVEs have a worse pollution record than SOEs; a recent t-wo-. 'i,dv by the Chinese Academy of Sciences, which - 12 - found that rural industries account for 1OZ of total industrial wastewater releases (compared to over 20% of total industrial production) and which failed in most localities to detect major air pollution problems in the sec- tor, could be seen as suggesting the reverse. However, TVEs' diversified ownership and dispersed locations do seem likely to represent obstacles to further pollution abatement efforts (see also para 3.25). 1.34 In agricultural processing, TVEs can benefit from their proximity to suppliers especially of perishable raw materials, but facility designs and procedures sometimes fail to meet contemporary hygiene standards (e.g. in abattoirs) and methods of preservaflit mmid packaging are often dated (exported foodstuffs are at times repackaged abroad). In the engineering industries, some TVEs have successfully established themselves as component suppliers or manufacturers of simple equipment items. Many firms are equipped with a small number of basic, general purpose machine tools, in principle suiting them to custom-production in small runs. However, their relatively unsophisticated workforces are not always able to achieve the necessary flexibility while maintaining quality standards. In addition, supply networks for intermediate goods and components (e.g. bearings) are ill-developed and some firms are obliged to machine even standard parts individually, resulting in high costs and inconsistent quality compared to buying-in mass produced items. In elec- trical appliances and electronics, some TVEs have established ties with over- seas groups and developed efficient assembly operations. As electronic compo- nent suppliers, however, TVEs' record is mixed, and some larger firms are reportedly recentralizing component production in view of unsatisfactory stan- dards of TVE output. In textiles and garments, some enterprises (especially in coastal areas) have clearly been successful in finding appropriate market niches (again often involving direct links to overseas buyers). However, some of the smaller firms appear to have productivity problems, outmoded product designs are still widespread, and there is a need for upgraded finishing facilities of economic scale. II. THE SPARK PROGRAM A. Objectives and Design 2.1 Objectives. The Spark Program is an initiative by GOC, and in par- ticular by SSTC, to create a bridge between: (a) the emergence of a rural enterprise sector, with proven dynamism but facing constraints which include limited access to technology, infor- mation, skills and management; and (b) policymakers' determination that China's S&T sector should be more active in helping find practical solutions to economic problems. 2.2 Spark was launched by SSTC on an experimental basis in 1985, and became a nationwide program in 1986. Its overall objective is to help trans- fer technological and managerial knowledge from the "modern' sector [including R&D and design institutes, Institutes of Higher Education (IHEs) and SOEs] to - 13 - rural enterprises, so as to support continued growth, restructuring and devel- opment in rural output and employment. TVEs are the principal target benefi- ciaries, but county collectives are also supported and in special circum- stances, e.g. where they manufacture equipment for TVEs, selected SOEs. Both industrial and agricultural activities are eligible for support, though greater emphasis has generally been given to the former. While the original initiative for Spark came at national level, its objectives have been taken up by lower levels, and an increasing proportion of Spark activities is sponsored by provincial or county governments. This reflects a more general trend over the period to decentralize government program execution and budgetary author- ity. 2.3 Original national goals emphasized three aspects: (a) development and large-scale production of equipment sets suitable for TVE adoption; (b) establishment of "model" enterprises to demonstrate upgraded production and management processes, product design and quality control techuiques; and (c) training of rural enterprise personnel in appropriate modern technologies and management skills. These objectives were initially summarized in targets of 100 equipment sets, 500 "model" enterprises and one million trainees to be achieved during the Seventh Five-Year Plan (1986-90). In 1987, additional objectives called for support of comprehensive development in areas of "Spark concentration": selected mountainous regions, coastal areas and technology- intensive zones near large cities. 2.4 Design. Spark's original intention of developing sets of equipment suitable for TVEs does not in general appear to have been institutionalized in a systematic way (though some individual enterprise subprojects do produce such equipment). The program's major emphasis, in practice, has been on sup- port of subprojects to modernize and upgrade production technology and/or product quality within existing rural enterprises (though in a smaller number of cases Spark has helped establish new firms). Subprojects are expected to exhibit significant technological innovation (e.g. by being the first enter- prise, at either local or national level, to adopt a new technique) and to offer demonstration benefits to similar enterprises. The technology should be at a sufficiently developed stage to be ready for enterprise adoption (Spark is not an R&D program). The enterprise is required to receive support in subproject design and implementation from at least one qualified technical partner, e.g. a research or design institute, IHE or SOE (in some cases the technical partner may in addition become a financial partner, e.g. in a joint- venture). Policy statements have emphasized that subprojects should have relatively short implementation periods and show rapid returns, though SSTC recognizes that some important innovations will not fit into this pattern. SSTC has also placed increasing emphasis on the need for subprojects to demon- strate appropriate economies of location and scale. 2.5 Spark approval helps assure at least partial financing of subproject costs. At first, this funding usually came from budgetary sources, but now it predominantly comes as bank credit (para 2.16); terms and cond'tions have evolved over time (paras. 2.31-2.32). Spark approval may also assist with priority access to materials and supplies, to the extent that these are still allocated through planning channels. Finally, although the launching of Spark - 14 - did not per se change tax regulations, acceptance by Spark is one way to qual- ify for tax incentives for innovation.4/ 2.6 The source of assistance for the subproject, and the scrutiny it will receive, depend on the level of Spark approval granted. While subprojects typically originate at village, township or county level (or alternatively from a research institute seeking an enterprise partner), ultimate approval may occur at: (a) county level (in which case resources will come from the county budget and/or credit plan); (b) following successful submission upwards by the county, at provincial level (making provincial resources also availa- ble); or (c) following SSTC approval, at national level. SSTC indicates that national subprojects should demonstrate innovation at national level and pro- vincial subprojects at least local level innovation; county subprojects may involve diffusion more than innovation. Though the earliest subprojects were all at national level, subnational approvals now account for the large major- ity of subprojects (para. 2.14). 2.7 SSTC has recognized that Spark's focus on individual enterprises may sometimes provide an unduly narrow perspective: e.g., where coordinated prog- ress on raw material supplies and processing technologies is needed. This led to the 1987 launching of the program for comprehensive development of 20 moun- tainous regions, 10 coastal areas and 20 technology-intensive zones. By the end of 1989, SSTC had identified 18 mountainous regions, 8 coastal areas and 27 technology-intensive zones (the latter more than the original target). SSTC/STC typically organizes a task force from specialized institutions to study local development issues and help design an integrated strategy for the area. Resulting subprojects could be considered for priority Spark assis- tance. Additional outcomes might include longer term twinning arrangements e.g. between local agricultural trial stations and higher level research institutes. One of the identified coastal areas, Chongming Island, would par- ticipate in the present project. 2.8 From the outset, Spark has accurately identified deficiencies in the supply of trained personnel (para. 1.29) as a crucial constraint to sound TVE development, and the original program targets included the training, over 1986-90, of one million people, defined as "high school graduates or rural technical and business management personnel under the age of 35 with an equiv- alent education". Trainees were to "learn to use one or two technologies, or in the case of administrative staff, the basic skills for a factory director, manager, salesman or accountant". Spark training courses generally undertake short in-service skill upgrading for existing enterprise employees (though agricultural extension is also supported). Most training involves either courses in widely needed technical, managerial and financial skills relevant 4/ SSTC may authorize partial or total waivers for up to three years of the product tax on products meeting various criteria of innovativeness and social utility. Product tax is China's principal indirect tax, calculated on sales value and charged at product-specific rates from 3Z to 60% (though rates of 20% and above generally apply only to luxury items). Provincial governments may grant waivers for up to two years. The practical significance of such concessions may be less than might appear, given the discretion that still exists in setting taxes on profits. - 15 - to many enterprises, or support for specific Spark enterprise modernization subprojects. An additional objective cited is to assist diffusion of Spark achievements; It is not clear how far this has been put into practice. 2.9 The need to improve business information systems for rural enter- prises was not specifically identified among the key original objectives of Spark. However, in a parallel initiative, SSTC's affiliate ISTIC (para. 1.28) has recently commenced pilot efforts to upgrade information services to TVEs. ISTIC plans to create data bases of relevant information on technologies, products, markets, management methods and specialized consultants, at national, provincial and city levels. Diffusion methods will include publica- tions, audiovisual media (including video tapes and television programs), extension services and conferences. ISTIC also hopes to encourage the devel- opment of fee-based information consulting activities, directly responsive to TVE requests, throughout the SSTC/ISTIC system. B. Organization and Implementation Organization 2.10 Spark's national (i.e. central level) organization is almost entirely within SSTC, with little detailed involvement of other ministries. SSTC's role has evolved over time to one primarily of planning, policy guidance, coordination and training, with its executive function restricted to selection of national-level subprojects (now a relatively low percentage) and allocation of the limited national budget. Day-to-day work is handled by a Spark Program Office (SPO), currently consisting of 20 full-time professional staff. Most staff are engineers or agricultural specialists. Tht SPO acts as a secreta- riat which provides input for major policy decisions to be made by the SSTC leadership. It obtains help with subproject technical assessment and other aspects of policy or implementation from specialists in other SSTC units. 2.11 At provincial level, STCs play a key leadership and executive role, normally through relatively small (10-12 staff) Spark Program Offices (SPOs), which, as at national level, can draw on help from experts elsewhere in STCs, their affiliates or local bureaus. Provincial management typically involves a wide range of agencies outside the STCs in decision-making. The project prov- inces (and many counties) have established Spark Program Leading Groups, i.e. management committees. Their membership varies but as a minimum usually includes the local Finance Bureau, the Planning Commission and the main parti- cipating banks. The STC, through its SPO, acts as secretariat to the Leading Group, which is responsible for confirming local Spark plans and policies and approving enterprise subprojects. Organization charts for the project areas are in Annex 3. 2.12 Spark training is directed at national level by three staff in the SPO. They undertake overall planning, policy formulation and monitoring, and allocate national training budgets among provinces and activities. Implemen- tation is largely concentrated at provincial level and below. Planning and policy responsibility generally lies with the relevant STC Scientific and Technical Personnel Department; usually 2-4 staff have been assigned primarily to Spark activities. An important additional role in developing Spark training approaches, as well as delivering selected courses, is often piayed - 16 - by provincial "key Spark training bases". At SSTC's initiative (and to serve as a focus for the distribution of national Spark training funds), at least one such base has been designated in each province; some have up to three. While a few existing institutions chosen to become key bases appear to have had a relatively specific subsectoral focus, most bases demonstrate a broad S&T orientation, equipping them to play an apex role at provincial or (in larger provinces) regional level. In some localities, subprovincial STCs are directly responsible for the operation of Spark Training Centers (e.g. at city level in Jiangsu). At county level and below, however, Spark courses are often largely subcontracted to designated training "spots" operated by "cooperating organizationsn (e.g. local professional associations, research institutes or technical bureaus). The seniority of trainees, and sophistication of both managerial and technical training provided, appear to be closely correlated with the level of the Spark training establishment. 2.13 The apex of SSTC's technology information system is provided by ISTIC, which was formed in 1956. ISTIC undertakes research, documentation and retrieval of both Chinese and foreign language materials on S&T; there are counterpart information institutes in each province. To date, ISTIC's empha- sis has been largely on serving the S&T sector and policymakers; existing data bases are heavily bibliographic in nature. In view of recent policy changes, with their greater emphasis on fee generation, ISTIC is seeking to make its services more accessible to the business sector, including TVEs. Responsibil- ity for this initiative has been assigned to a newly formed Department of Domestic Information Exchange. Below provincial level, information offices are increasingly closely integrated with local STCs. At the township level, ISTIC and the local STC merge in the persons of the Science and Technology Assistants, who provide the interface between TVEs and the STC system. ISTIC's direct staff number about 1,350; it reports that the overall national network involves some 60,000 people. Details of staff and facilities ir the project areas are in Annex S3. Implementation 2.14 Subproiect Approvals. According to SSTC, 14,746 Spark enterprise subprojects costing Y 8,929 million were approved during 1985-88: Y 99 mil- lion for 41 subprojects (all national-level) in 1985; Y 2,276 million for 4,351 subprojects in 1986; Y 2,855 million for 5,263 subprojects in 1987; and Y 3,699 million for 5,090 subprojects in 1988. The industrial sector accounted for about 65% of investment costs and the number of subprojects, and collective enterprises for more than 95% of total approvals. Though subproj- ect sizes have varied, their average has been relatively small (Y 0.60 mil- lion). Ten percent of the subprojects have been approved at national level, 31% at provincial level and 59Z at county level; corresponding shares in total investment are 35% for national subprojects, 39Z provincial and 26% county, indicating that average stubproject size increases with approval level. A breakdown of approvals is in Annex 5. While SSTC does not have comprehensive data on actual disbursements, it suggests that, for a typical subproject, about 60% would be disbursed during the year of approval and most or all the balance in the following year. 2.15 Spark subprojects have covered a wide spectrum of subsectors, with inevitable regional variations. They have also ranged from improving a single - 17 - manufacturing stage to creation of com lete new plants or lines. Available data suggest that, compared to the overall distribution of TVE output (Annex 4), the main difference in coverage may be the apparent underrepresentation of the construction materials industry in Spark, possibly because its technolo- gies ire relatively homogenous (and perhaps because some do not lend them- selves to incremental technology improvements). Spark activities in food- stuffs and timber products may include integration between raw material pro- duction and processing (e.g. introduction of improved varieties or breeds plus new or upgraded factory facilities). Spark has also been active in the engi- neering (machine building) subsector, either helping upgrade quality standards of existing products (equipment, instruments, electrical appliances) or assisting TVEs establish capacity for new products (whether designs recently developed through R&D, or models transferred to TVEs from SOEs). Some support has been provided for establishing component supply to larger firms. Subprnj- ects in textiles and garments have generally emphasized quality upgrading (finishing, printing, etc.) rather than expansion. Overall, though a number of Spark subprojects have supported acquisition of foreign technclogy, these appear to date to have been a relatively small minority. There are indica- tions that foreign currency constraints at local levels (together with poor information services) have at times biased technology selection in favor of possibly sub-optimal domestic sources. 2.16 Financing patterns for Spark subprojects have been evolving. In 1985, financing closely followed the original concept of equal shares from the center, the province and the enterprise: participation of banks was minimal (7%). However subsequent years saw sharp declines in central funding and increases in the role of banks and enterprises' own funds. For 1985-88 as a whole, Spark subprojects were financed by enterprise internal funds (51%), bank borrowings (40Z) and budget allocations (9%). Provinces accounted for 691 of budgetary resources, counties 21% and central government 102. Prov- inces (and many lower-level authorities) have established Spark Funds, con- trolled by the Leading Groups, into which budgetary allocations are deposited and from which subproject support is made; loan repayments will also accrue to the Funds. Among banks, the Agricultural Bank of China (ABC) plays the lead- ing role, accounting in 1987 for an estimated 572 of total bank funding; the Industrial and Commercial Bank of China (ICBC) comprised 31X, and others (including the China Investment Bank (CIB) and the Bank of China) the remain- ing 12%. Of total bank financing in 1988, ABC accounted for 39Z, ICBC for 34% and other banks for 272. 2.17 Only partial data are available on implementation and resul.ts of subprojects. In June 1987, a senior SSTC official stated that: (a) of the 1985 subprojects, 13 had yielded "good results" within a year, 19 would be completed ahead of schedule and yield benefits in 1987 and 7 others were expected to be completed within three years (the other 2 subprojects were not accounted for); and (b) 70X of the 1986 subprojects had achieved "parti&l success" by the end of the a..me year. SSTC subsequently reported that, as of January 1988, 63Z of the 1986 subprojects had been completed and that their incremental output value was estimated (on "incomplete data") at about five times the total financial inputs. More recently, SSTC reports that by the end G.. 1988, 5,353 subprojects, or 36Z of the total approved to date, had been completed, including 592 state-level subprojects, 1,855 provincial-level sub- projects and 2,906 county-level subprojects. Output value for these subproj- ects amounted to about Y 14.0 billion and pretax profits to Y 3.6 billion, or - 18 - 26% of otutput value. Given the degree of program decentralization, the relia- bility of such estimates is unclear: there is some question, for example, whether reporting from lower levels always distinguishes fully between comple- tion of disbursements (sometimes made at least partly in advance), physical completion and commercial production. Regarcing results, emphasis was ini- tially placed (both at national and provincial levels) primarily on the ratio of incremental output to investment; this is not a very meaningful economic measure, but does provide some indication of subproject outcome and is easier to observe than more sophisticated alternatives (though it is not always clear when reported output value figures represent verified actual results, as opposed to projections made at subproject approval). More recently, Spark has also reported data on incremental profit and tax payments. Subproject approv- als, financing and implementation in the project provinces are analyzed in Annex 6. 2.18 Spark Training. Spark has rapidly put in place a network of training bases and centers. Nationwide, some 67 key training bases had been selected by end-1989, against an original 1990 target of 100, since scaled down in the current climate of austerity; and about 60 training centers (out of a proposed 150). In the project provinces, Jiangsu had by early 1990 identified 3 key bases, 11 centers and 40 spots; Jilin 2 bases, 8 centers and 19 spots; and Shanghai 1 base, 1 center and 20 spots. SSTC's national budget for Spark training was Y 12 million in 1986, but with decentralization declined to Y 1.3 mfillion in 1987. This was said to be about 8% of total 1987 Spark training expenditures, with the balance reportedly coming from provinces (20Z), lower level governments (22Z) and fees paid by enterprises (approximately 50Z). The share of fees is clearly substantial throughout the program; if anything, it increases at lower levels. By 1989, SSTC's natiunal Spark training budget had increased to Y 1.7 million; the total budget for Spark training at all levels had grown to a cumulative Y 47.2 million. 2.19 Trainee numbers, both target and actual, are problematic. SSTC's original one million figure was soon overtaken by the provinces which, in aggregate, set significantly higher five-year goals (Jiangsu, alone, around half a million; Jilin 140,000; Shanghai 130,000). One source suggests that the various targets would sum to over six million. The estimated breakdown is 17% for management training and 83% for technical training. The accuracy of "actual" trainee numbers (reportedly 4.0 million nationwide through end-1988) is unclear; their consistency with the training budgets reported in para. 2.18 is not obvious, though aggregate trainee numbers do conflate, e.g., senior staff attending intensive month-long courses with farmers at one-day extension events. A further issue is the incremental nature of Spark training, since some of the selected training bases, centers or spots were previously existing institutions, whose training levels prior to Spark are not recorded. In the project provinces, Jiangsu reported having trained 375,000 people over 1986-89; Shanghai, 223,000; and Jilin, 110,000 over the same period. 2.20 Technology Information System. Various initiatives have been taken to improve information flows to TVEs. Expanded publication programs include a weekly technology and market bulletin in Jiangsu, and a biweekly technology review in Jilin. ISTIC and both these provinces have produced video tapes on selected Spark technologies. Jiangsu has allocated key responsibility for different priority subsectors to specific information centers (Nanjing for - 19 - agroprocessing, Wuxi for textiles, etc.) and is planning establishment of a TVE registry; Jilin has introduced annual two-day Information Transaction Meetings in each county; and in Chongming the local information staff are credited with identifying the research basis for at least one successful Spark subproject. ISTIC has arranged several conferences to review international experience with information systems for small businesses and is investigating overseas data bases which might supply relevant inputs. ISTIC has also started building an initial data base on technologies appropriate for TVE use. and pilot dissemination programs have been launched at various levels (includ- ing a county-level pilot in Jilin). Further details of information activities are in Annex S3. C. Assessment 2.21 It is premature to attempt a comprehensive quantified evaluation of program achievements, and current reporting systems would in any case not support such an exercise. The present assessment is largely qualitative. It draws on observations by four missicns which, between them, traveled to six provinces, held extensive discussions with national and local officials, visited about fifty actual or potential Spark subprojecto and reviewed docu- mentation on more than 200 others. Specialists also reviewed Spark training, the technology information network and the program's internal management information systems. The discussion below summarizes the as3essment, and highlights the principal ways the project will address the issues raised; subsequent chapters provide more detail on project design. Setting Program Goals 2.22 Spark must seek a balance between "top down" goal setting and "bottom up" initiatives. This involves two dimensions: first, how far goals are set at national (SSTC) level or at provincial and lower levels; secondly, whether management seeks to define ex ante specific types of subproject (by subsector or technology) or rather to provide generic eligibility criteria to be applied on a case-by-case basis. In the first phase, SSTC was heavily involved in detailed subproject review. In addition, SSTC's early policy statements largely emphasized detailed lists of specific "priority" subsectors or tech- nologies (one 1987 document listed 140 such "priorities").5/ 2.23 Subsequent decentralization has shifted the focus of decision-making primarily to provincial and lower levels, with SSTC's role one largely of overall guidance. The most recent SSTC implementation guide6/ offers only br-oad references to subsectors, and instead provides extensive and often very thoughtful guidance on types of technological development to be supported at different levels, how to identify subsectors with competitive advantage, and approaches to subproject evaluation and financing, training, etc. It also indicates where further evolution is still needed, e.g., improving access of partnerships and individual enterprises, promotion of greater horizontal links 51 The National Spark Plan: The Key Points of Implementation, 1987-90 (February, 1987). SSTC, Beijing. 6/ A Guide to Project Implementation of the Spark Program (January 1988). SSTC, Beijing. - 20 - between firms, conduct of feasibility studies and approaches to diffusion. In addition to its written guidelines, SSTC also organizes interprovincial con- ferences to exchange experience of Spark implementation. Goal setting at provincial levels is discussed below (para. 2.25). 2.24 Project Response. The SSTC Guide offers a good overall basis for program developmer.t. It is, however, long and detailed, and, as agreed with the Bank Group, it has been supplemented by a more succinct policy statement. This statement (copy at Annex 7) was adopted by SSTC on March 25, 1990; and assurances were obtained during negotiations that the Bank Group would be informed in advance of any changes in the future. SSTC provided at negotia- tions updated information on the organization, staffing and procedures of the national SPO; this information is reflected in the discussion above. Subproject Priorities, Review and Selection 2.25 Responsibility for developing detailed priorities (subsectors, tech- nologies) and selecting and supervising subprojects has been largely devolved to provinces and counties. Approaches in the project areas are discussed in Annex 1. Chongming Island, as an area of "Spark concentration", draws on an impressive overall strategy document prepared with assistance from Shanghai STC. Jilin, whose TVE sector is underdeveloped, has identified ten subsectors as priorities (mostly upgraded processing of primary products) and organized local expert task forces to prepare rolling strategies for each. A typical strategy might identify e.g. three new technologies to be introduced over a given period, then leading to identification of enterprises to undertake dem- onstration subprojects; early indications are that this approach is working well. Jiangsu faces a larger and more diverse TVE sector and initially adop- ted a pragmatic case-by-case approach, under which initiatives mainly origina- ted with enterprises or R&D institutes. Some subsectoral and geographical priorities have been indicated, however, and Jiangsu has instituted an annual Project Directory which sets out priority objectives for the year and is used to solicit subproject proposals more actively. 2.26 At provincial level, Spark's organization has three main features: (a) A higher level, interagency Leading Group, responsible for final decisions on local policy and subproject approvals; (b) A small SPO, the secretariat for the Leading Group, and responsible for screening and recommending subprojects; and (c) A high degree of delegation by the SPO (to technical bureaus, insti- tutes, etc.) of detailed subproject appraisal; supervision is also frequently delegated to bureaus or counties. For such a model to operate successfully, the key SPO staff must possess the necessary knowledge and skills both to carry out an effective initial screen- ing and to evaluate the appraisals made on their behalf. The STCs' close ties to the technology community provide unrivaled opportunity to benefit from specialist input; however, the delegation involved indicates the importance of explicit guidelines on policies and procedures, to ensure that the numerous - 21 - staff participating have a clear understanding of program criteria and of their responsibilities and reporting requirements. 2.27 The quantitative data available (para 2.17) suggest that implementa- tion of most subprojects has proceeded broadly on schedule: the same appears true of most of those visited by Bank Group missions. Most subprojects visited or discussed fit with program objectives regarding innovation and rep- licability, but a significant minority apparently involves only minor upgrad- ing, introduction of fairly standard techniques, or resolution of specific problems with little likely spin-off effect. Subprojects in general seem primarily oriented to installing specific new items of hardware and training staff in their use, with perhaps less attention to improving management, pro- duction control, laycit, etc. and strengthening institutional capacity. The discussion of subproject selection in SSTC's recent Guide indicates that it recognizes the need to give greater attention to these aspects. 2.28 In most cases reviewed with enterprise managers, the choice of tech- nical partner and source of technology was based on their own contacts and information, rather than STC assistance. STCs need to make greater use of technology information systems to identify technologies, technical partners and Spark achievements outside their immediate locality. This would broaden the pool of technologies considered, resulting in more appropriate technology selection, while reducing "reinvention" of innovations already made elsewhere. 2.29 The SPOs are staffed primarily by engineers, who generally possess sound technical qualifications and significant working experience. However, because of historically low mobility, SPO staff, drawn mainly from other STC units, have usually spent their careers entirely in administration of R&D support, or have moved from research institutes, universities or similar agen- cies. Technical or managerial experience in industry is rare (though SPOs have started to recruit staff with economics or finance backgrounds). Beyond this, given the recent emergence of the economy from central planning to greater market orientation, there is a dearth, in all agencies, of personnel with experience in evaluating market risks and marketing strategies. Bank missions have observed that, while responsible STC staff tend to have a good grasp of subprojects' direct technical content, there has sometimes been insufficient attention to the commercial maturity of the technology, the absorption capacity of the enterprise, the appropriate scale of development, the availability of competing technologies and proposed marketing and packag- ing strategies. This may reflect a more general phenomenon in China, that project parameters are apparently often set at an excessively early stage and not seriously questioned thereafter. Reviewers seem largely to choose between accepting or rejecting subprojects as proposed, rather than actively contri- buting to their redesign. 2.30 Project Response. At negotiations, assurances were obtained on sub- project eligibility criteria for the project (Annex 8). Discussions were also held with each project area on updated Spark priorities and procedures, and understandings were reached that these would be subject to periodic consulta- tion with the Bank Group during project implementation. At negotiations, Jiangsu Province confirmed that its SPO had recently recruited two additional staff with backgrounds in economics and that it planned to hire shortly two more staff with backgrounds in finance. Jilin Province confirmed similar - 22 - plans to strengthen its SPO by recruiting three to five staff in management, economics and finance and advertisements have already been placed to this end. The Chongming Island SPO anticipates bringing its economic/finance staff com- plement to four with the planned recruitment of two more staff. As with Spark priorities and procedures, the adequacy of SPO staffing would be subject to review during project implementation. Under the project, the quality of sub- project appraisal would be reinforced by ensuring that the participating financial intermediaries have the authority to reject subprojects. The proj- ect also includes a training subcomponent to strengthen SPO capacity in sub- project evaluation. Financing Terms and Conditions 2.31 The terms for Spark enterprise financing have lacked uniformity, but are evolving towards prevailing market-oriented rates. Initial national bud- getary support provided significant rebates of principal for timely and suc- cessful implementation, uith the retained funds intended to be dedicated to further technological development. More recently, SSTC has emphasized that subprojects should be financed mainly by the banking system (which will gener- ally apply prevailing rates), supplemented by enterprises' own resources: this trend is observable in the actual financing statistics (Annex 5). There was, for some time, some sentiment at provincial and lower levels in favor of using the Spark Funds to reduce the effective cost of capital (e.g. by subsi- dizing interest on bank loans), either on the grounds that TVEs are seen as inherently weak and unable to pay market rates, or because of the higher risks asso(iated with technological innovation. The former argument is belied by the profitability and growth of the TVE sector over the past aecade (Chapter 1); the latter may, in the medium term, be better met by the discriminating use of innovative risk-sharing financial instruments to support higher risk investments, largely those at precommercial stage. Even at local levels, theugh, provision of "soft" funds has been declining, under the influence of budgetary stringency and overall reforms in enterprise finance; local authori- ties also increasingly recognize the potential distortionary effect of "soft" money (and its encouragement of Spark applications without significant tech- nology upgrading content). 2.32 Terms for budgetary/Spark Fund resources have varied between the project provinces and over time. Jiangsu at first provided interest-free loans and partial grants (the latter covering 10% of costs for industry and 207 for agriculture); from 1988, it charged 3% on Spark Fulnd loans. At nego- tiations, Jiangsu advised the Bank Group that financing will in future be pro- vided on market terms for all subprojects with the exception of those in depressed rural areas in the north of the province and some agricultural sub- projects, where an element of concessionality may remain. Shanghai also ini- tially worked mostly with interest-free loans and grants (in 1987, these together accounted for 70X of total disbursements); subsequently the Spark Fund paid half the interest due to the banks on loans over a two year period. This payment was halved in 1988. At negotiations, Shanghai advised the Bank Group that it had recently reduced interest subsidies to represent 5 of the interest due and thus subsidization haE virtually been eliminated. In Jilin, the Spark Fund provides direct loans to technologically more risky projects with discounts from commercial rates determined on a sliding scale according to the pLoject period (for a one year project, subsidies from the Fund cover 23 - about one third of the total interest due; for a two year project 20Z; and for a three year project 10Z; this range represents a cut from earlier levels of 20-50Z). The Spark Fund has also paid part of the interest due on bank loans; however, at negotiations the Bank Group was advised that, while in the past such subsidies were provided routinely for all subprojects, subsidies are now provided on a more discriminating basis depending on the degree of a subproj- ect's technological innovation, and that market rates would be taken as the norm for most subprojects. 2.33 project Response. The National Spark Policy Statement (para. 2.24) indicates that provinces should avoid indiscriminate use of budgetary resources to subsidize Spark subprojects. Assurances were obtained at nego- tiations that, under the project commercial credit subcomponent, all Bank Group funds and counterpart local funds would be passed on by the financial intermediaries at prevailing market rates, and Spark Fund resources would not be used to subsidize interest on such subprojects. At negotiations, each project area provided updated information on guidelines for future Spark Fund terms on nonproject lending, which is reflected in the discussion above. Understandings were reached that these would be subject to periodic review during project implementation. In Jiangsu, the project would introduce the pilot use of risk-sharing financial instruments to fund precommercial subproj- ects (Annex 9). MXianagement Information Systems 2.34 Project processing has revealed serious deficiencies in provision of accurate and relevant data on Spark Program implementation. SSTC lacks confi- dence in data it possesses on operations in the provinces and Bank Group mis- sions have also identified discrepancies betwten national and provincial fig- ures. Some provinces can provide no information on county activities, while others have difficulty disaggregating province-level data into functional categories. It is uncertain how far subproject supervision reports are used to update "actual" implementation status and results. Ironically, much rele- vant informationi is already collected at enterprise level (e.g. by the BTVEs) but is not effectively collated for Spark management purposes. Sucn problems may in part reflect the recent decentralization of the program. However, they also result from lack of hands-on familiarity with the design and implementa- tion of responsive management information systems (MIS). Provinces have, for example, aspired to design overly amb.tious systems to be run on mainframe computers, intended for other STC agencies with different priorities: in conisequence, practical working systems have not in fact been developed. This lack of information impedes efficient management (reducing the opportunity, for example, for higher level STCs to assist lower level units when implemen- tation problems arise). The absence of good historical data also hinders preparation of realistic medium-term plans. Finally, these gaps render almost i:z'possible any objective evaluation of the program, whether by SSTC or other key agencies of GOC. 2.35 Project Response. Technical assistance (and a small number of micro- computers) would be provided to design and implement a simple, responsive MIS in Jiangsu and Jilin and at SSTC, with the intention of ultimately creating a shared, interlinked MIS for the entire program. - 24 _ Diffusion 2.36 Spark set itself the initial objective of supporting 500 "model" enterprise subprojects, intended to serve demonstration purposes. In fact, rapid uptake has resulted in approvals to date of almost 15,000 models. How- ever, even this remains small compared to the total number of rural industrial enterprises (para 1.23), and it would be unrealistic and inappropriate to expect Spark to become a dominant channel for funding TVE investment needs. The limited number of subprojects directly supported therefore needs to be accompanied by mechanisms for diffusion of technological and managerial improvements to the larger TVE population. 2.37 SSTC's recent Guide to Project Implementation recognizes that diffu- sion of Spark achievements lies at the heart of the program, but that rela- tively little experience exists of practical Spark diffusion. The stirting point for a successful diffusion strategy must clearly be the initial selec- tion of subprojects with high potential for replication. The new national approach to technology policy, with its emphasis on technology markets (para. 1.11), provides an appropriate overall framework for Spark diffusion. Con- tracts signed with all Spark subproject beneficiaries create an explicit obli- gation to share results with other enterprises in return for reasonable mone- tary compensation; it is not, however, clear whether such provisions have been widely invoked. SSTC has called on lower level governments to develop Spark diffusion programs and hopes later to encourage the wider adoption of success- ful approaches. The Spark training and technology information programs, assessed below, hold potential to become leading mechanisms for diffusion. 2.38 Project Response. Subproject eligibility criteria place emphasis on potential for replication, while the National Policy Statement highlights the importance of diffusion. Specific project components will strengthen the Spark training and technology information networks. At negotiations, under- standings were reached that SSTC and participating STCs would prepare annual reports on their experience and strategies for Spark diffusion, for review with the Bank Group. Spark Training 2.39 The Spark training program responds to the failture of the education system adequately to address skill needs of rural enterprises (para. 1.29): the scale and variety of unmet training requirements make possible duplication of SEdC efforts a secondary concern. National guidance for Spark training (for example, in SSTC's Guide to Project Implementation) remains at this stage more tentative than that provided for the enterprise modernization component. SSTC seems to lack a clear vision of the contribution it can make to Spark training, which is perhaps an inevitable consequence of the limited national staff resources so far dedicated to this component. 2.40 The overall scale of Spark training is impossible to establish with any confidence (para. 2.19), but without doubt Spark has been successful, at subnational levels, in putting together impressive multitiered delivery sys- tems, cowprising training bases, centers and spots, and in developing links with a substantial range of cooperating organizations. A wide variety of courses has been organized, and the subject matter of most appears relevant to - 25 - TVE needs and consistent with Spark goals. The enthusiasm of the TVE sector for improved training opportunities is manifest, inter alia, in the fact that enterprise fees typically account for half or more of the cost of Spark train- ing programs. 2.41 Review of Spark training in the project provinces, however, irdicates that its overall effectiveness and efficiency are currently well below accept- able or potential levels. Many of the problem areas represent general charac- teristics of current educational methods in China, and are not restricted to the Spark Program. While Spark training managers are as a rule highly com- mitted, their focus tc datp has boin im cIti-nit ty rather than quality of train- ing, and at all levels they lack the protessiovial exposure necessary to man- age, evaluate and improve high-impact adult training to maximum effect. Course conten, is usually overly academic and theoretical, and insufficiently adapted to the level and needs of the target population. Provinces have typi- cally commissioned course textbooks from personnel in local universities or research institutions. Focused course curricula have generally been absent; usually the textbook becomes de facto the curriculum, and often no supporting instructional materials are used. Instruction, in turn, is almost entirely by the lecture method, and courses longer than would normally be considered nec- essary elsewhere. Most instructors come from university or research back- grounds, and have received no exposure to nonacademic adult training methods; some supplementary training is undertaken by part-time local instructors with business experience. Finally, the speed of Spark's development has meant that many training bases and centers are still operating from temporary premises, which are unable to provide the specialized facilities needed for technical courses. There is also a lack of residential accommodation, necessary for courses which address shared training requirements of a number of widely dis- persed enterprises. 2.42 Project Response. At negotiations, SSTC and each project area pro- vided materials on progress in and plans for strengthening staff involved in Spark training at the level of provincial STCs and in particular at the key training bases. Understandings were reached that the adequacy of Spark train- ing staff would be subject to periodic consultation during the course of proj- ect implementation. Under the project, SSTC wiil carry out a study on Spark training objectives, organization and implementation (para. 3.16). At negotiations, the project area authorities confirmed measures to ensure coordination between Spark training and other relevant activities; in Jilin and Chongming this would be achieved by the recent additions of representa- tives of the local Education Bureau to their Spark Program Leading Groups and in Jiangsu by arranging periodic and at least annual consultations between the two parties. The project Spark training component will support technical assistance and training pt -rams for key training managers and trainers at national and project area levels, in contemporary methods of training program management, design and evaluation, and in the production and use of suitable instructional materials for adult trainees. The project will also assist the construction and equipping of appropriate tra'ning facilities at four sites in the project areas. - 26 - Technology Information 2.43 Of China's existing information systems (para. 1.28), that of ISTIC appears to have the best potential to develop into an effective business information system for TVEs: its extension system is in place (para. 2.13); its technology focus is broad rather than subsectoral; and it will have direct access to achievements of successful Spark subprojects. ISTIC has a sophis- ticated senior management which recognizes the system's need for strengthening and is exploring international lessons; there is also experience, at higher levels, in the use of extensive computerized data bases, and the ability to process and retrieve large amounts of data (ISTIC has a one million entry data base in Western languages on an IBM computer and a Chinese language base on a VAX, both close to their capacity limits).7/ ISTIC has substantial capacity to assist lower levels through coordination, advice and training. 2.44 Creating a functioning system for TVEs will still be a major chal- lenge. Very little of ISTIC's existing data bases will be directly relevant to TVEs, and new collection systems will be needed to capture relevant mate- rial from domestic and international sources. Staff must be trained to create data entries suitable for TVEs (as opposed to the present bibliographic empha- sis). At lower levels, in particular, existing equipment will need to be upgraded and staff strengthening undertaken to create a corps of "information entrepreneurs" able to adopt a proactive role. One danger is of attempting unduly ambitious nationwide blanket coverage before the necessary models have been proven on a pilot basis. 2.45 Project Response. The project would support data base development at higher levels of the ISTIC system, together with pilot programs in diffusion and information consultancy in the three project areas. Existing computer capacity would be augmented, and technical assistance and training provided in system planning, data base development, computer applications, information consulting and extension functions. D. Project Rationale and Objectives 2.46 Rural enterprises constitute a dynamic sector with considerable potential. However, they face a number of constraints which are likely, in the absence of focussed support, to persist for some time in an environment which still, in many ways, favors the SOEs. The above review of Spark objec- tives and implementation indicates the strong start made in developing practi- cal programs to meet priority needs of rural enterprises. It has also identi- fied the need to improve program implementation through continued development of policies and procedures, additional staff training and recruitment, and transfer of new concepts and methods in specific areas. The program's objec- tives and achievements, together with the potential for further strengthening, provide the rationale for a Bank Group supported project whose priority objec- tives would comprise: (a) Clearer articulation of program policies; 7/ Only a few computer firms currently offer Chinese character capability. - 27 - (b) Implementation of agreed programs of Spark agency staff training (including training in evaluation of innovative technelogy subproj- ects); (c) Design and introduction of an effective and responsive management information system (MIS) for the program; (d) Experimental introduction of support for precommercial technology development through use of new risk-sharing financial instruments; (e) Transfer to the Spark training program of modern methods of identify- ing enterprise employee training needs and designing and delivering targeted, high-impact adult training programs; (f) Transfer to the ISTIC system of new approaches to building relevant data bases and delivering information services to enterprises; and (g) Provision of credit for eligible TVE technology projects as a cata- lyst to demonstrate to a financial system still largely oriented towards SOEs that such projects can be financially viable and worthy of the system's support. 2.47 Future Agenda. These objectives constitute a substantial agenda for a first project. Their achievement and diffusion would result in major strengthening of Spark operations. They do not, however, exhaust the identi- fiable scope for upgrading performance. In the medium-term, attention should be given to such areas as: (a) Building on the project-supported staff strengthening arnd MIS intro- duction to upgrade Spark's planning capability (identification of priority subsectors and technologies and formulation of development strategies); (b) Using the MIS data bases as a foundation for formal monitoring and evaluation systems; and (c) Developing more systematic institutional frameworks to pursue Spark's objective of fostering design and production of equipment packages suitable for rural enterprises. These objectives could provide the basis for subsequent support efforts. III. THE PROJECT A. Froject Areas and Summary Description 3.1 Demonstration effects of the project would be maximized through implementation in one proviluce with an advanced TVE sector, one where TVEs are currently underdeveloped and one area of "Spark concentration". Detailed background on the project areas is in Annex 1. They are: - 28 - (a) Jiangsu Province. Jiangsu, a prosperous coastal province, has expe- rienced perhaps the most dramatic upsurge of TVE growth in China. Together with neighboring Zhejiang it was the first province where the value of non-State industry output surpassed that of State indus- try (by 1988, 59.3Z of output versus 34.7Z from SOEs and the balance from individual and other enterprises). TVE output is broadly dis- tributed across subsectors, and increasingly technically sophistica- ted and export-oriented; (b) Jilin Province. Jilin, in the northeastern interior, is an important agricultural center, which contributes significant shares of maize and soybean output. The mountainous east is noted for mineral depos- its and timber production. Jilin's economy is dominated by SOEs in heavy industry, including vehicles and chemicals. Educational and technological indicators are above national averages. However, non- State industry is underdeveloped; collectives contribute only a quar- ter of industrial output and TVEs less than 1OZ; and (c) Chongming Island (Shanghai municipality). An alluvial island at the mouth of the Yangtze, Chongming county has seen its development ham- pered by inadequate transport links to the mainland and low educa- tional and technological levels. Agriculture remains keyed to staple crops, failing to exploit advantages to process specialty items for Shanghai and export consumers. Existing industrial TVEs, in areas including electrical appliances and textiles, need to update their technology to remain competitive. As an area of "Spark concentra- tion" Chongming has been studied intensively by experts organized by Shanghai STC. Their recommendations, accepted by the county govern- ment, provide the basis for a comprehensive development strategy and for Chongming's participation in the project. 3.2 Components to be supported are as follows: (a) The Enterprise Modernization Component would provide credit to TVEs (and a restricted number of county collectives) implementing approved Spark subprojects to introduce new or upgraded production technology and/or product design. Most of the component would comprise the Commercial Credit Subcomponent, providing credit on conventional terms in support of commercial scale technology upgrading subpro- jects. In Jiangsu, an experimental Precommercial Credit Subcomponent would finance smaller subprojects at the precommercial stage; financ- ing terms would involve partial risk-sharing, with interest related to subproject results; (b) The Spark Training Component would support programs to upgrade the skills of rural enterprise managers and workers, by providing tech- nical assistance and training to Spark training managers and instruc- tors to strengthen their management skills and training methods. It would also finance facilities and equipment at four Spark training locations, and include a study to be carried out by SSTC on the long- term development of the Spark training program; - 29 - (c) The Technology Information Component would help ISTIC adapt its information netwurk to reach TVEs with business-oriented information. The component would provide technical assistance, training and equip- ment for developing relevant new data bases, improving electronic and other information systems and upgrading delivery networks in the project areas; and (d) The Institutional Development Component would strengthen implementa- tion capabilities within SSTCISTCs and participating financial inter- mediaries. (i) The Management Information System (HIS) Subcomponent would finance technical assistance for design of an effective MIS for Spark, and its introduction at national and provincial levels, together with essential micro-computer hardware. (ii) The Technology Evaluation Subcomponent would finance design and delivery of training programs on the evaluation of industrial subprojects incorporating innovative technology, together with production of instructor and trainee manuals. (iii) The component would also assist the partici- pating financial intermediaries implement agreed training programs. In addition to programs in the project areas, components (b), (c) and (d) above would also incorporate activities at national level, to strengthen the ability of SSTC and ISTIC to provide essential support and cocrdination for the relevant provincial activities. For these three components, assurances were obtained at negotiations with GOC, the project provinces and the finan- cial intermediaries that staff training would be carried out in accordance with programs agreed with the Bank Group. Signature of contracts with agen- cies acceptable to the Bank for the implementation of technical assistance and training under components (b), (c), (d,i) and (d,ii) would be a condition of disbursement for components (b), (c) and (d). B. Enterprise Modernization Component 3.3 This component would account for the majsr portion of project cost and Bank Group financing and would consist of two subcomponents. Commercial Credit Subcomponent 3.4 This subcomponent would provide credit on conventional terms for commercial scale Spark enterprise modernization subprojects. Onlending would be tlrough ABC and CIB in Jiangsu, ABC in Chongming and the Jilin Province Economic Development Investment Corporation (JEDIC) in Jilin (paras. 4.17-4.20). Final lending terms would be in line with prevailing rates (para. 4.22). 3.5 Eligibility Criteria. Sponsoring enterprises and their subprojects would meet agreed eligibility criteria (Annex 8). To permit focused support, these limit the project to financing industrial subprojects (including agro- processing, but excluding agriculture). Enterprises would be TVEs (whether community, cooperative or private), county collectives or joint-ventures con- trolled by TVEs. At least 752 of Bank Group resources in each province would go to TVEs, i.e. a maximum of 25Z to county collectives, which usually have somewhat better access than TVEs to financial and other support outside Spark (para. 1.20). In Jilin, in view of its less developed TVE sector, the minimum - 30 - percentage for TVEs would be modified to 65Z. Subprojects would demonstrate technological innovation or upgrading content beyond normal investment in expansion, generally involving innovation and/or demonstration effects at the level of the province (or, for Chongming, the county). To ensure that sub- projects receive sufficiently rigorous examination, the project would finance only those reviewed and approved at provincial STC level. 3.6 Subprojects approved by provincial STCs as meeting the above eligibi- lity criteria and being technically sound would be subject to independent appraisal by the financial intermediaries (the two evaluation processes would in practice overlap). The intermediaries would bear the credit risk on all commercial subprojects and would be authorized to accept or reject subprojects based on their own assessment of viability and creditworthiness. Subprojects would have minimum projected financial and economic rates of return of 12%, which approximates the opportunity cost of capital (formal economic analysis would be carried out to control for remaining price distortions in China; it would be required only for subloans of US$300,000 and above but would be expected to cover a majority of subprojects). To ensure broad use of Bank Group resources, and given the moderate size of most TVE subprojects, maximum total subloans from Bank Group resources to any enterprise would be US$2.5 million. Subloans to be financed from Bank Group resources would not exceed the greater of: (a) 100% of actual foreign exchange expenditures for imported goods and services, or (b) 50Z of total subproject cost (excluding the cost of land). The last date for the submission of subprojects to the Bank Group would be June 30, 1993. Assurances on the above arrangements were obtained at negotiations. 3.7 Subproject Pipelines. Project area authorities have exchanged views with the Bank Group on a large number of subprojects being considered for project support. The project areas should not have difficulty in bringing forward a sufficient number of suitable subprojects within a reasonable period, or in meeting agreed stipulations on the minimum participation of TVEs. Proposals in Jilin (and to a large extent in Chongming) generally involve helping TVEs assimilate production techniques already proven in other enterprises in China or overseas. In Jiangsu, a higher proportion of subproj- ects will involve introduction to commercial production of innovations (new products and processes) recently developed in the R&D sector. This difference in emphasis is an appropriate reflection of the level of development in the different project areas. Sectoral allocation of subproject proposals appears essentially to follow the Spark priorities established for each of the project areas (Annex 1). Precommercial Credit Subcomponent 3.8 This subcomponent would support technology development in enterprises preceding full-scale commercialization of a product or process. Examples might include construction of a pilot plant or prototype development. A pre- commercial subproject typically faces technical and/or market risks which may make it unappealing to an individual enterprise, with limited risk-bearing capacity, despite its being socially desirable. Financial support for precom- mercial development in other countries is therefore sometimes provided through risk-sharing financial instruments, such as the conditional loans to be intro- duced under- this subcomponent. Conditional loans have been used, with the - 31 - support of the Bank Group, to promote technology development in countries such as India, Korea and Mexico. There is little experience with formal risk- sharing contracts in China; the concept of equity capital is also at this stage ill-defined. 3.9 Eligibility criteria for enterprises would be the same as those for the commerci&l subcomponent; further details on subproject eligibility cri- teria, which establish a more detailed definition of precommercial develop- ment, are in Annex 8. Bank Group and counterpart financing for the subcompo- nent would be channeled through ABC and CIB. In view of the subcomponent's experimental nature, the intermediaries would serve as agents for the provin- cial government, 'DUt would still be expected to make an independent evaluation of the likelihood of successful commercialization, and expected costs, sales and profits, as well as the enterprise's creditworthiness. The intermediaries would be paid service fees equivalent to 1.75Z of outstanding amounts, until the loan is fully repaid. In addition, to provide an incentive for the inter- mediaries to manage the funds effectively, they would receive a one-time suc- cess fee of 3X of loan principal for subprojects which lead to successful commercialization. Assurances on these terms were obtained at negotiations. 3.10 During the development stage, enterprises would pay only the service fee. All subprojects would be expected to repay loan principal in full, while those resulting in successful commercialization would pay interest at rates above those on the project commercial credit loans, and related to their esti- mated financial returns. Understandings were reached at negotiations that the interest to be paid in respect of successful subprojects would exceed the equivalent prevailing commercial terms by not less than two percentage points. Loan repayments and interest (following deduction of fees) would accrue to a circulating fund. Further details of the risk-sharing formula, which was agreed at negotiations, are in Annex 9. Translation of these general princi- ples into a practical contract format requires some additional work. At nego- tiations, an understanding was reached that, before finalizing approval of the first precommercial subproject, Jiangsu Province would submit the proposed draft contract to the Bank Group for approval. 3.11 Bank Group financing for any one precommercial subproject would not exceed US$200,000 and the total costs of such a subproject would not exceed US$400,000. An enterprise would be eligible for only one precommercial loan at any time and would not simultaneously be receiving a commercial loan from any source for the same product or process. Expenditures eligible for Bank Group financing (and the deadline for subproject submission to the Bank Group) would be as in para. 3.6. Assurances on the above arrangements were obtained at negotiations. Jiangsu's ad-ranced stage of rural industrial devel- opment makes it an appropriate location for such an experimental subcomponent. The province has provided satisfactory indications of its ability to commit the sums involved to suitable subprojects within a reasonable period. C. Spark Training Component 3.12 The Spark Training Component would introduce modern training methods and improved management to the Spark training system, through provision of technical assistance and training of trainers. Spark training managers and instructors would be exposed to moderi high-impact training methodologies, irmd - 32 - new methods of planning and evaluating training programs, as currently prac- ticed by businesses in North America and Western Europe. They would acquire the ability to design, produce, evaluate and disseminate high quality training programs to large numbers of Spark instructional staff and enterprise employ- ees. Bank Group experience with s4zable technical assistance and overseas training components in China indicates the crucial importance of achieving clear responsibility for coordinated implementation. A management associa- tion, institute or firm would therefore be contracted to arrange the provision of all the techniccl assistance under the component, to coordinate and deliver selected in-country training programs for senior training managers and instructors, and to organize overseas training programs. The possibility of nongovernmental organization (NGO) involvement in executing the component is under active review. 3.13 The technical assistance would include two groups of specialists: (a) shared training methods consultants, who would conduct in-service work- shops and provide continuing technical support on key aspects of training management and methodologies, and (b) instructional package consultants, who would work with training staff at each project location on practical assign- ments to design "model" courses (including production of supporting materials) in local priority technologies and/or managerial or financial skills. In addition, a coordinator would be responsible for ensuring overall implementa- tion of the technical assistance and training plan. 3.14 The international consultant services would amount to 40.5 man-months over a 36 month period. Two hundred man-months of training by local specia- lists is also included, to undertake dissemination. The component would sup- port 28 man-months of overseas training for 18 staff, comprising 20 months of training for 10 senior instructors and 8 months of training for 8 managers. This would involve courses specially designed, under the coordination of the managing agency, to expose Spark staff to high-impact industrial training programs, including specialized training for the instructors. Full terms of reference, as agreed at negotiations, together with detailed costs of the component, are in Annex SI. 3.15 New facilities would be constructed at key training bases in Nanjing and Jiangyin (Jiangsu) and Changchun (Jilin) and at the Chongmiing County Training Center. Training laboratories for technical training and workshops for production of instructional materials would also be equipped. The build- ing designs have been reviewed by the Bank Group and are appropriate for the scale and level of training proposed (see Annex Si). The equipment lists are also considered appropriate in principle; however, at negotiations understand- ings were reached that each province would develop, in consultation with the consultants to be employed under the project, final written justification explaining the relevant courses to be held, including proposed numbers of trainees and course outlines. These would be submitted to the Bank Group for approval prior to any procurement for related equipment and materials. 3.16 Study on Long-Term Training Program. Towards the end of the project period, SSTC would carry out a study on the long-term development of the Spark training program. The study would include an assessment of the contribution made by the project's training component and the priorities for further short- - 33 - and long-term improvement and development of Spark training. It would be car- ried out by a task force of training experts, organized and coordinated by the training unit within SSTC's SPO. At negotiations, assurances were obtained that SSTC would complete the study, no later than December 31, 1993, in accordance with terms of reference acceptable to the Bank Group (Annex S2), and would review results with the Bank Group. D. Technology Information Component 3.17 This component will strengthen and support the capacity of ISTIC and 16 information offices in the project areas to design and implement a TVE- focused information system. The information organization and retrieval sub- component will undertake the formation of data bases, as the basis for pre- paration of information packages. Target enterprise data bases, covering initially a total of 15,000 to 18,000 TVEs in the three project areas (and based on interviews and registration forms in which current activities and perceived information requirements will be surveyed), will form the basis for design and operation of a proactive, user-focused information system. Other Spark data bases, to be prepared at national, provincial and/or regional levels, will. cover products and technologies, markets, consultants, relevant management techniques and successful experience of technology transfer. 3.18 The information diffusion subcomponent will develop and refine the existing extension mechanism to transfer information more effectively into the hands of the users. The subcomponent will target three broad areas: (a) exransion of information delivery programs (audiovisual, publications, mobile information units); (b) refining and implementation of the information consulting services program; and (c) training programs to improve the aware- ness of staff both of the STCs and within enterprises of the resources avail- able in the ISTIC/STC system. The information design and structure subcom- ponent will help strengthen the computer, telecommunications (facsimile), video and printing systems which support and facilitate the information trans- fer process, including financing specific equipment needs of the participating offices. The design of information transfer systems takes account of the current status of telecommunications inf..astructure. The subcomponent would ensure that each location has the physical equipment and supporting systems to play its role effectively and that the whole system is interactive and can move information quickly to users. 3.19 The above program will require the services of an initial team of three international specialists (five man-months) over a six-month period to assist ISTIC in developing specifications for the information network and parameters for data base development. ISTIC will also assign staff to work with a second team of international specialists (4 persons/9.5 man-months) to develop training programs and materials for courses to be delivered by ISTIC's own trainers. The latter team will divide its time between ISTIC headquarters and the project provinces. Training activities also include overseas training courses (9 man-months) for senior system managers. The two teams will be pro- vided, and the overseas training designed and implemented, under a single con- tract with an international agency acceptable to the Bank Group. Terms of reference for the technical assistance (as agreed at negotiations) and detailed costs for the component are in Annex S3. - 34 - E. Institutional Development Component 3.20 Management Information System (MIS) Subcomponent. As discussed above (para. 2.34), there are currently severe deficiencies in the provision to program managers at different levels of accurate, complete and timely informa- tion on the approval, financing, implementation and results of Spark subproj- ects. The involvement of several layers of government in the program through- out China makes it highly desirable that a shared and mutually compatible management information system (MIS) be adopted. The project would therefore support the technical assistance, staff training and essential small computer hardware necessary to design an appropriate MIS and introduce it at the level of SSTC and Jiangsu and Jilin provinces (Chongming's program is sufficiently small that manual methods of information processing are considered appropri- ate; Shanghai STC has indicated its intention, at municipal level, to adopt an MIS compatible with that designed under the project). Following successful trial implementation under the project, the system would be suitable for replication in other provinces. 3.21 The Spark Program MIS is intended to be a simple and user-friendly system, run on small personal computers by designated staff within the SPOs (to be trained under the project); it would thus be immediately accessible to program management and input could be made and output generated with minimal delays. Standardization of data bases would facilitate communication between different levels. Subproject data bases would be organized into three linked files (subproject inventory; implementation; results). The project would finance the costs of an internationally recruited team comprising one experi- enced MIS designer (8 man-months), and one prograrmer (6 man-months) with Chinese language capability. The team would operate under a single contract for system design, software development and supervision of introduction (including operator training). The project also includes provision for the cost of limited numbers of small computers, peripherals and associated materi- als needed to introduce the system, and 8 man-months of overseas study tours. Terms of reference (as agreed at negotiations) and cost estimates for the MIS subcomponent are in Annex S4. Technology Evaluation Training Subcomponent 3.22 Spark implementation makes heavy demands on the staff of the STCs/ SPOs at different levels, as regards evaluation of large numbers of subproj- ects, covering many different innovative technologies in diverse subsectors. Discussion of current SPO staffing and subproject evaluation capabilities in paras. 2.27-2.29 establishes the need to strengthen capacity in subproject evaluation, through both recruitment and the delivery of new skills and analy- tical frameworks to existing staff. 3.23 Training even in standard appraisal techniques is a comparative inno- vation in China; the teclnology assessment requirements under Spark are con- siderably more onerous. Under the subcomponent, a training program in the evaluation of industrial projects involvirLg innovative technology would be designed and delivered. The main target population would be provincial and county SPO staff in the project areas, though participants could also be drawn from elsewhere in the SSTC/STC system (and from project financial intermedia- ries). The training package would assist trainees to develop a "checklist" of - 35 - questions to apply in subproject evaluation, as well as acquainting them with relevant analytical techniques and sources of information. Case studies drawn from both Chinese and comparable experlence would be developed. An interna- tional entity (or consortium) with outstanding relevant experience in indus- trial project evaluation and training would be contracted to develop the training course and materials, deliver a one-month course twice (to two groups each of about 30 trainees) and prepare trainers' and trainees' manuals to per- mit further replication by local trainers. Detailed terms of reference, as agreed at negotiations, are in Annex S4. Bank Group and JGF financing would cover the contract coste (fees, travel, subsistence, materials preparation and overheads); trainees' costs would be financed locally. 3.24 Financial Intermediary Staff Training. The participating financial intermediaries have each identified specific staff training requirements and at negotiations proposed training programs were reviewed and their implementa- tion under the project agreed. To assist in meeting the cost of the agreed training programs, allocations from Bank Group financing have been made (A..nex 11) for CIB and ABC, Jiangsu and ABC, Chongming/Shanghai (JEDIC will implement its agreed training program from its own resources). F. Impact on Environment, Women and Minorities 3.25 Environment. SSTC's Spark guidelines have consistently emphasized the need for close attention to environmental aspects in program execution. The National Policy Statement (Annex 7) stresses the need to ensure subproj- ects meet all prevailing environmental standards. It also urges priority support for technology development to mitigate existing adverse environmental consequences of rural industrialization. Under a separate operation, under preparation, the Bank Group plans to support an environmental protection proj- ect in Southern Jiangsu which among other activities would assist relocation and mergers of small-scale enterprises in an effort to improve their environ- mental impact. The development program prepared under Spark for Chongming Island gives close attention to environmental aspects and makes strong recom- mendations on industrial zoning, which are being implemented by Chongming authorities (see map and Annex 1). Review of existing procedures in the proj- ect areas has confirmed that authorities will only approve Spark subprojects following a satisfactory finding by the local environmental protection bureau. In addition, at negotiations, Jiangsu and Jilin provinces and Chongming Island confirmed that they have each added a representative of their local environ- mental protection bureau to their respective Leading Group. The design of subprojects financed under the project will be required to meet all prevailing environmental regulations (which are acceptable to the Bank Group); recently issued "Regulations for Engineering Design on Environmental Protection" would constitute an appropiiate model. Appropriate assurances on these environmen- tal actions were obtained at negotiations. Subproject supervision arrange- ments would ensure that compliance is adequately monitored during implementa- tion. 3.26 Women and Minorities. China's non-State enterprises, whose develop- ment is supported by the Spark Program and the project, have been markedly more effective at expanding employmcnt for women than the SOE sector. In 1986, women comprised 46.9X of total staff and workers (i.e. permanent employ- ees) in city and township collectives nationwide, compared to only 32.72 in - 36 - SOEs (comparable data for village collectives are not available). In Jiangsu, women are 44.1% of collectives' staff and workers, against 33.9% in SOEs, in Jilin 54.6% compared to 31.82, and in Shanghai 55.2% against 37.72. Thoitgh statistics are not available on pay and status differentials, there are also indications that non-State firms, with their market orientation, flexibility and emphasis on payment by results, offer better opportunities for women than available alternatives.8/ While neither Jiangsu nor Shanghai has sizable minority populations, several minority groups are found in Jilin, including a significant concentration of the Korean national minority in the East. Jilin's selection of priority Spark subsectors demonstrates that attention was paid to identifying development potential for products originating partly or primarily in the area of minority concentration (Annex 1). IV. COSTS, FINANCING AND IMPLEMENTATION A. Costs and Financing Summary of Costs 4.1 The total cost of the project, including contingencies, is estimated at Y 1,062 million or US$222.1 million equivalent. The estimated cost by major components is summarized in Table 4.1. Costs broken down by province and component are in Annex 10. Following usual practice, the enterprise mod- ernization (credit) component does not include contingencies. Base costs for other components reflect prices for the first quarter of 1990. Price contin- gencies were calculated on the basis of an estimated annual increase in local prices of 14% in 1990, 10% in 1991, 8.0 irt 1992 and 5% in 1993, and in for- eign prices of 4.9Z in 1990 and thereafter. Purchasing power parity was assumed. Physical contingencies were calculated at 10X for civil works and 5% for other costs. 4.2 Basis of Cost Estimates. The cost of the enterprise modernization component is estimated at US$204.7 million equivalent, on the assumption that Bank Group funds allocated to the component will on average finance 52Z of subproject costs. The foreign exchange cost of the component is estimated at US$55.3 million, based on an average foreign exchange share of 27? derived from a large sample of potential subprojects. Annexes S1, S3 and S4 detail costs for the Spark training, technology information and institutional devel- opment components, respectively. Equipment prices for these components were based on quotations obtained in China. Civil works costs for Spark training 8/ A study carried out for the International Labor Organization (ILO) described rural industry as "a popular form of employment among young peasant women for they usually acquired a skill of some kind, they received their own wages quite separate ftom those of the rest of the household and these wages were usually the same as their male colleagues and slightly higher than women's wages in agricultural production.' See Croll, E., 'Women and Rural Development in China" (ILO, 1985). - 37 - Table 4.1. SUMMARY OF PROJECT COSTS BY COMPONENT Y'OOO US$'000 Z of total Component Local Foreign Total Local Foreign Total base costs Enterprise Modernization 705,196 260,827 966,023 149,406 55,259 204,665 92.9 Commercial credit 682,229 252,331 934,560 144,540 53,460 198,000 89.9 Precommercial credit 22,967 8,496 31,463 4,866 1,799 6,665 3.0 Spark Training 28,089 12,205 40,294 5,952 2,586 8,538 3.9 Civil works 17,266 2,350 19,616 3,65P 498 4,156 1.9 Equipment 4,883 5,462 10,345 1,035 1,157 2,192 1.0 Furniture 4,690 - 4,690 994 - 994 0.4 Technical assistance 312 3,441 3,753 66 729 795 0.4 Training 698 952 1,650 148 202 350 0.2 Study on long-term training improvement 240 - 240 51 - 51 <0.1 Technology Information 15,932 13,313 29,245 3,375 2,821 6,196 2.8 Equipment 9,368 11,775 21,143 1,985 2,495 4,480 1.8 Technical assistance 296 1,232 1,528 63 261 324 0.1 Training 1,668 306 1,974 353 65 418 0.2 Program support 4,600 - 4,600 974 - 974 0.7 Institutional Development 1,221 3,070 4,291 259 650 909 0.4 MIS 300 2,126 2,426 64 450 514 0.2 Equipment - 1,050 1,050 - 222 222 0.1 Technical assistance/ training - 1,076 1,076 - 228 228 0.1 Program support 300 - 300 64 - 64 <0.1 Technology Evaluation 100 944 1,044 21 200 221 0.1 Technical assistance - 944 944 - 200 200 0.1 Program support 100 - 100 21 21 <0.1 Financial Intermediary Trainin8 821 - 821 174 - 174 0.1 Training 661 - 661 140 - 140 0.1 Program support 160 - 160 34 - 34 <0.1 Total Base Costs 751,359 290,359 1,041,718 158,992 61,316 220,308 100.0 Physical contingencies 3,125 1,547 4,672 662 328 990 0.9 Price contingencies 8,723 6,481 15,204 338 426 764 0.3 Total Project Costs 763,207 298,387 1,061,594 159,992 62,070 222,062 101.2 - 38 - were based on local estimates, which are broadly consistent with recent educa- tion building contracts financed by the Bank Group in China. Costs of inter- national specialists reflect differences in seniority and the degree of coor- dination required. Overseas training costs were estimated at US$6,000-7,200 per month per person, based on a two- to three-month overseas stay and com- prising per diem, round-trip air fare from China, travel to training sites and traininlg preparation, execution and coordination, as relevant. Financing Plan 4.3 The overall financing plan by component is shown in Table 4.2. The Bank Group would finance the equivalent of $114.3 million, representing 51.5% (it total costs or 97.3Z of foreign exchange requirements (2.7Z or US$1.'7 mil- lion equivalent would be cofinanced, para. 4.5) plus 33.7Z of local currency requirements. Bank Group financing will be utilized by the project provinces in the amounts shown in Annex 11. GOC will make the funds available to the provinces on terms and conditions satisfactory to the Bank Group. The terms are expected to be 90Z of the Bank's variable rate for 15 years including 5 years grace. For the commercial enterprise modernization credit subcomponent, the provinces will lend the funds to the financial intermediaries under subsi- diary loan agreements with terms and conditions approved by the Bank Group. Signing of the subsidiary loan agreements would be a condition of effective- ness. These terms will be: maturity of 15 years, including 5 years of grace, interest at a rate to yield the agreed spread (para. 4.25), and foreign exchange risk provisions explained in para. 4.24. Assurances on the above were obtained at negotiations. 4.4 Bank Group participation in project financing reflects proposed dis- bursement arrangements summarized in para 4.6. In the case of contracts for technical assistance and training, the relevant allocation of the Bank loan and IDA credit and cofinancing resources has been pro-rated between the national level (SSTC/ISTIC) and the three provinces (Annexes 10 and 11). The fina.acing plan assumes that, under the enterprise modernization component, Bank Group financing will cover on average about 52% and enterprises will on average finance 30% of subproject costs (the relevant covenant specifies 30% as a normal enterprise input, and 20% as a minimum); to the extent that sub- project sponsors provide more or less than 30Z overall, the balance of resource requirements to be provided by the financial intermediaries (or, for the precommercial subcomponent, Jiangsu Provincial Government) may diverge from the present estimates. The financing plan further reflects the intention of SSTC/ISTIC and the STCs to purchase a portion of their equipment require- ments for the MIS and technology information components using local funds. Bank Group allocations for civil works reflect limits based on recent Bank Group experience in China with comparable training buildings. With the excep- tion of the financial intermediaries' training subcomponent, the plan assumes Bank Group financing only of internationally recruited consultant costs. GOC and provincial policies involve enterprises paying, through fees, an increas- ing share of the costs of staff training and other support services; it was not, however, feasible to separate this out for the relevant project compo- nents, which relate essentially to capital rather than recurrent costs. - 39 - Table 4.2: FINANCING PLAN (US$ million) Local Foreign Component costs costs Total % Enterprise Modernization 149.4 55.3 204.7 2.2 Subproject sponsors 61.4 0.0 61.4 27.6 Financial intermediaries 35.4 0.0 35.4 16.0 Jiangsu Province 1.3 0.0 1.3 0.6 IBRD/IDA 51.3 55.3 106.6 48.0 Spark Training 6.7 2.9 9.6 4.3 SSTC 0.2 0.0 0.2 0.1 Provincial governments 4.1 0.0 4.1 1.8 IBRD/IDA 2.4 2.5 4.9 2.2 JCF 0.0 0.4 0.4 0.2 Technology Information 3.6 3.2 6.8 3.1 ISTIC 0.8 0.0 0.8 0.4 Provincial governments 2.8 0.0 2.8 1.3 IBRD/IDA 0.0 2.3 2.3 1.0 JGF 0.0 0.9 0.9 0.4 Institutional Development 0.3 0.7 1.0 0.4 SSTC <0.1 0.0 <0.1 0.0 Provincial institutions 0.1 0.0 0.1 0.0 1BRD/IDA 2 0.3 0.5 0.2 JGF .0 0.4 0.4 0.2 Total 160.0 62.1 222.1 100.0 4.5 Cofinancing. Under the Japanese Grant Facility (JGF), the Government of Japan has approved cofinancing for this project in the form of a grant amounting to Y 243 million (US$1.7 million equivalent). The Japanese Grant Facility would be administered by the Bank and allows for procurement in accordance with Bank guidelines. Grant funds would be used to finance the full foreign exchange cost of expenditures allocated at the national level under the Spark training, technology information and institutional development componients. These would include equipment, technical assistance and overseas training for the benefit of SSTC and ISTIC. Disbursements 4.6 Under the enterprise modernization component, the Bank Group would disburse against 100% of amounts disbursed by financial intermediaries under eligible subloans (as defined in paras. 3.6 and 3.11). Under the Spark train- ing and technoiogy information and institutional development components, dis- bursements would be made for: (a) 100% of expenditures for specialists and - 40 - training; and (b) 1002 of the c.i.f. cost of imported equipment and information software, 100Z of the ex-factory cost of locally produced items and 75X of local expenditdures for other items procured locally. Under the Spark training component, disbursements would be made for 50% of expenditures on eligible civil works. Disbursements by location and component are summarized in Annex 11. 4.7 For the Spark training, technology information and institutional development components, disbursements for contracts of over US$500,000 would be made against full documentation. For contracts under these components of less than US$500,000, and for enterprise subloans under the credit (enterprise modernization) component, disbursements would be made against Statements of Expenditure, with the full documentation held by the financial intermediary or implementing agency, as appropriate, for review by supervision missions. Financial intermediaries would submit a Statement of Expenditure, giving information on amounts of individual subloans, amounts of payments, purpose of subloans, name and address of machinery suppliers, and the country of origin of machinery. Central and provincial agencies, as appropriate, would submit withdrawal applications for expenditures under other project components. 4.8 Retroactive Financing. Subprojects under the enterprise moderniza- tion component are at an advanced stage of preparation as are arrangements for construction of civil works. Up to US$11.0 million (10Z of the total Banl: Group allocation) would be available for financing expenditures for subprojects and civil works incurred after July 1, 1989. 4.9 Special Accounts would be esteblished and maintained in dollars, in banks acceptable to the Bank Group, for each of the three project areas, under the control of their respective Bureaus of Finance. Initial deposits, approx- imately equal to an estimated four months' average eligible expenditures, would be made as follows: Jiangsu, US$3.6 million; Jilin, US$1.4 million; Chongming, US$1.1 million. Applications for replenishment of the Special Accounts would be submitted monthly or when the amounts withdrawn are equal to 50Z of the initial deposit, whichever comes sooner. A special account would also be established under the JGF for national-level activities; the initial deposit would be US$0.1 million. 4.10 Completion and Closing. In view of the significant advance work already undertaken on preparing subproject proposals, Bank Group funds under the enterprise modernization component are expected to be fully committed within about two years. Bearing in mind the relatively rapid execution of Spark subprojects to date, disbursements against this component should be substantially completed by September 30, 1995. The noncredit components are expected to be executed over a three-year period through the end of 1993. However, as this is the first Bank Group project for Spark, the applicable standard disbursement profile for industrial credit projects in China, which provides for a six-year period, is applied in Annex 12. The closing date would be September 30, 1996. - 41 - B. Implementation and Reporting Coordination 4.11 Each provincial Leading Group will have ultimate responsibility for coordinating project implementation within its province. Day-to-day responsi- bilities will be delegated, as under present program implementation arrange- ments (paras 2.10-2.13), to the respective SPOs, Spark training units and bases, and provincial information institutes. For Chongming components, ulti- mate approvals will be made at Shanghai Municipal Leading Group level, based on recommendations made by the Chongming County Leading Group; the Chongming Spark organization will havre day-to-day implementation responsibility. Enter- prise modernization subprojects approved at provincial Spark level as meeting relevant eligibility criteria will be subject to approval by the financial intermediaries (Section C below). Contracting and supervision of civil works will be undertaken on the STCs' behalf by the respective specialized agencies in each project area. 4.12 The national SPO, Spark training unit and ISTIC, zespectively, will ensure overall coordination of the technical assistance and training activi- ties under (a) the MIS and technology evaluation subcomponents, (b) the Spark training component, and (c) the technology information component. Following consultation with the provincial authorities, the national agencies will sub- mit proposals on contract award in each area to the Bank Group. In addition, to ensure the necessary standardization, ISTIC will coordinate provincial pro- curement of equipment for the technology information component and SSTC for the MIS. Procurement 4.13 Under the enterprise modernization component (US$106.6 million or 93.3% of Bank Group financing and US$204.7 million or 92.3% of total project costs), project sponsors would be required to obtain at least three quotations for all items of equipment (other than proprietary technology, not expected to exceed 15% in total, for which direct negotiations would be permitted); civil works would be procured under local procedures acceptable to the Bank Group, and technical support services hired directly. The civil works requirements of the Spark training component (with a Bank Group allocation of US$2.1 mil- lion or 1.8Z of total Bank Group financing) would be relatively small and scattered, and would be procured under procedures for Local Competitive Bid- ding (LCB) satisfactory to the Bank Group. Consultants' services for Spark training, technology information, MIS and technology evaluation training (Bank Group allocation of US$1.0 million or 0.9%) would be obtained in accordance with Bank Group guidelines for selection of consultants, including not more than a single contract for each component/subcomponent. Equipment for the training centers, technology information and MIS components will involve a variety of small, diverse items at over 20 locations; for some of the specialized items only a limited number of suppliers exists (e.g. computers with Chinese character capability). This equipment (totaling about US$4.5 million or 3.9% of the Bank Group financing) would be procured under a combination of international and local shopping. Training support for the financial intermediaries' training component (Bank Group allocation of US$0.1 million) would include consultants' services and equipment, as for - 42 - other training components above. At negotiations, understandings were reached that each project province/municipality and SSTC/ISTIC would present for prior Bank Group review and agreement a procurement plan covering the proposed procurement agency, packaging and procurement methods to be used and the justification thereof for all equipment and materials to be financed under all components/subcomponents other than enterprise modernization. 4.14 Bank Group Review. Contracts for the major technical assistance and training programs will be approved as a condition of disbursement against the Spark training, technology information and institutional development compo- nents. The contracts for civil works under the Spark training component. Contracts (and the respective invitations to bid) are also subject to Bank Group review. Individual contracts under the enterprise modernization compo- nent, and those for equipment under other components, are expected to be relatively small. Repo-ting to the Bank Group on proposed enterprise moderni- zation subprojects will indicate the intended procurement arrangements; enter- prise modernization subprojects and purchases of equipment will be subject to random ex post review during supervision. Audits and Reporting 4.15 Audits. SSTC, ISTIC and project area STCs will each maintain sepa- rate accounts for project expenditures, and will annually submit audit reports on these accounts, prepared by independent auditors acceptable to the Bank Group, within six months of the close of the fiscal year. Similarly, the financial intermediaries will annually submit audit reports, prepared by inde- pendent auditors acceptable to the Bank Group, on the project accounts and the overall financial statements of the entity (for ABC, provincial branch state- ments will be audited; ABC's consolidated statement will be provided on an unaudited basis). Audit reports will include opinions on the adequacy of sup- porting documentation for expenditures made under Statements if Expenditure. 4.16 Reporting. In addition to detailed ex ante review of selected sub- projects (para. 4.21) summaries on all proposed enterprise subprojects will be provided in advance to the Bank Group for information. SSTC/ISTIC will coordinate submission of six-monthly progress reports by the project area authorities and the national agencies on the implementation of components and subcomponents within their jurisdiction, which will specifically compare implementation with agreed monitorable indicators. An indicative list of such indicators is provided in Annex 14: details will be firmed up at the time of appointment of the respective consultants. SSTC will similarly ensure prepa- ration of a Project Completion Report and its submission to the Bank Group within six months of project completion. C. Financial Intermediation Intermediaries 4.17 Proceeds of Bank Group financing allocated to the commercial credit subcomponent will be lent to enterprises by the branches of ABC and CIB in Jiangsu, by the Shanghai branch of ABC (through the Chongming county sub- branch) in Chongming and by JEDIC in Jilin. The intermediaries have indicated their ability to provide the necessary local counterpart resources. Bank - 43 - Group finarcing proceeds allocated to the precommercial credit subcomponent in Jiangsu will be handled by ABC and CIB as agents on behalf of the provincial government (para. 3.9). In Jiangsu, enterprises will select which of the two intermediaries (ABC and CIB) they apply to: the respective Bank Group finan- cing allocations to the two institutions have therefore not been fixed in advance. This arrangement reflects the relative strengths of the two institu- tions: CIB has strong offices in the main urban centers, ABC has a more extensive rural network. 4.18 ABC is the second largest bank in China, with a nationwide network of 50,000 offices, and is the dominant channel for (primarily seasonal) agricul- tural credit. It also has wide experience in lending to collective enter- prises, primarily for agro-industry, and is the leading provider of bank credit under the Spark Program. Net profits in 1989 were an estimated Y 1.2 billion. Under the Third Rural Credit Project, ABC has carried out reviews of key institutional development issues, including generation of an asset base to support more term lending. The Fourth Rural Credit Project will further sup- port ABC's institutional development. The overall policies and procedures of ABC are satisfactory. The two branches and one subbranch which will partici- pate in the project are in general appropriately staffed (Chongming subproj- ects will all require authorization by Shanghai municipal branch). To upgrade staff familiarity with appraisal methods satisfactory to the Bank Group, the branches have already commenced suitable training efforts, which will be fur- ther expanded with project support; they have also recruited additional indus- trial engineers and will draw on outside consultants for assistance as needed. ABC and the participating branches and subbranch are reviewed in Annex S5. 4.19 CIB was established in 1981 to provide predominantly foreign exchange financing for smaller and medium-scale industrial investments. Its initial staff were largely recruited from the People's Construction Bank of China (PCBC), with which CIB retains close links. The appraisal methods and proce- dures of CIB reflect its history of close cooperation with the Bank Group. Its performance under ongoing projects has been satisfactory, and its finan- cial position is well within parameters agreed with the Bank Group; assurances were obtained at negotiations that CIB will continue to maintain the debt: equity ratio of 5:1 agreed with the Bank Group under other operations. Sub- projects have historically come mainly from the SOE sector, but CIB has also lent to collectives, and its Policy and Strategy statements were amended in the first part of 1989 9/ to explicitly authorize lending to TVEs. At negotiations, assurances were obtained that CIB would consult with the Bank Group on any proposed changes in these statements. CIB has strengthened its staffing through recruitment of highly qualified graduates and through well- conceived training programs. It has also commenced giving enhanced lending autonomy to provincial branches. Further progress in these areas, and in diversifying funding sources and the range of financial products offered, are the subject of ongoing dialogue with the Bank Group. The CIB Jiangsu branch is one of the strongest in the nation. It has extensive experience of cooperation with the Bank Group and its overall staffing is satisfactory for project implementation. The branch program for further staff training will be 9/ See SAR No. 7659-CHA, dated April 28, 1989, on China--Fifth Industrial Credit Project, Annexes 2 and 3. - 44 - supported under the project. A more detailed assessment of CIB and its Jiangsu branch is in Annex S6. 4.20 JEDIC participation in the project would represent the first occasion on which it has cooperated with the Bank Group. In its present form, JEDIC dates from January 1985; it was formally approved by the People's Bank of China (PBC) as a nonbank financial institution under PBC's direct supervisory responsibility in March 1988. However, JEDIC inherited its core of experi- enced managers and staff, together with its initial loan portfolio, from a Department of the Jilin Province Finance Bureau which had been in operation since the early 1960s. JEDIC has overtaken CIB as a source of finance for small industrial enterprises in the province. At the end of 1989, it had total assets of Y 1,449.4 million, of which the net long-term loan portfolio comprised Y 708.2 million and equity investments Y 197.8 million. At negotia- tions, an understanding was reached that JEDIC would submit an audit of its 1989 accounts, including a portfolio review, prior to seeking withdrawal of funds under JEDIC's component of Bank Group financing; this audit would take into account Bank Group comments on a previous audit reviewed by the Bank Group. JEDIC's senior management is appointed by PBC on the recommendation of the Governor of Jilin province. Management has been successful in establish- ing operational autonomy in decision-making; JEDIC typically approves only one sixth of the investment proposals submitted to it. At negotiations, under- standings were reached that any lending on behalf of the province which does not conform to JEDIC's lending criteria would be undertaken at no risk to JEDIC under a managed fund arrangement or with provincial government guaran- tee. Understandings were also reached that JEDIC would gradually reduce the share of its lending extended on subsidized terms and would maintain an ade- quate spread on such lending. JEDIC's Policy Statement, prepared in consulta- tion with the Bank Group and adopted on March 27, 1990 (copy at Annex 13, Attachment 1), provides for lending exposure limits and a maximum 3:1 debt to equity ratio; assurances were obtained at negotiations that JEDIC would con- sult with the Bank Group on any proposals to modify the Policy Statement in the future. As of end-1989, JEDIC had a headquarters (HQ) staff of 45 with plans to expand this to 50. The general quality of HQ personnel is good; at negotiations JEDIC's proposed training program was reviewed and found satis- factory. Loan administration and recovery are largely handled through a net- work of 52 independer,t but closely affiliated branches and subbranches, which receive much of their resources from fees or an agreed share of the total interest spread on loans. Proposed projects are appraised (and later super- vised) by joint HQ-branch project teams; all projects require the approval of HQ management. These procedures and the background and experience of JEDIC's management and staff provide a satisfactory basis for its participation in the project. JEDIC recently began to extend working capital loans and has elabo- rated a statement of polici. s to cover such lending. A detailed review is in Annex 13. 4.21 Free Limits. Under the Third Rural Credit Project, ABC is required to seek prior Bank approval only of subloans in excess of US$3.0 million. Under the latest CIB project (Fifth Industrial Credit Project), free limits from the Bank are set on a branch-by-branch basis; well-established branches, including Jiangsu, enjoy a free limit on subloans of US$4.0 million. Review of JEDIC indicates that its institutional capability may be expected to be comparable to that of the more established CIB branches. Bearing in mind that - 45 - the maximum subloan from Bank Group resources under the project would be US$2.5 million, while also considering the need for reasonable Bank Group review of subproject evaluations, each participating financial intermediary would submit full documentation on the first four proposed subpro4ects (chosen to be representative in terms of size and sectoral distribution) for prior Bank Group approval; in Jiangsu, the first four precommercial proposals from each intermediary would also be subject to prior review. Provided the results of these reviews were satisfactory, the intermediaries would thereafter be authorized to approve subsequent subp.ojects without prior Bank approval, although subproject summaries would be provided in advance to the Bank for information, with the Bank Group retaining the right to detailed ex post review. If, for any intermediary or subcomponent, the initial or ex post reviews were not satisfactory, the Bank Group would retain the right to adopt a free limit of less than US$2.5 million. Final Lending Rates and Spreads 4.22 Lending rates under the commercial credit subcomponent will be linked to those for comparable loans at the time of subloan approval. Foreign exchange subloans would be onlent at the Bank's variable interest rate plus an agreed spread for the intermediary (a formulation that will result in rates not less than those under the recent Fifth Industrial Credit Project). For renminbi subloans, subborrowers will pay interest not less than the prevailing minimum rates for fixed asset loans of similar maturities to township enter- prises published by PBC. These currently are the same as rates on fixed asset loans to SOEs and are 9.38% for loans of one year or less, 10.08% for loans of more than one through three years, 10.80% for loans of more than three through five years and 11.16X for loans of more than five through ten years. Commitment fees (0.75%) will be passed on separately. 4.23 PBC's rate for lending to TVEs was positive in real terms, by com- parison to the official retail price index, through January 1988. In subse- quent months, China experienced rapid escalation in the inflation rate, which reached more than 25% in early 1989, and lending rates became largely nega- tive. The general level of interest rates was raised twice, in September 1988 and February 1989, and the rates on deposits of three years and above have been explicitly indexed to the inflation rate. Inflation has been especially concentrated in typically volatile sectors, such as construction and fresh foodstuffs. While a part has been played by qoecific adjustments under price reform, the inflation is more broadly a symptom of macroeconomic overheating and related to high investment and the absence of effective monetary control. The government has accorded high priority to reestablishing macroeconomic stability and reducing inflation. It has cut non-priority investment, placed some further price reforms in abeyance and pursued restrictive monetary and credit policies. These measures have enjoyed considerable success in stabi- lizing macroeconomic imbalances, and the rate of inflation has markedly declined, allowing some downward adjustment in interest and deposit rates in April and August 1990. As measured by the retail price index, inflation was estimated at 16.3% for 1989, and for January to July of 1990, it was around 3-4%. Inflation is projected to be between 52 and 10% in the early 1990s. GOC and the Bank Group are pursuing an active dialogue on macroeconomic man- agement and the interest rate policies of PBC. Assurances were obtained at negov-iat-ins frcm GOG, ABC, CIB and JEDIC that they will periodically review with the Bank Group lending rates under the project in light of intermedia- - 46 - ries' cost of funds and profitability and interest and inflation rates in China and internationally. 4.24 Borrowers receiving loans in fcreign exchange would bear the foreign exchange risk between the renminbi and dollar only, in return for a fee of at least 0.5% per annum (which could be raised to up to 2.0% per annum if, during the life of the subloan, this were considered necessary to cover fully the foreign exchange risk). The risk between the US dollar and the currency pool/SDR is proposed to be borne by provincial Bureaus of Finance (BOFs), or in the case of Jiangsu by ABC and CIB, in return for the aforementioned fee. This arrangement is desirable because the greater complexity and uncertainty of the currency pool/SDR risk, as compared to a single currency risk, might discourage TVEs from borrowing unA-r the project. The provinces would bear the full foreign exchange risk in :espect of local currency subloans financed from the loan/credit. 4.25 Lending terms under the precommercial credit subcomponent would be as described in paras. 3.9 and 3.10 and Annex 9. Foreign exchange risk assump- tion arrangements would be in line with those under the commercial credit sub- component; Jiangsu province will advise the Bank Group whether the provincial Bureau of Finance or the two financial intermediaries will bear the risk between the dollar and currency pool/SDR in the case of foreign exchange sub- loans. 4.26 Spreads. Minimum interest rate spreads to the participating finan- cial intermediaries would be sufficient to cover their incremental administra- tive expenses, provision for credit risk and a reasonable profit margin. Assurances were obtained at negotiations with the project provinces that 8preads would be not less than 2.0X (of which JEDIC would retain at least 702 for its headquarters). Assurances were also obtained that the adequacy of these spreads would be reviewed periodically with the Bank Group. Subloans will be made with grace periods and repayment periods consistent with the sub- project implementation profile (subloan terms will not normally exceed 7 years, and will not, in any case, exceed 12 years). The intermediaries will be authorized to recycle repayments to new subloans for beneficiaries and sub- projects similar to those supported under the project, within the respective project areas. V. BENEFITS, JUSTIFICATION AND RISKS A. Benefits and Justification 5.1 In terms of both output growth and employment creation, TVEs have been the most dynamic element in China's economy over the past decade (Chapter 1). They play a crucial role in expanding the supply of consumer goods to the domestic market and are increasingly significant exporters. The Bank uroup has projected China's labor force to grow from 452 million in 1981 to 631 million in the year 2000. in any scenario agriculture's share in employment (70% in 1981) will decline. Given remaining inefficiencies in State industry (and the high costs of rapid pwowth in city populations), much lhangs on the continued dynamism of the TVEs. As this report has shown, past TVE growth has - 47 - been achieved in spite of the concentration of official support on other sec- tors and despite limited access to qualified staff, technology and relevant information. It cannot safely be assumed that TVEs will continue to thrive if this neglect persists. 5.2 Spark is the most significant systematic national program to address TVE needs. Its objectives indicate accurate diagnosis of many key TVE plO- blems and it has already recorded significant progress. But its institutional basis remains weak, and in many respects the program falls short of what is needed or what could be accomplished. Spark's unconventional design, and the lack of reliable data on its achievements, have made it difficult for GOC policymakers to form a clear and accurate picture of the program and assess its priority. 5.3 Bank Group involvement with Spark has provided the first indeper.dent assessment of the program (Chapter 2). The project's MIS subcomponent (paras. 3.20-3.21) should improve the future availability of reliabli .EI>'Ll.;- tion. Spark is perhaps best seen as a phenomenon of China's transition to greater market orientation, wider mobility of qualified personnel and 1uOLe evenhanded access to support services. The need for targeted programs~ like Spark may eventually disappear, but recent experience indicates that the aml.i- tious transition China is undertaking could be a long one. It thus makes sense to continue strengthening Spark, and the Bank Group's involvement has helped i.'entify specific areas where systematization of the program, and transfer of approaches from other countries, could contribute to this proctr (paras. 2.46-2.47). 5.4 The project will introduce the measures identified in three repre-un- tative project areas. Successful implementation will lay the basis tor ouIi-e- quent diffusion. The criteria and review procedures for subprojects are designed to maximize the likelihood that each will, in its own right, p)rove financially and economically viable. Beyond this, given the nature of lhe program, subprojects are expected to demonstrate the replicability of improved technologies and management methods. The Bank Group, for its part, will gain from i-s association with an innovative program, which could hold lessons lr other borrowers. B. Risks 5.5 Subprojects which introduce new production techniques or prochdi designs inevitably pose risks regarding the appropriateness and absorba[i.lit of technology or the market prospects for new products. Spark deals witli technology issues by drawing on specialist assistance from other agencies, and by insisting on qualified technical partners for enterprises. Market analysis capability is less developed, though the TVEs themselves generally display considerable market awareness. The project includes a subcomponent to strengthen subproject evaluation skills (para. 3.23), and the independent sub)project assessments by participating financial intermediaries would rein- force attention to market prospectF and financial viability. Development of ISTIC's network (paras. 3.17-3.19) should, over time, upgrade the infoll,aition on technology and markets available to both TVEs and STC reviewers. Whil(i tlhe recent austerity program has included measures by the Central Governmlenit ti tighten credit controls and other forms of regulation of non-State industhst', - 48 - China's leadership recognizes that the vitality of the rural industrial sector remains essential to meeting overall targets for growth and employment. Spark goals of improving efficiency, product quality and environmental standards thus continue to enjoy strong support at both national and lower levels. 5.6 Risks associated with effective and timely implementation of techni- cal assistance and staff training assignments would be minimized by the prior agreement reached at negotiations on terms of reference and by ensuring that all activities for a given component are implemented under the same contract with a suitably experienced international entity, whose signature would be a condition of disbursement against noncredit components. VI. AGREEMENTS REACHED AND RECOMMENDATION 6.1 Assurances were received on the following conditions of loan/credit effectiveness: (a) approval by the State Council of the loan and credit agreements; and (b) signature of subsidiary loan agreements, satisfactory to the Bank Group, between the provinces and the respective financial intermedi- aries. Assurances were also received that signature of contracts with agen- cies acceptable to the Bank Group for provision of technical assistance and training under the Spark training and technology information components and the MIS and technology evaluation subcomponents would be a condition of dis- bursement for the noncredit comlponents. 6.2 Assurances were also received on the following: (a) from GOC: (i) loan/credit funds would be made available to provinces on terms and conditions satisfactory to the Bank Group (para. 4.3); (ii) the Bank would be informed in advance of proposed changes in the National Spark Policy Statement (para. 2.24); (iii) SSTC and ISTIC would carry out staff training programs and the Spark training study as agreed (paras. 3.2 and 3.16); and (iv) audits and reporting (paras. 4.15-4.16); (b) from Project Provinces: (i) subproject and enterprise eligibility as agreed would apply (paras. 3.5-3.6 and 3.9); (ii) Spark Fund resources not to be used to subsidize subloan interest rates (para. 2.33); (iii) Jiangsu risk-sharing terms (para. 3.10); (iv) environ- mental approzal and monitoring of subprojects (para. 3.25); (v) funds on-lent to financial intermediaries at agreed spreads and maturities (para. 4.3); (vi) staff training programs in provinces (para. 3.2); (vii) audits and reporting (paras. 4.15-4.16); and (c) from Financial Intermediaries: (i) final on-lending rates in line with prevailing rates (para. 4.22); (ii) subproject sponsors normally to provide 30Z of costs, and no less than 20% (para. 4.4); (iii) sub- loan criteria: free limits, maximum sub-loans, rates of return, etc. (paras. 3.5-3.6, 3.9 and 4.21); (iv) audits (para. 4.15); (v) train- ing programs (para. 3.24); (vi) interest rate reviews (para. 4.23); (vii) CIB debt-equity ratio (para. 4.19); (viii) CIB to consult with the Bank Group on any proposed changes to its Policy and Strategy - 49 - statements (para. 4.19); and (ix) JEDIC to consult with the Bank Group on any proposed changes to its Policy Statement (para. 4.20). 6.3 Understandings were reached on the following matters: (a) period'c consultations between the Bank Group and provincial STCs on Spark policies, procedures and staffing (para. 2.30); (b) reporting on diffusion of Spark Program achievements (para. 2.38); (c) coordination between Spark training and local Education Bureaus (para. 2.42); (d) precommercial subcomponent terms and submission of draft contract (para. 3.10); (e) submission of final justification for Spark training equipment (para. 3.15); (f) terms of reference for technical assistance and studies (paras. 3.14, 3.16, 3.19, 3.21 and 3.23); (g) financial intermediary training programs (para. 3.24); (h) submission of equipment procurement plan for Spark training, technol- ogy information and MIS components (para. 4.13); and (i) JEDIC spread; plan to gradually reduce subsidized lending; managed fund or provincial government guarantee for lending not in conformity with standard viability criteria; and submission of satisfactory 1989 audit prior to submitting disbursement requests under the project (paras. 4.20 and 4.26). 6.4 Subject to the above agreements, the project provides a suitable basis for an IDA credit of SDR 45.1 million (US$64.3 million equivalent) and a Bank loan equivalent to US$50.0 million to the People's Republic of China. ANNEX 1 Page 1 - 50 - CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Project Areas: Economic Structure, TVE Development, Science and Technology Infrastructure and Spark Program Strategies 1. The three areas selected for participation in the project (two prov- inces and one county within a provincial-level municipality) offer contrasts in general development level and economic structure, as well as in the prog- ress to date of TVE development. As a result, each faces its own challenges and each is evolving a distinct Spark strategy in response. Jiangsu has expe- rienced perhaps the most dramatic upsurge of TVE growth of any province in China, and the challenge for Spark and other programs is to respond adequately by providing the supporting services needed to sustain TVE dynamism. Jilin's urban economy has grown largely on the basis of State enterprise investment in heavy industry, but in spite of a diverse and promising rural resource endow- ment, the development of TVEs has lagged behind many other areas. The prov- ince is thus adopting more of a leadership role in fostering TVE growth by transferring selected technology for intensified resource processing in key subsectors to rural areas. Shanghai is China's greatest commercial and indus- trial center, but the offshore island selected to participate in the project, Chongming, has been handicapped inter alia by poor transport connections and restricted opportunities for investm.ent in human resources. Spark focus on Chongming (chosen as one of the areas of special Spark concentration) is envisaged as part of an integrated and comprehensive effort to raise the level of development by exploiting better the island's potential advantages of loca- tion and resource endowment. 2. Jiangsu Province, located on China's East coast, has a population of 64.4 million. National income per capita (1987) was an estimated Y 1,251, approximately 16Z above the national average (Y 1,081).l/ With 628 inhabitants per km2, it is--with the exception of the urban provinces of Shanghai and Tianjin--China's most densely populated province. It remains, however, a predominantly rural province, with only 24.5? of the population living in urban areas (compared to 36.62 nationally). Most of the province comprises flat, fertile, low-lying soils, intersected from West to East by the Yangtze and many smaller rivers and from North to South by the Grand Canal and other man-made waterways. Jiangsu has been noted for centuries for highly intensive agricultural production and continues to achieve some of the highest grain yields in China: the province produces a tenth or more of China's total output of rice, wheat, cotton and rapeseed. It is also China's third largest producer of silk, accounting for more than & fifth of national production. By contrast to the agricultural interior, coastal areas have historically been lightly settled, though in recent years greater focus has been given to devel- oping their potential for mariculture. 1/ As methods of calculating national income differ between provinces, such figures are not strictly comparable between different provinces or with national level estimates. ANNEX 1 - 51 - Page 2 3. Jiangsu's commercial and industrial development has been shaped by its strong agricultural base and its excellent transportation links with other parts of China and the outside world, as well as by the skills built up by its labor force and managers. These strengths have also induced China's leader- ship to select Jiangsu as a pioneer for a number of economic reforms, includ- ing those related to the "open door' policy. Industry accounts for about 68.52 of total social product in Jiangsu and agriculture for 16.4X. Out of a total labor force of 36.3 million, some 10.1 million (27.8X) are employed in industry and 16.6 million (45.7?) in agriculture. Leading subsectors of industry include machinery (24.0 of 1988 gross industrial output value), textiles (24.0Z), chemicals (14.0?), food processing (9.1?) and construction materials (4.5Z). The province produces 13? of China's output of machine tools, 19? of all yarn, chemical fibers and cloth, 102 of total sulfuric acid output and over 20? of pesticide production. Jiangsu is also a significant producer of consumer durables and electronic products; in this category it produces 14-17? of all China's output of electric fans, tape recorders and televisions, 15Z of all cameras and 37? of all radios. 4. Among the most striking features of Jiangsu's development is the leading role played by collective enterprises, including TVEs. Jiangsu shares with neighboring Zhejiang province the distinction of being the first area of China in which the value of collective industry output surpassed that of state owned enterprises. By 1988, collective industry accounted for 59.3? of pro- vincial industrial output, as against 34.7X from state industry; within the collective total, TVEs were responsible for 40.2? of total industrial produc- tion. Differences in statistical coverage, in Jiangsu as in other provinces, make it difficult to correlate output indicators precisely with the number of enterprises or the level of employment in the industrial TVE sector. The total number of TVEs, including those in nonindustrial sectors, was estimated in 1988 at 119,788, with total employment of 7.37 million. A separate series indicates a 1988 total of 39,334 industrial enterprises in Jiangsu (including 3,573 state enterprises, 34,763 collectives and 998 other enterprises). A third series identifies 7.4 million rural workers (27? of the 1988 rural labor force) as employed in the industrial sector. Finally, a study covering the period 1978-84 found 68,000 industrial TVEs in the latter year (up from 56,500 in 1978) with total 1984 employment of 4.4 million people (compared to 2.5 million in 1978). The same study provides the following shares of different subsectors in industrial TVE output: machinery 29.5Z; textiles 19.92; con- struction materials 16.1Z; chemicals 10.8?; garments 4.3Z and food processing 3.52. 5. Jiangsu's above-average income levels coexist with indicators of educational and research inputs that are not consistently either above or below national averages on a per capita basis. The province's 71 institutions of higher education have a total enrollment of 147,708 students, about 21? above the corresponding national level, but the ratio for enrollment at spe- cialized secondary schools (127,785 students at 196 schools) is essentially identical to the equivalent national figure. There are 325 research insti- tutes in Jiangsu, with a total of 54,773 staff (including 21,362 at college graduate level and 10,754 at specialized secondary school level); total research expenditures, at Y 630 million in 1988, converted to a figure per head of population (Y 9.8) somewhat below the national average (Y 12.1). ANNEX 1 - 52 - Page 3 However, Jiangsu undoubtedly benefits from the proximity of Shanghai, which is one of China's leading centers of advanced education and research (para. 11). 6. Compared to the other two areas participating in the project, the overall Spark financing program in Jiangsu is expected to continue to a large degree to respond to initiatives coming from the enterprise sector rather than following a highly specific set of predetermined priorities. However, the province is making increasing use of its annual Project Directory to solicit proposals in a more targeted manner. Jiangsu authorities stress that they give priority to proposals from "representative" enterprises which hold high potential for replication. ll addition to primary sector activities (maricul- ture, fruit, animal husbandry, etc.), the province has identified industries such as textiles, electronics, building materials, machinery, industrial com- ponents and fine chemicals as among its priorities for development. The TVE sector is seen as having particular advantages in labor-intensive light indus- try, agro-processing, textiles, building materials, etc. The 1990 Directory also places emphasis on subprojects to improve energy efficiency and reduce pollution. Spark will pay particular attention to improving product quality and to export potential. In geographical terms, the progra!n'8 initial focus has been on the Yangtze valley, and specifically on counties surrounding the cities of Suzhou, Wuxi and Changzhou. More recently, the province has empha- sized the need for greater assistance to less developed northern areas. 7. Jilin Province, located in Northeast China, has a population of 23.7 million. Its 1987 national income per capita (Y 1,016) was about 17? above the national average. Over 61Z of the population lives in urban areas. Industry accounts for 76% of the province's gross value of agricultural and industrial output (1988) of Y 59.5 billion and employs 2.7 million people, or about one-fourth the total labor force. The industrial sector is still heav- ily dominated by state enterprises, which account for 711 of irdustrial output (compared to 572 nationally) and about 622 of industrial employment: vehicle- building (trucks, tractors and railway coaches) and chemicals are important areas of concentration. Creation of this industrial base can be linked to the strong railway network, especially in the center of the province. By con- trast, collective and rural industry are as yet relatively underdeveloped. Collective industry accounts for some 24? of total industrial output: the bulk of this originates from about 9,872 urban, county and township collec- tives. According to provincial statistics, in 1986 there were about 3,700 industrial firms in the TVE sector producing only about 9Z of the total (com- pared to more than 20X nationally). Out of a rural labor force of 5.7 mil- lion, agriculture employs 4.9 million and industry less than 274,000. 8. Jilin possesses a diversified natural resource endowment, in many respects still less than fully exploited, which the province plans to use as the basis for further rural industrialization. The 4.0 million ha of crop- land, predominantly in the center of the province, make Jilin China's largest producer of corn and second largest supplier of soybeans. The density of rural population is relatively low, and average farm size is consequently high by Chinese standards. The west of the province, adjoining Inner Mongolia, is dominated by 1.5 million ha of grasslands, used mainly for sheep and cattle raising, though there is also some specialized crop production: the area is among the world's leading producers of castor beans. Eastern Jilin, bordering North Korea, is mountainous, remote and underdeveloped. It is the main area ANNEX 1 - 53 - Page 4 of concentration within China of members of the Korean national minority. This region includes most of the province's 8.8 million ha of forests, which yield some 6.3 million m3 of timber per annum (102 of China's total output), and is also known for the supply of a range of fruits, furs and Chinese tradi- tional medicines (including ginseng). Jilin is richly endowed with mineral resources, again largely concentrated in the East; in addition to metal ores vuch &s iron, copper, gold, nickel and molybdenum, there are significant deposits of nonmetallic minerals including wollastonite, diatomite and bento- n15tee 9. Jilin has created a relatively intensive infrastructure in the areas of science and technology, as well as education. The province's 42 institu- -3onS of higher education have a total enrollment of 72,933 students, which :elp)-e-ents a level, per 1,000 of popultion, nparly 66Z above the national ;ax)age. A comparable ratio applies to secondary school enrollment. Nation- Eily celebrated research institutes operate in such areas as optical machinery an(i applied chemical research. In addition to enterprises' own research d-partments, in 1986 over 170 'independent" research institutes were in opera- tion and employed some 29,900 staff and workers; of this total, 58 institutes uv 11,900 employees concentrated on industrial research. The proportion of tecinrically qualified personnel in the labor force is well above the national AvL'Y age, as is the number of patent applications. By contrast, much less socr&(-s, has been achieved in the supply of technically qualified personnel to Itc rnolJ.ective enterprise sector; according to one estimate, such staff rf-ccur.t for less than 0.5Z of total employment in the collective sector. 10. Given the relatively weak existing rural Industry base in Jilin, provincial authorities are adopting a more precisely targeted approach to Sljprk than that of Jiangsu. Most of the priority areas involve increasing .-oc.ssing value added for the province's raw material base. Ten priority &reCnrs have been identified: grains; wood; oil seeds; castor beans; feed; n,oi,inetallic ores; furs and hides; specialty fruits from mountainous areas; ';!ine_e traditional medicines and tonics; and component supply to large enter- pixes. In each of these priority areas, the province has assembled task fort-s to assess issues and propose strategies. In some cases, when an appro- pisJt.e newr technology has been identified, the province has assisted a rural co-,mnur-ity in the formation of a new enterprise to implement the project. In 10o0l1 processing, for example, TVEs are being encouraged to make use of mate- rial d4scarded by the large state sawmills for the production of parquet 1cl-os, particle board, etc. As another example, the province has carried out ruiveys of selected large state enterprises to identify opportunities for .rnail community industries to develop as component suppliers. I1. Shanghai is one of three municipalities in China to hold provincial status. The municipality as a whole has an area of 6,100 km2 and a population of 12.6 million. Of these, nearly seven million live in the 151 km2 of '-hanghai City, making it China's most populous city. The remainder are divided among 9 suburban or rural counties under Shanghai municipal jurisdic- tLion. Geography and history have combined to make Shanghai China's leading plort (handling almost three times the cargo volume of its nearest rival) as w1el as its most important industrial center (accounting for .jome 7.1% of the tote] industrial output of the nation). Shanghai produces 9X of China's cloth output, 142 of all steel, 18Z of synthetic fiber production and between a ANNEX 1 - 54 - Page 5 sixth and a fifth of the national output of bicycles, watches, televisions, radios and sewing machines. In recent years environmental concerns about Shanghai's concentration of heavy industry have led to moves not only to tighten pol,ution control but also to encourage industrial relocation. Shanghai is rivaled only by Beijing as a center of higher education (51 col- leges/universities, with a total enrollment of 128,163 students) and of research (over 258 research institutes with 98,142 staff and workers, includ- ing 38,315 college graduates and 20,074 other technical staff, and total 1988 budgets exceeding Y 1.2 billion). 12. Chongming Island is one of nine nonurban counties falling within Shanghai's administration. It has been selected for special development attention under the Spark program and will also be the exclusive focus of the Shanghai component of the project. Chongming is a narrow alluvial island, with an area of 1,100 km2, located at the mouth of thie Yangtze River. It lies some 15-20 km north of the Shanghai shore and, at its closest point, 2 km south of the shore of Jiangsu province (see map). With heavy deposits of silt from the Yangtze, Chongming's area is continuing to grow quite rapidly: parts of the Eastern shoreline are moving outward by an average of 143 meters per year. Nearly 39? of the island's present surface area has been "reclaimed' during the past 40 years, and further reclamation works currently add an addi- tional 500-700 ha per annum. 13. Chongming had a population in tne mid-1980s of 745,000, of whom 648,000 came under the direct authority of the county government and 97,000 under the quasi-autonomous jurisdiction of the Bureau of State Farms. The gross value of industrial and agricultural output (1985) was Y 1.94 billion (Y 2,600 per capita) and GNP an estimated Y 883 million (Y 1,186 per capita). These indicators, while significantly above national averages, were less than half the comparable levels for Shanghai as a whole. Industry accounted for 63? of GNP, agriculture for 212 and services the remaining 16?, while the three sectors' shares in total employment of 484,000 were respectively indus- try 39?, agriculture 50? and services 11Z. Out of total industrial output, county collectives accounted for 19Z and TVEs for nearly 47?; State-owned enterprises as such played no role, but industries sponsored by State Farms accounted for the remaining 34?. There were, in total, about 1,300 rural industrial enterprises on the island. Leading sectors in industry included metallurgy (21.5Z of total output), textiles and garments (16.3z), household appliances (13.0Z) and processing of food and feed (9.3?). The gross social output value of industry grew at an average 16? between 1980 and 1985. Agri- cultural output was dominated by crops (64.9? of total output), followed by animal husbandry (27.3?); in spite of Chongming's favorable location for aqua- culture and mariculture, fisheries provided only 6.3? of primary sector output (and forestry the remaining 1.5?). Within the cropping sector, staple crops including grains, oilseeds and cotton accounted for the great majority of the total cultivated area of 54,400 ha; there had, however, been some increase in planting of specialty crops, including squashes, vegetables, spices and herbs. 14. There is a keen feeling within the municipal and national leadership, and among Chinese specialists who have studied the island, that Chongiing is failing to exploit the potential advantages of its strategic location and its natural endowment. There are also justified fears that, without technologi- cal strengthening and modernization, the island's existing production base, in ANNEX 1 - 55 - Page 6 areas such an appliances and textiles, may be overtaken by technical develop- ments and maxket shifts elsewhere. Two key areas of weakness which rightly attract attention are Chongming's transport links to the mainland and its educational facilities. There are currently only limited services by small passenger-car ferries to Chongming from Shanghai and from Jiangsu, though their frequency and coverage is now being stepped up. Out of two facilities constructed in 1972 to handle 1,000 ton vessels, only one is fully opera- tional, as the other has largely silted up. A channel exists which could accommodate vessels up to 10,000 tons; construction of a port for cargo ves- sels of this size was hoped to be completed during 1989. 15. The second crucial weakness that has now been recognized is in the technical and educational area. A recent study (para. 16) found that only 8,300 members of the workforce were "technically qualified" in the sense of having reached the secondary technical school level or above: i.e. less than 2X of the total (see Chapter 1 for equivalent national figures). The nine axisting technical secondary schools on the island had a total enrollment of 1,400, but offered courses only in a fairly narrow range of subjects, includ- ing civil engineering, general agriculture and agricultural machinery, com- merce, finance and economics. No training at this level could be offered locally in such areas as metallurgy, textiles, food technology or aquaculture. Although Chongming also sends secondary school graduates to mainland colleges for further education, the study suggests that only a small minority of these students eventually return to employment on Chongming. 16. Spark support for Chongming would form part of a larger strategy for the island's development. Over 1985-87, a task force organized by Shanghai STC, and comprising over 100 specialists organized into eight subteams, car- ried out a series of studies into Chongming's development potential. Their recommendations on strategy have been reviewed by the Shanghai municipal authorities and accepted by the Chongning county government. The task force recognized that Chongming's development needed to proceed sequentially, with attention at each stage to building up infrastructure and transport links, as well as the educational and technical levels of the workforce. In the long term, it saw potential for Chongming to develop as a transshipment point, as well as possibly an export processing zone and a tourist center. The more immediate focus would include strengthening and diversifying primary sector production, with expansion of mariculture and aquaculture, as well as increased concentration on higher valued specialty items among fruits, vegeta- bles, spices and animal husbandry products, while integrating these with mod- ernization of the existing food processing industry. Present textile, garment and appliance activities would also be modernized to improve product quality, and scope for further expansion of ship repair, component manufacture and subcontracting explored. The task force also recommended stricter zoning procedures for potentially polluting industries in machinery and chemicals, and increased efforts to deal with current, localized water pollution. Chongming already has a vigorous Bureau of Environmental Protection, with a total 1988 staff of 65 (including 16 qualified engineers), which in 1987 imposed fines for infraction of environmental standards totaling approximately Y 1.5 million. In response to the task force's recommendations on industrial zoning, the county has formed a new committee on industrial location, chaired by the Head of the County Government and including the chief of the Bureau of ANN 1 - 56 - Page 7 Environmental Protection, to approve the siting of all now Industrial proj- ects. The committee is supported by a staff of 12. A land use planning map is currently under preparation; interim zoning proposals are indicated on the map attached to this report. 17. The task force's work appears to be based upon thorough analysis and to provide a realistic overall framework for Chongming's participation in the Spark program and the project. ANNEX 2 - 57 -Page 1 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Industry and Finance and the Bank Group Strategy in China Structure and Performance 1. Industry is China's largest productive sector, accounting for 46X of its gross domestic product (GDP) in 1988 and employing nearly 18% of the coun- try's total labor force. About 99,000 state-owned enterprises generate 57Z of total industrial output; the remainder is produced by more than 1.5 million non-State enterprises--primarily urban and rural collectives, township and village enterprises. The state enterprises concentrate on important raw mate- rials, capital goods, and strategic commodities such as fertilizers, although there are also state enterprises producing a wide range of light industrial and consumer goods. Nenstate enterprises mainly produce downstream consumer products. The gross value of industrial output (GVIO), which amounted to Y 1,811 billion ($486.7 billion) in 1988, is shared almost equally by light and heavy industry. GVTO increased rapidly between 1980 and 1988, at about 13.7% a year in real terms. During this period, light industry registered a much faster annual growth rate (14.9Z) than did heavy industry (10.9z). Macroeconomic stabilization policies initiated in 1988 led to a reduction of the annual growth of total industrial output to about 7Z in 1989. 2. Between the mid-1950s and mid-1970s, Chinese industry was oriented mainly toward the rapidly growing domestic market. Since then manufactured exports have grown rapidly, especially during the 1980s. They rose from around US$8 billion in 1980 to about US$33 billion in 1988, and expanded fur- ther in 1989, in spite of the overall slowdown of the economy. Industrial Development Issues and Strategy 3. Between 1949 and 1978, China's industrial development was guided by an inward-oriented, import substitution strategy, with emphasis on capital accumulation. This led to rapid growth of industrial output and employment, building up industrial skills, and development of a wide range of basic, intermediate and consumer goods industries. Nevertheless, it also resulted in deficiencies that have constrained industrial development in several respects. The most obvious deficiencies pertain to: outdated technologies (nearly 80% of the current stock of capital equipment is obsolete and needs replacement or technical renovation); institutional rigidities deriving in part from quota and price controls; a distorted structure of prices; Inadequate infrastruc- ture; and an underdeveloped financial sector. These problems are reflected in the low productivity of labor and low efficiency of resource use in Chinese plants. Emphasis on self-sufficiency at the regional level has led to a frag- mented national market, reduced domestic competition, and the suboptimal use of scarce skills and resources. As a result, potential gains from economies of scale are often missed. Subeconomic-sized enterprises proliferate, often in the same markets as large enterprises, and are usually financially profita- ble due to government price controls and other support. Institutional inflex- ibility, compounded by inadequate market integration, has provided little ANNEX 2 - 58 - Page 2 incentive for industrial enterprises to improve managerial efficiency and product quality. This incentive is further reduced by the weak budgetary constraint for large state-owned enterprises, which can normally expect their losses to be covered by the government. The low prices of eneLgy and basic intermediates for industrial production also contribute to the inefficient use of inputs. Investments in infrastructure, particularly for transportation and telecommunications, have lagged behind those in industry. This disparity has in turn been a major constraint on industrial development. 4. Between 1979 and 1988, the Government of China (GOC) changed its industrial development strategy and gradually introduced reforms, after peri- ods of local and regional experimentation, to strengthen market forces and improve the incentives to industrial efficiency. The new strategy emphasized modernizing existing equipment, developing manufactured exports and more effi- cient light industry, and conserving material and energy resoucces in indus- try. The reforms have foctused mainly on four areas: (i) prices--expanding the role of market forces in price determination; (ii) enterprises--strength- ening management accountability; (iii) trade--promotion of exports to earn foreign exchange, which in turn finances imports of modern technology and equipment; and (iv) financial sector--developing financial institutions and markets. The introduction of these reforms has been a cautious process, involving experimentation and repeated fine-tuning. Since the beginning of 1989, a stabilization program has been implemented, with consequent slowing of some reforms and reconsideration of others. 5. Prices. In 1984, reforms were adopted to enhance the role of markets in determining prices and industrial output by reducing the role of mandatory planning and initiating the correction of major price distortions. As a result of these price reforms, a two-tiered pricing system now exists: con- trolled prices for production to meet planned output targets, and market- related prices for output above plan targets. The Government has allowed a growing portion of industrial products to be sold at market prices outside the plan and it has considerably raised the price of major industrial inputs including energy. While this system is a significant improvement over the strict price control of the past, significant distortions in relative prices and large gaps between controlled and market prices have a number of shortcom- ings: reduced allocative efficiency, discrimination across producers and consumers, administrative complexity, and creation of opportunities for cor- rupt practices. 6. In 1988, further price reforms were interrupted by increasing evi- dence of macroeconomic instability as urban consumer prices, having risen 15% in the first two quarters of that year, soared to an annualized monthly rate of over 60X in the third quarter. In response, the GOC rescinded the proposed reforms and initiated a stabil.ization program. This ongoing three-year pro- gram involves redoubling efforts to control the prices of the approximately one-fifth of commodities still within the price control system, but has not resulted in reinstating strict controls for commodities outside that system at the beginning of 1989. The Government has stated its intention of doing away with dual pricing in the medium term, and adjusting controlled raw material, energy and transport prices, to reduce remaining distortions. In early 1990, new price adiustments for cotton, and for rail and water freight transport tariffs were announced, and further price adjustments for coal, crude oil, grain, edible oils, and power are planned, but thePir timing is uncertain given ANNEX 2 _59 - Page 3 the sensitivity associated with increasing prices. Continued price reforms are essential for the improvement of resource allocation in China. 7. Enterprises. Enterprises have been provided with various incentives to enable them to operate with greater management autonomy in a more competi- tive business environment. Reforms adopted in 1984 aimed at decentralizing economic decision-making toward the provinces and enterprises based on greater use of market signals. The state enterprise reforms introduced, among other things, a system of contract management responsibility, a uniform basic tax rate (55X) for enterprise income, wage incentives for workers, and higher profit retention. Continued reform is needed to address a number of remaining issues. GOC continues to actively study and experiment with modification of the management contracting system, alternative forms of enterprise ownership, and the introduction of company law and bankruptcy legislation. Of particular importance are current efforts to design a shareholding system ("joint-stock ownership") suitable for Chinese state-owned enterprises. Several versions of shareholding are being introduced experimentally in selected locations. Fur- ther clarification of ownership rights, exposure of enterprises to competi- tion, removal of government coverage of losses, are vital to further effi- ciency gains. 8. Trade. As a result of the decentralization of export responsibili- ties in the 1980s, several thousand Chinese enterprises now have the right to trade directly with foreign firms, and many more use trading companies as agents rather than selling exportable goods to them. There is concern that this rapid granting of direct export rights, especially in 1988, without suf- ficient regulation and institutional support for enterprises to adhere to quality and delivery standards, may have created negative impressions in over- seas markets. GOC is studying ways of addressing these problems, and expand- ing direct trading more slowly, although its commitment to the "open-door" policy initiated in 1979 has not changed. The availability of foreign exchange to nonexporting enterprises has improved somewhat with the creation of the foreign exchange adjustment centers, mainly in the coastal zone. Cen- tral mandatory planning continues to be used to ensure imports of essential raw materials to fill the deficits left in the domestic economy, and licensing (rather than tariffs) discourages some consumer goods imports. 9. Financial Sector. Prior to 1979, China essentially had a monobank system which allocated resources according to fiscal directives. Reform of the system was initiated in the early 1980s with the formal establishment of the People's Bank of China (PBC) as the country's central bank, and divesti- ture of its banking functions to independent specialized banks. Since 1986, China's financial sector reforms have accelerated. Before then, the system was largely limited to four national banks, specialized along economic and sectoral lines, and financial assets mainly consisted of deposits and govern- ment bonds. As a result of the reforms, the range of financial institutions and instruments has markedly increased. Numerous nonbank financial institu- tions (NBFIs) have been established. Financial bonds, commercial paper, bank- ers acceptances, trade bills, and bond-like enterprise shares have been intro- duced. These reforms have resulted in considerable financial deepening, despite some setbacks in the recent period of high inflation: M2 as a propor- tion of GDP increased from 37Z in 1979 to 722 in 1988 and to about 76Z in 1989. The reforms have also succeeded in reducing the role played by the ANNEX 2 60 - Page 4 budget in investment financing, wlhile substantially increasing the role of bank finance. 10. Notwithstanding these advances, weaknesses remain. The system is dominated by the four specialized banks. Financial institutions still need substantial institutional upgrading to function as effective intermediaries. The recent trend of increasing portfolio arrears in the banking system needs to be arresced. Regulation and supervision of the financial system require considerable strengthening, as do the accounting and legal frameworks. Recent government efforts to finance investment in priority sectors through directed credit and preferential interest rates need to be reduced. While recent reli- ance on administrative mechanigmq lhnq Pnab]ed the government to regain control of rapidly accelerating inflation, in the louiger term, PBC should make greater use of indirect monetary credit policy tools. 11. Interest rates have been adjusted several times during the past decade. Currently, interest rates on deposits generally range from 8.64Z for one-year deposits to 13.68Z for eight-year deposits, and from 2.16? to 6.48? for deposits of less than one year. The interest rate on individuals' time deposits of three years' or more duration are indexed to the rate of infla- tion. Lending rates are generally 9.36% for working capital loans, and between 9.36X and 11.16% for fixed asset loans, depending on their maturities. However, further rationalization of the structure is necessary. There is an excessive number of different rates, and they are widely dispersed. For some categories of loans and deposits, there is an inadeouate margin with a poten- tially negative impact on bank profitability. While the general level of real rates in the recent past was negative, recent and projected declines in the inflation rate, coupled with the &bove adjustments, have served to mitigate these problems. Although the need for a more flexible interest rate mechanism remains, the general level of real rates is now positive and is projected to remain so. Bank Support for Industry 12. The Bank Group's industrial lending operations in China, which began in 1982, comprise the following: (a) five loanicredit operations totaling US$945.6 million to the China Investment Bank (CIB) (Loan 2226-CHA/Credit 1313-CHA, December 1982; Loan 2434-CHA/Credit 1491-CHA, June 1984; Loan 2659-CHA/Credit 1663-CHA, March 1986; Loan 2783-CHA/Credit 1763-CHA, March 1987; and Loan 3075-0-CHA, May 1989); (b) four loans totaling US$394 million (Loans 2541-CHA, May 1985; 2838-CHA, June 1986; 2958-CHA, June 1988; and 3066-CHA, May 1989) for a Fertilizer Rehabilitation and Energy Saving Project, a Fertilizer Rationalization Project, a Phosphate Development Project, and the Hubei Phosphate Project; (c) a US$100 million loan (Loan 2784-CHA, April 1987) for the Shanghai Machine Tool Project; (d) a US$20 million industrial development component of the Gansu Province Project (Loan 2812-CHA and Credit 1793-CHA, April 1987); (e) a loan of US$127 million (Loan 2943-CHA, May 1988) for the China Pharmaceutical Ptoject; and (f) a loan of US$154 million (Loan 3022-CHA, February 1989) for the Tianjin Light Industry Project. In addition, the Planning Support and Special Studies Project (Credit 1835-CHA, June 1987) includes components for long-tern planning and strategic studies in some industrial subsectors. International Finance Corporation (IFC) support, since the first operation in 1985, totals US$25 million equivalent in the following projects: Guangzhou and Peugeot (Investment No. 813, FY85), China Investment C-i,i, ;rx (Investment No. 974, FY87), Shenzhen China Bicycles Co., Ltd. ANNEX 2 61 Page 5 (Investment No. 1020, FY87', and Shenzhen Crown Electronics (Investment No. 37740, FY88). 13. Apart from some delays in the first China Investment Bank (CIB) oper- ation, disbursement of the CIB loans and credits generally has proceeded satisfactorily, and the basis of a sound development bank and premier finan- cial intermediary for small- and medium-sized industries has been established. A PCR for the first CIB project has been prepared. The PCR concludes that the project's objectives have been fully achieved, in particular, in laying a foundation for CIB, a new financial institution, to develop as an autonomous and efficient financial intermediary in industrial finance. With continued Bank support, CIB's capecity in project design/selection and appraisal has improved significantly since its establishment. Lessons learned from the implementation of the first project were reflected in the design of subsequent CIB projects supported by the Bank. Recently, the quality of CIB's portfolio has deteriorated, mainly due to the general economic downturn China has been experiencing in recent years. Strengthening of CIB's capabilities to monitor and supervise subprojects and cope with problem loans is a priority in provid- ing further Bank assistance to CIB. Physical implementation of the first two fertilizer projects is proceeding satisfactorily. After some delays in proj- ect implementation due to the Government's recent austerity program and the resulting shortage of local counterpart funds, the two phosphate projects are now proceeding well. Procurement is well under way for these two projects without major difficulties. Procurement is also well under way for the Phar- maceuticals Project, Phosphate Development Project, the Shanghai Machine Tool Project, which involves rehabilitation and modernization of the machine tool subsector in Shanghai, and the industrial component of the Gansu Project, which involves diversification and modernization of rural industry. 14. As part of its agricultural sector lending program, the Bank Group has also provided support to rural agroprocessing industries (including TVEs), both through a series of three Rural Credit Projects implemented by the Agri- cultural Bank of China (ABC) in a total of nine provinces (Credit 1462-CHA, FY84; Credit 1642-CHA, FY86 and Cred! 1871-CHA, FY88, together totaling US$310 million equivalent), and through smaller agroprocessing components in a number of other, primarily agricultural operations. In addition, Board docu- mentation for a proposed Fourth Rural Credit Project was circulatedA to the Executive Directors on October 11, 1990. ABC has a large network of rural branches, as well as strong links to the rural credit cooperative movement, and has made progress with Bank-supported programs to upgrade staff training and procedures (see also Annex S5). In addition, the Bank has participated in a collaborative research project with the Chinese Academy of Social Sciences to study the TVE sector, ircluding in-depth research in four counties, the results of which have been published in a book.l/ Bank Group Objectives and Strategy 15. The Bank Group's overall objectives in the industrial and financial sectors are to assist the Government to: (a) improve the policy framework for 1/ China's Rural Industry: Structure, Development and Reform, W.A. Byrd and Lin Qingsong, eds. (1990). ANNEX 2 -62 - Page 6 the sectors as a whole; (b) build sound institutions and practices for finan- cial intermediation, subsector planning and project approval and implementa- tion; and (c) promote and implement technology upgrading, plant restructuring and rehabilitation, and energy and material conservation, in selected subsec- tors at the national and provincial levels. In the industrial sector, the Bank Group would seek to underpin further programs of price, enterprise and trade reforms designed to give market forces a greater role in stimulating efficiency improvements. In the financial sector, emphasis would be placed in the near term on strengthening and enhancing the viability of the banking sys- tem, which must play an increasingly important role as other economic refol.ns proceed, through reforms designed to: (i) safeguard banks' financial viabil- ity, through attention to the adequacy of their interest rate spreads and accurate reflection of their portfolio quality; (ii) improve bank management; (iii) strengthen regulation and supervision of the financial system; and (iv) improve the bank accounting framework. Other reforms to be supported in the near to long term include strengthening the central bank's ability to effectively implement monetary and credit policy with greater use of indirect tools, developing more robust money and capital markets, improving the overall level and structure of interest rates and enhancing competition in the banking system. 16. The present and emerging operational pipeline and the program of eco- nomic and sector work reflect the above strategic thrust. Specific plans in the industrial sector include assistance to selected major subsectors, includ- ing chemicals, fertilizers, machinery manufacturing, electronics and building materials, consistent with their comparative advantage and national economic priorities. The increasing devolution of responsibilities for planning and implementation from the center to the provinces has the potential for a signi- ficant impact on the industrial sector, provided the provincial authorities can effectively enunciate and carry out their new role. An anticipated series of coherent provincial industrial development strategies, is designed to help selected provinces articulate and implement their new responsibilities for industrial planning and project implementation. The present project is expec- ted to be the first of a number of operations aimed specifically at providing support for China's non-State industrial sector. 17. In the financial sector, specific plans include further support for CIB as well as other intermediaries designed to foster their overall institu- tional development in a more competitive banking environment. While their large market share argues for upgrading the large nationwide specialized banks, the possibility of strengthening some of the newer dynamic intermedia- ries will also be reviewed. Support is also planned for improving the overall financial sector regulatory and supervisory activities of the central bank and other core central agencies. Financial intermediaries would also continue to help support operations with principally real sector objectives. Under such operations, the intermediaries would be expected to satisfy minimum eligibil- ity criteria and would receive support for targeted institutional improve- ments. 18. The Bank Group's program of economic and sector work and technical assistance in industry, trade and finance provides the basis for an active policy dialogue with the Government on many of the key issues of importance to these sectors. To date, studies have been completed on the state enterprise management system, enterprise reform, the financial sector, external trade and ANNEX 2 - 63- Page 7 capital, industrial policies and structural change, and the electronics sec- tor. Further studies and technical assistance are underway on enterprise reform and the automobile sector. Additional work is planned on other subsectors at the national and provincial level. Much of this work is being carried out jointly with Chinese agencies. 19. In addition to the above, the Bank Group is the executing agency for UNDP technical assistance projects and has financed two technical cooperation credits, thereby encouraging the use of technical assistance, particularly for project preparation. EDI's large training program in China and the past lend- ing program have helped in raising investment efficiency in China by demon- strating how the Bank Group's appraisal methodology can be applied to improve project selection and efficiency of project design, and by strengthening institutions' project preparation and appraisal capacities. STATE SCIENCE AND TECHNOLOGY COMMISSION THE PEOPLE'S REPUBUC OF CHINA Orgnizaton Chart I - H~~~~~~~~~~~~~~~~~~~~~~~~~~ Ss-rc D _mrf SSTC NM*d 0" OmllbOctofe d 5 h S & T B leh f d Adpintidsonti 1iiba bIilhAafS&T of11 H ilomalc 1ANWQ D_ d Q_~~~~~opon d a3: Bloi, ate b POfInS & L aoScine & Technology InVomratron a a C [t for Mangmnt Depabntw Dpaban of Ctn Nialonai Pu a[o China Natonal Poky a Logwaftn hv"n ~~~~~~~~~~~~~aso ~O.& ExpeftCo. 1 i ScisnUtIc D"rbwnt of I I Depalbuen od Rural I National Research Center 1C[hinaScience &1 Pi d |oWnce and TedwxfW |orS&Ttor i C Technolo gy (SpIc Plee am Oe b) DevotpS mrt Txchange Centr Deporbunt of Deptent of l China Natnal Center S &TTManageent I S&Ttor CinaRural Techno" r otec o Re ing Social Devalopra Dentve Deop.r1t Deparmnd of Depatmet of Chia Technolog Maket Ctina Software Finnc & S & T infoomatlon Pronwton & [ Technology } ~~Fadtbes M l agernet2 Demeopmert Cetr DepartmentO rhf* ofr1 Scie| & I I Of a | I_S d Techeobgy Acbivemen j Audkor S & T Ma lagemt Nat R s S Nallonal Office for F 1 hn rsh r 9 National Ofike forShanghia Training Center S 8 T Awards for S & T Managemt OUier CuIanizatlon under SSTC China Patent Office National Nuclear National Natural [ science & Satety Adntraon [ Science Foundation [ Technology Daily SNV i1 ANNEX 3 _65 - Chart 2 ----------I.- - J11 [ S '~~~~~~~~~~~~~I I ow iRS 1 , , 1~~~I at E g ! L W 17~~ , F 0*I t ii- jMif W:::: :: : : ::: . , ig!~~~~ ANNEX 3 -66- Chart 3 X a X~~~~~~~~~~~~~~~~L rL 1Li 1 Aull 3 - 67 Chart 4 SHANGHAI MUNICIPAULY STC / SPARK PROGRM Organzatlon and Stafilng SoftOo l o~~~cm (6) cownxi $M Soak,1g __ 1AS Teldo- |~~~~~~~~~~~~~~~~~~~6 (6) t E - -I .y" tVmww (10) ~ ~ ~ 40 Spat~~~~~~~~~~~~~~~~a .Soori,*froU1a1LeadingG(a. orrptm Ogvri NMW (C?iofmnon) and rnWtat d STC pkus M* C;oJwb .zs for Pronn.ng Ecamaue. rnonaen TxwE. Agftws ow PVk aw the fw lemnt bar*. as WO I os the ScW & TGo&ak. Auolon an local aus . r nprntofing woukem woen am yu.9h IAnorios Sa*J2?0a2 2 Admvoain L_J Ot ' VABw*42?M2 ANNEX 4 - 68 - CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Gross Value of Industrial Output by Subsector (Z of total) 1985 1988 Industry Industry as a whole TVEs as a whole TVEs Metallurgy 8.0 3.4 8.8 4.0 Electric power 3.3 0.4 3.0 0.3 Coal and coke 2.5 3.8 2.4 2.5 Petroleum 4.5 0.1 4.8 0.2 Chemicals (incl. plastics) 11.2 8.4 13.1 10.0 Machine building 26.9 25.5 26.1 24.4 Construction materials 4.2 18.9 5.6 17.6 Forestry 1.6 3.0 1.9 2.5 Food 11.5 7.9 11.7 8.2 Textiles 15.3 1.2.5 13.0 13.2 Garments 2.4 3.7 2.0 3.3 Leather 0.9 1.6 1.0 1.7 Paper 1.3 2.4 2.1 2.6 Cultural/educational 2.6 3.0 2.4 3.4 Other 3.8 5.4 2.1 6.1 Notes TVE data exclude below-village enterprises. Data may not be strictly comparable between years given changes in data source for subsectoral breakdowns. Source: IBRD Report No. 7267-CHA and Statistical Yearbook of China, 1989. >}tA RWAL NDATR1AL TEQ40LDCY PROJE' (SPARK) Investmenta and Financnn bn Aporooal Loe. (Yuan i 1 lion) 198s 1986 1987 198., 198-88 State/ Pro.- Pro.- Pro,- Pro- Appreo'd by: total State inc. County Total stat inc- County Total stt. ;nMc County Total sStat. inca County Total No. of proj.cI. 41 629 1,143 2.6re 4,351 291 1,699 3,273 5.26S3 499 1,780 2.811 5.090 1,461 4,622 8,668 14,746 S of otal 100 14 26 so 100 6 32 62 100 10 35 55 100 10 31 59 100 Inveatment costs 9.26 856.46 7s5.2s 66S.89 2,273.58 748.78 1,288.72 867.60 2,8S4.60 *1,382.98 1,498.25 817.72 3,698.95 3,087.48 3,492.20 2,349.21 8.e28.89 s of total 1oo S8 33 29 100 26 43 30 100 37 40 2S 100 55 39 28 100 Fi;acn Gov,. * llocations Central 28.93 54.78 0.00 0.00 54.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 83.71 0.00 0.00 83.71 Provincial 28.26 81.41 94.18 12.48 1-8.07 76.7r 85.15 18.88 1IB.28 63.82 105.58 0.00 169.35 250.24 284.91 31.38 566.51 Corunty 0.00 0.00 7.73 71.49 79.22 0.00 16.62 46.95 63.57 0.00 0.00 32.35 32.35 0.00 24.35 150.79 175.14 Subtotal S7.19 1I36 I0LI9 KJZ 3.22.07 76 7 101.7 6 243 e 6. lS8 32.S5 2013 OS 30e.26 Z 25. 6 Bank loan. 6.56 333.81 24.95 202.13 770.89 382.98 530.10 287.74 1,150.82 642.30 716.74 276.45 1,635.49 1,315.65 1,481.79 r66.32 3.36S.76 Enterpriasa 35.51 386.46 418.37 377.79 1,182.62 339.05 606.85 S14.03 1,459.93 676.86 675.93 s8.92 1,861.71 1.437.88 1,701.1S 1,400.74 4,539.77 Tota 9.26 8S6.46 75S.23 6.89 2.27S.58 748,.78 1,2s87 W; eO760 2.a54.60 I.,se.8 1,49s. 817.7 3.698.95 3,0a7.4 3,492.20 2J,aM 82,S2 Average sits of projact, (Y aIr) 2.42 1.36 0.66 0.26 0.52 2.57 0.73 0.27 0.54 2.77 0.84 0.29 0.73 2.11 0.76 0.27 0.60 Ptroportion of F-nancigo (5) 0Go. alloctieos Central 29.1 6.4 0.0 0.0 2.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.7 0.0 0.0 0.9 Prov ,nc;al 2B.5 9.5 12.5 1.9 8.3 10.3 6.9 2.2 6.3 4.6 7.1 0.0 4.6 8.1 8.2 1.3 6.3 County 0.0 0.0 1.0 10.8 3.5 0.0 1.3 5.4 2.2 0.0 0.0 4.0 0.9 0.0 0.7 6.4 2.0 Subtotal MA ILI zJ 14 . i eI L76 L. L.0 i& LA ie 7 .? 7.2 Bank loans. 6.6 39.0 31.1 30.4 33.9 44.5 42.8 33.2 40.3 46.5 47.8 53.8 44.2 42.6 42.4 32.6 39.9 Entarprisa 35.8 43.1 55.4 56.9 52.0 45.3 49.0 59.2 S1.1 46.6 48.7 59.7 48.9 45.1 62.2 50.3 50.9 Tot2- LW 100- 0 10.0 0 100 0 100 0 loo o 00o 100.0 100.0 100 0 100 100.0 10 100 0 lop,o 100 0 100.0 to MD~ CHI MAtL INXSTRIAL T8L0CY PRMJBT (SPAM Inv_ntg *nd Financii, b TTe af Ent reria (Yuan ci IIon) 1965 ~ ~~~~~9B6 3.~~~~~87 ~~1988M8S8 cntarpriaea Coal5e lI- CO le- COlle- Col lee- col le_ ewned by: State tive Toal state tives Total State tive Total State thee Total state tivea Total No. of project. 11 30 41 132 4,219 4,351 37 5,226 5.263 30 5,060 5.090 210 14,535 14,745 S of total 27 73 100 3 97 100 1 99 100 1 99 100 1 9 100 Lo n.m. n.m. n.m. n.m. n.a. n.a. n.s. n.a. n.a. n.m. n.a. n.D. n.a. n.m. Foreign n.a. n.n. n.s. n.m. n.n. n.m. n.a. n.n. n.r. n.m. n.a. n.a. n.s. n.n. n.&. TotaL 40.9 5B.36 99.26 145.-81 2i ,=9.77 2z.m .S8 63.88 ;2,790.7 2.oEi4.6 ;65.0 3,6q5 3.69S.95 3S059 S.62.5 8.928.39 Sof totel 41 59 100 6 94 100 2 98 100 1 99 100 34 96 100 projecta 9 1S 25 132 2,616 2,748 37 3,279 3,316 30 3,Z2b 3,258 208 9.139 9,347 Iof total 82 53 61 100 62 63 100 63 63 100 64 64 99 63 64 Coats 38.10 33.64 71.74 145.81 1,310.56 1,436.37 63.88 1,763.07 1,826.9S 55.00 2,423.30 2,478.30 302.79 5,530.S7 5,833.36 S of total 93 5S 72 100 62 64 100 63 64 100 66 67 99 64 65 No. ofproj 2 14 16 0 1.603 1,603 0 1.947 1.947 0 1,832 1,a32 2 5,396 5.398 Cost 2.80 24.72 27.52 0.00 819.21 819.21 0.00 1,027.65 1,027.65 0.00 1,220.65 1,210.65 2.80 3.092.23 3,095.03 "CevI. locations a Central 14.77 14.16 28.93 11.63 43.25 54.78 0.00 0.00 0.00 0.00 0.00 0.00 26.30 57.41 83.71 O Provinciml 12.56 15.70 28.26 16.92 171.15 188.07 7.57 172.71 180.28 8.00 161.40 169.40 45.05 520.96 566.01 Counts 0.00 0.00 0.00 0.00 79.22 79.22 0.00 63.57 63.57 0.00 32.35 32.35 0.00 175.14 175.14 Subtotal 27, 2986 57.19 28.45 293.62 322.0Z 7_Z 26.2S 243.S5 8.00 1937 201.75 715 753.51 824.86 Bank loans 3.06 3.50 6.56 59.12 711.77 770.89 32.18 1,118.65 1,150.83 22.00 1,613.49 1,635.49 116.36 3,447.41 3,563.77 Enterprises 10.51 25.00 35.51 58.24 1,124.38 1,182.62 24.14 1.435.79 1,459.93 25.00 1,836.71 1,861.74 117.89 4,421.88 4,539.77 Tota1 40.90 58.36 W.26 14S.81 2.129.7 2,275 63.89 2,790.72 2461 550 3.,643.95 3 698.95 305.60 . 8.92S.40 6vOCra Size o 3.72 1.95 2.42 1.10 O.S0 O.S2 1.73 O.S3 0.54 1.83 0.72 0.73 1.45 0.59 0.60 Industry 4.23 2.10 2.87 1.10 0,51 0.53 1.73 0.64 0.55 1.83 0.75 O.e 1.4" 0.60 0.62 Agriculture 1.40 1.77 1.72 0.00 0.51 0.51 0.00 0.63 0.53 0.00 0.67 0.67 1.40 0.57 0.57 Fin--ncino (s Go. El 1 oc tim0 Central 36.11 24.26 29.15 7.91 2.03 2.41 0.00 0.00 0.00 O.C0 0.00 0.00 8.60 0.67 0.94 Provincial 30.71 26.90 28.47 11.60 8.04 8.26 11.85 6.19 6.32 14.55 4.43 4.58 14.74 6.04 6.34 County 0.00 0.00 0.00 0.00 3.72 3.48 0.00 2.28 2.23 0.00 0.89 0.87 0.00 2.03 1.96 Subtotal 6682 AIX; 57.62 IL95 1i3.7 14& ILli L_! 8A.4 24.U 15M 5.45 ;; 8.74 9.24 Bank loans 7.48 6.00 6.61 40.5S 33.42 33.88 50.37 40.08 40.31 40.00 44.28 44.21 38.08 39.98 39.91 Entarprian 25.70 42.84 35.77 39.94 52.79 S1.97 37.78 51.45 51.14 45.45 50.40 50.33 38.53 51.28 50.85 M M ID Xi - 71- ANNEX 6 Page 1 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Project Provinces: Historical Spark Subproject Approvals, Financing and Implementation 1. The Spark Program was initiated in 1985 in Jiangsu and 1986 in Shanghai and Jilin. Based on data provided by provincial governments, the Program had approved 685 subprojects for a total Y 475 million by mid-1989 in Jiangsu; 516 subprojects for a total Y 429 million by end-1989 in Shanghai; and 304 subprojects for a total Y 290 million by end-1989 in Jilin.l/ Programs in all three project areas increased significantly in 1988 in terms of total amounts by between 55? and 712. The Shanghai and Jilin programs declined in 1989 as a result of the overall credit and other constraints. While mid-year figures suggest a 1989 slowdown in Jiangsu, this is apparently due to delays in allocation of budgetary funds and approvals are expected to pick up in the second half of the year. 2. Provincial and lower level subprojects accounted for between 60% and 93? of the total volume of approvals during the period under review in the three provinces. Jiangsu Province had the largest percentage of national level subprojects (and smallest percentage of lower level subprojects), fol- lowed by Jilin. When broken down by enterprise ownership, the significant majority of approvals in each province, in terms of both number and amount, were for collective rather than state enterprises (due to apparent anomalies, data on the collective/state breakdown for Jilin are not presented in the table: however it is understood that collectives accounted for at least 77Z of subprojects and 63Z of financing volume). The sectoral allocation of approved subprojects has been increasingly concentrated in favor of industry, which accounted for 76Z to 852 of the volume of approvals in the three areas during the period under review. The average size of subprojects approved during the period ranged from Y 0.69 million in Jiangsu to Y 0.95 million in Jilin. In Jiangsu, the average size of subprojects sponsored by state enter- prises was larger than that of subprojects sponsored by collectives; the reverse was true in Shanghai. 11 Jilin statistics exclude subprojects approved at the county level. - 72 - ANNEX 6 Page 2 PROJECT PROVINCES: SPARK ENTERPRISE INVESTMENT FINANCING (1985-89) (2 by number of subprojects/Y million) Jiangsu /a Shanghai Jilin /c Number Amount Number Amount Number Amount 2 By Approval Level State 25 40 6 7 24/b 20/b Province 16 24 64 67 76/b 80/b County 59 36 30 26 n.a. n.a. Z By Ownership State 22/c 26/c 6 6 n.a. n.a. Collective 78/c 74/c 94 94 n.a. n.a. 2 By Sector Industry 83/d 76/c 92/b 80/b 79 85 Agriculture 17/d 24/c 8/b 20/b 21 15 Average size of subproject Jiangsu Shanghai Jilin (Y million) All 0.69 0.83 0.95 Industry O.65/d 0.84/b 1.03 Agriculture 0.501d 2.49/b /e 0.67 State enterprise 0.87/c 0.81 n.a. Collective 0.71/c 0.84 n.a. /a Through mid-1989. /b Through end-1987 only. /c Excludes county-level subprojects. /d 1988 through mid-1989 only. /e Average size biased upwards by exceptionally large subprojects in 1986. 3. Financing patterns in the three project areas indicated an average 92 to 182 in the form of government budgetary allocations; 37Z to 55Z in the form of bank loans and 342 to 49X in the form of enterprises' own funds. Compared to the pattern through 1988 for the nation as a whole, there was a higher budgetary input (18% and 102 respectively as compared to 92) in Jilin and Jiangsu;2/ a higher bank loan input (46Z, 432 and 42Z in Jiangsu, Jilin and Shanghai respectively as compared to 40Z); and a lower enterprise input (402, 44Z and 49Z in Jilin, Jiangsu and Shanghai respectively as compared to 51%) in all three project areas. In line with the national trend, all provinces have experienced a marked decline in the percentage of financing in the form of 2/ Results are biased by the omission of county-level projects from the statistics for the whole period in Jilin and for 1988 through mid-1989 in Jiangsu. Information on financirg patterns for Jilin are available only through 1987. ANNEX 6 Page 3 - 73 - budgetary contributions and an increase in the percentage of financing in the form of bank loans. 4. Bank financing in the three jurisdictions has come principally from ABC, and to a lesser extent ICBC. In Jiangsu, in 1988 and the first half of 1989 at the provincial and national levels, ABC accounted for 74Z and ICBC 26% of total bank financing. In Shanghai, of bank financing through 1987. 89? came from ABC, 4Z from ICBC and 7% from the Bank of Communications; more recent breakdowns for Shanghai are not yet available. In Jilin about 78% of bank financing through 1987 came from ABC and the balance from ICBC. 5. The three participating provinces have also submitted data on the results of past Spark subprojects. Jiangsu STC reported that, up to the end of 1987, 56 national and provincial Spark subprojects had been "accomplished" (63.7% of the total projects), with an incremental output value of Y 109.2 million, increase in tax payments of Y 17.4 million and US$10.3 million of foreign exchange earnings. Subsequent reporting indicates that, for 1988, Jiangsu completed 40 subprojects, with a total investment of Y 44.4 million, annual output value of Y 101.8 million and annual profits and taxes of Y 19.1 million; and for 1989, completed 35 subprojects involving investments of Y 30.1 million, annual output of Y 91.6 million and annual profits and taxes of Y 13.6 million. Of Shanghai's cumulative total of 516 subprojects approved over 1986-89, 187 had been completed as of end-1989. Production value was an estimated Y 667.7 million and profits Y 127.8 maillion. Jilin reported that, out of a cumulative 304 subprojects authorized over 1986-89, 258 had been put into production by end-1989, with estimated 1989 output value of Y 385.2 million and profits and taxes of Y 92.7 million. Of these, 85 had finished paying off their loans. -74 - ANNEX 7 Page 1 CHINA RURA' INDUSTRIAL TECHNOLOGY (SPARK) PROJECT National Policy Statement for the Spark Program 1/ Objectives and Policies of the Spark Program 1. The Spark Program is a long-term program of the Government of China which serves to promote the development of a rural commodity economy by the introduction of modern scientific and technological knowledge into rural areas. Spark aims to provide appropriate technology to small- and medium- scale rural enterprises, especially township and village enterprises, as well as to the agricultural and livestock sectors. The program encourages continu- ing upgrading of the science and technology available to the rural sector, with a view to promoting the rational development and adjustment of the indus- trial structure of the township and village economy. Among the objectives of the program are to achiev- optimal combination of key productive elements, to assist in the transition from extensive to intensive agricultural production, to support the development of production units of economic scale and to help provide training in modern tec'ology and management to large numbers of rural enterprise managers and workers, as well as to young farmers and rural entre- preneurs. Modes of Implementation 2. To achieve its overall objectives, the Spark program supports a vari- ety of different types of activity and subprojects. These may include, but not necessarily be limited to, the following: (a) Assistance, through mobilization of financial and technical support, for innovative subprojects to be undertaken by rural enterprises for upgrading production technology, improving product quality or intro- ducing new product lines; (b) In selected "Spark intensive areas', support for the planning and implementation of integrated development programs (e.g. combining production of raw materials with their processing irto finished goods), including mobilization of experts to prepare studies and plans, and subsequent support for ensuing investments; (c) Support, either direct or indirect, for training programs aimed at meeting priority training needs (in both managerial and technical areas) of rural enterprise personnel; (d) Development and implementation of systems to improve the delivery to rtural enterprises of information of a type relevant to their needs and in a form appropriate to the intended users, in areas irncluding technology, management and marketing; and 11 Adopted on March 25, 1990 by SST,. -5 _ ANNEX 7 Page 2 (e) Support for studies on matters relevant to rural enterprise develop- ment. Institutional Arrangements 3. Leadership in implementing the Spark program is provided by the State Science and Technology Commission (SSTC) and by the Science and Technology Commissions (STCs) at provincial and lower levels. Depending on the signifi- cance of the innovation involved and the support required, subprojects may be approved and supported at county, provincial or national level. The various Commissions have primary responsibility for proposing overall Spark policy guidelines to the government authorities at their respective levels, for screening potential Spark subprojects and for ensuring adequate supervision of program execution. At the same time, the effective implementation of the program also calls for coordination with other relevant agencies, including those responsible for planning and finance, environmental regulation and edu- cation, as well as with the various banks and other financial institutions active in providing enterprise finance in rural areas. Diffusion 4. The principles of the Spark program call for the small spark to spread into a prairie fire, i.e. foi ensuring that lessons learnt under the program are diffused to the maximum possible extent. To this end, Spark sub- project assistance will as a priority be concentrated on subprojects which introduce technology which is innovative at either the national or local level, and which possess high potential for replication: i.e. those sponsored by representative enterprises in subsectors of national or local importance. Every effort will be made through the information and training programs to prnmote the spread of successful experience. In addition, Spark will give priority to suppe'ting projects to develop and manufacture improved items or sets of equipment suitable for adoption by rural enterprises. Each level of Spack program organization will promote exchange of ideas at the next level below; thus SSTC w'll encourage, through conferences and other means, the diffusion of knowledge between different provinc:es, while each province will promote diffusion at subprovincial level. Key Poinits of Po'icy 5. In implementing the programs described above, the following key points of policy t 'uld be followed: (a) Sperk will encourage the development and adoption of t."hnology that embodies the most up-to-date knowledge but is also appropriate to the capabilities and conditions of rural enterprises; (b) The progrsm sixall be consistent with overall national and local eco- nomic development strategies; its formulation and implementation shall tak- account of actual local conditions and requirements; (c) The central task of the program is to promote economic development and support economically viable activities, taking account of both short-term conditions and long-term objectives; -76 - ANNEX 7 Page 3 (d) Spark activities will seek a rational integration of different elements in production and trade, including due attention to marketing, raw materials availability, finance, technology and both teuhnical and managerial manpower resources. The use of modern management methods will be stressed. Full attention will be paid to exploiting opportunities fcr integration between raw material production (including agricultural production) and processing, to market development (both internal and external), and to opportunities for linkage between rural enterprises and larger, urban enterprises (for example, through component supply or subcontracting arrangements); (e) To encourage optimal use of scarce financial resources, Spark subprojects undertaken by productive enterprises should make maximum use of self-raised funds and of loan funds (primarily provided by the banking system). The indiscriminate granting of subsidized funds to enterprises, financed from budgetary sources, should be avoided; (f) Support priority will be given to activities which receive technical assistance from scientific and technical organizations, including various forms of cooperative endeavor between such organizations and rural enterprises; (g) All activities supported by the Spark program should be fully consistent with all prevailing national and local regulations for environmental protection. Furthermore, Spark will give priority support to technology development activities which aim to assist in finiding ways to resolve or ameliorate existing environmental problems related to rural enterprises; (h) Spark training programs are intended to complement other existing training programs which serve the rural enterprise sector, and should avoid duplication. Spark training will therefore be targeted at priority areas of currently unmet needs, including requirements common to many rural enterprises (management, finance, widely needed technical skills) and training needs specific to enterprises implementing Spark subprojects. Training programs should be based on local assessments of priorities. Courses will usually he intensive and relatively short, and their content and design should be appropriate to the needs and level of the treinees; and (i) Suitable Spark subprojects may also be considered for other forms of recognition and assistance, in conformity with national policies for the promotion of innovation in science and technology. - 77 - ANNEX 8 Page 1 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Agreed Subproiect Eligibility Criteria and Requirem;ents A. Eligibility Criteria for Commercial Spark Subproiecta 1. The criteria enumerated below define the types of enterprises and subprojects eligible to be considered for Spark financing. They constitute initial screening criteria before a financial intezaediary determines that the investments are economically and financially viable and that the enterprise is creditworthy. 2. Enterprises which satisfy the following three criteria would be eli- gible: (a) Township and village enterprises (TVEs), county collectives, and cooperative arrangements between TVEs and any other type of enter- prise or entity (e.g., research institute or university) as long as the TVE has a controlling interest; (b) Existing enterprises which are well managed and operating effi- ciently, as well as promising new enterprises which are likely to be considered creditworthy by the financial intermediary; and 5C) Enterprises which have their own technological capability (in partic- ular, technological manpower) or maintain an ongoing formal working relationship with an institution (such as an advanced urban enter- prise, a research institute or a university) which has the requisite and relevant technical capability. 3. Subprojects which satisfy the following four criteria would be eligi- ble:l/ (a) Industrial subprojects (including those involving the processing of agricultural and animal products) which aim at producing marketable products; (b) Those whose site and scope are within the managerial and financial capacity of the enterprise; (c) Those which have a technology content beyond the standard investment, expansion and/or modernization project. Each should involve the application of an appropriate technology not commonly used in the province. The technology content should involve substantial technol- ogy upgrading, adaptation or development. The technology could be based on developments within or outside the enterprise (e.g., in a 1/ Among subprojects satisfying these criteria, potential replicability and demonstration effect should be considered in determining priorities. ANNEX 8 -78 - Page 2 research institute or universityJ or could involve the adaptation or improvement of imported or domestic technology; and (d) Subprojects which satisfy environmental, occupational safety, health and hygiene laws and standards in the country. B. Special Requirements for Financing Under the World Bank Group Supported Project (a) At least 75Z of Bank Group funds for each province would be onlent to subprojects managed by TVEs, i.e., no more than 252 of Bank Group funds would be onlent to county collectives.2/ (b) The maximum subloan(s) extended to any individual enterprise out of Bank Group funds would not exceed US$2.5 million equivalent. (c) Formal economic rate of return calculations would be required for subloans above $300,000. Financial and economic rates of return should be at least 122. C. Eligibility Criteria for Precommercial Subprojects 4. Spark precommercial industrial subprojects are those undertaking activities preceding full-scale commercialization of a product or process. Such subprojects include the range of activities involved in the development of new technology leading to but nct including full-scale commercialization of the product or process resulting from the development. Examples of eligible subprojects would include the building of a prototype or a pilot plant along with the test marketing of the product; the design and building of an innova- tive production line; applied research and development work to use more effec- tively the raw materials already used ir. production; all activities related to testing and raising the quality of a technology under development and related training of technical staff and workers; and adapting and improving imported technclogy. 5. In general, the activity should involve considerable development work and contribution by the enterprise and its technical partner as appropriate. The basic technology or research work could be imported or originate in a research institution or the enterprise itself; the remaining precommercial work should be carried out largely at the eligible enterprise. Environmental, health, hygiene and safety conditions must satisfy all applicable laws and standards in China. 6. Eligible enterprises include only those wiich satisfy the three cri- teria already agreed between SSTC and the Bank Grou;3 for industrial enter- prises. 7. The above constitute initial screening criteria before the financial intermediary, with appropriate advice on technical and marketing issues, detenmines that the subproject, assuming it is followed by full-scale commer- cialization, would be financially and economically viable. 2/ For Jilin Province, because of its relatively smaller percentage of TVEs, the percentage of TVEs would be reduced to 652 (i.e., not more than 35Z for county collectives). - 79 - ANNEX 9 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Risk Sharing Terms for Precommercial Loans 1. The experimental precommercial loan subcomponent will be implemented in Jiangsu province. The principles of the risk sharing terms were confirmed at negotiatiens. 2. Funds allocated to the subcomponent would be managed by the financial intermediaries (CIB, ABC), acting as agents for the provincial governments in return for fees. While the provincial government would bear the credit risk, the fees to the intermediaries would be in part related to the success of individual subprojects, thus giving the intermediary a stake in the effective management of the funds and selection of subprojects. The fees to the inter- mediary will be composed of three elements: (a) a fee of 0.751 of outstanding principal per annum (corresponding to the service charge due to the central government in respect of Bank Group funds); (b) a management fee of 12 of outstanding principal per annum to cover the administrative costs of the intermediary; and (c) a one-time "succesF fee" of 32 of total principal paya- ble to the intermediary (out of interest) in respect of those precommercial subprojects which result in successful adoption of the innovation on a commer- cial scale. 3. All precommercial subproject3 wiLl be expected to repay loan princi- pal in full. Payment of interest wil] be dependent upon the success or other- wise of the subproject. It was agreed at negotiations that, where subprojects result in successful commercialization, the investment enterprise will pay intereat at a rate exceeding commercial rates, and according to a formula agreed in advance (at the time of subloan approval by the financial intermedi- ary). Further, understandings were reached at negotiations thats (a) the interest to be paid on sccount of a "successful" subproject would exceed the equivalent prevailing commercial terms by not less than two percentage points; and (b) Jiangsu would establish a floating rate system, with the actual interest to be paid related to a suitable indicator of the financial rsturn on investment in the precommercial plus commercialization phase. It was further agreed that, in respect of foreign exchange risk, the same principles would apply as were applicable on the commercial credit. 4. It was recognized at negotiations that some further detailed work would be needed to convert the agreed principles above into a practical con- tract format. Among the key challenges for the managers of the experiment will be to devise and agree on an indicator or indicators of financial returns which will lend itself to reasonably objective monitoring. It may be neces- sary to show some flexibility and select different .ndicators most applicable to different subprojects. 5. In view of the above, an understanding was reached at negotiations that, before finalizing approval of the Airst precommercial subproject, Jiangsu would submit the proposed draft contract to the Bank for approval. CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Summary Project Cost - National Level Yuan US. Local Foreign Total Local Foreign Total --------------------------------------------------------------__------------__------------------------------------------ Training - SSTC _______________ Tec%nlcal Assistance 104,000 1,741,680 1,846,680 22,034 389,000 391,034 Training 300,000 67,968 387,968 83,559 14,400 77,969 Study on L.T. Training Improv 240,000 0 240,000 50,847 0 S0,847 Total Training 644,000 1,809,648 2,453,648 138,441 383,400 519,841 Technology Information - ISTIC Equipment 2,394,260 8,123,687 5,517,937 507,266 881,798 1,169,064 Technical Assistance 162,000 381,080 513,080 32,203 76,600 108,703 Training 134,000 101,952 235,962 28,390 21,600 49,990 Program Support 1,023,000 0 1,023,000 216,737 0 218,737 0 Total Tech. Information 3,703,250 3,686,719 7,289,969 784,687 759,898 1,544,48S Institutional Development MIS SLbccmpon*nt _______________ Eqs'ipment 0 382,320 382,320 0 81,000 81,000 Tech. Assist./ Training 0 879,680 679,680 0 144,000 144,000 Program Support 120,000 0 120,000 25,424 0 25,424 Subtotal 120,000 1,082,000 1,182,000 25,424 226,000 260,424 Technology Evaluation Subcomp. Technical Assistance 0 66,400 568,400 0 120,000 120,000 Progrm Support 30,000 0 30,000 8,368 0 6,358 Subtotae 30,000 588,400 596,400 6,866 120,000 128,358 Total Inst. Dov$t. 150,000 1,628,400 1,778,400 31,760 845,000 376,780 Total Bse Cost 4,497,260 7,024,787 11,522,017 952,807 1,488,28M 2,441,105 Contingencl es Physical 224,863 351,239 578,102 47,040 74,416 122,066 Price 759,328 1,448,49-. 2,207,822 20,213 88,039 108,262 m X Total ContinVncies 984,191 1,799,732 2,783,923 67,854 182,454 230,308 0 TOTAL PROJECT COST 5,481,441 9,824,499 14,305,940 1,020,861 1,650,762 2,671,413 CiINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Summary Project Cost - Jiangsu Province Yuan US$ Local Foreign Total Local Foreign Total Training Jiangsu STC Tachnical Assistance 0 424,800 424,800 0 90,000 90,000 Training 0 101,962 101,952 0 21,600 21,eoo Subtotal Jiangsu 0 528,762 528,752 0 111,800 111,800 Nanjing Training Base Civil Works 8,048,730 823,132 6,871,862 1,281,610 174,392 1,456,903 Equipment 1,323,404 1,265,577 2,578,981 280,382 268,012 546,394 Furniture 1,269,338 0 1,269,338 2e8,928 0 288,928 1 Technical Assistance 24,000 254,880 278,880 6,086 54,000 59,086 Training 104,000 203,904 307,904 22,034 43,200 86,234 Subtotal Nanjing 8,789,472 2,537,.493 11,306,965 1,857,939 537,604 2,395,643 Jiangyin Training Base Civil Works 2,389,180 322,408 2,691,588 501,945 68,307 570,252 Equipment 298,870 976,677 1,275,547 83,320 206,923 270,243 Furniture 1,035,276 0 1,035,276 219,338 0 219,338 Technical Assistance 12,000 254,s80 268,a80 2,542 54,000 58,542 Training 80,000 35,938 215,938 16,949 28,800 46,749 Subtotal Jiangyin 3,795,326 1,689,900 5,485,226 804,094 368,030 1,182,124 Total Training 12,564,798 4,754,145 17,318,943 2,682,033 1,007,234 3,689,288 Technology Information Equipment 4,878,000 4,057,878 8,936,878 1,033,476 869,720 1,893,195 Tec:hnical Assistance 72,000 39e,312 471,312 16,254 84,600 99,854 Tris;ning 648,000 87,9s8 71S,968 137,288 14,400 151,688 PFogram Support 1,437,500 0 1,437,600 304,E65 0 304,566 Total Tech. Information 7,036,600 4,525,168 11,560,s68 1,490,672 958,720 2,449,2s2 9r 24 0 Institutional Development _________________________ MIS Subcomponent __________________ Equipment 0 89,880 99,880 0 19,000 19,000 Technical Asait./Training 0 198,240 198,240 0 42,000 42,000 Program Support 90,000 0 90,000 19,068 0 19,068 Subtotal 90,000 287,920 377,920 19,068 61,000 80,068 Technology Evaluation Subcomp. _____________________________ Technical Assistance 0 141,600 141,600 0 30,000 30,000 Progrm Support 26,000 0 25,000 6,297 0 6,297 Subtotal 26,000 141,600 168,600 6,297 30,000 35,297 Financial Intermediary Trg. _________________________ Training 877,800 0 877,600 80,000 0 80,000 I Program Support 100,000 0 100,000 21,186 0 21,186 00 Subtotal 477,800 0 477,800 101,188 0 101,186 | Total Inst. Dev't. 692,600 429,620 1,022,120 125,661 91,000 218,661 Total Base Cost 20,192,898 9,708,823 29,901,721 4,278,168 2,058,954 6,336,110 Contingencies Physical 1,430,640 642,720 1,973,280 303,001 114,983 418,064 Price 3,886,743 2,280,743 8,147,488 150,114 161,464 301,688 Total Contingencies 6,317,283 2,803,463 8,120,748 463,195 288,437 719,632 TOTAL PROJECT COST 25,610,181 12,612,286 38,022,467 4,731,361 2,323,391 7,054,742 = = 0 3 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Summary Project Cost - Jilin Province Yuan US3 Local Foreign Total Local Foreign Total Training Jilin STC Technical Assistance 0 169,920 169,920 0 36,000 36,000 Training 0 67,968 67,968 0 14,400 14,400 Subtotal Jilin 0 287,888 237,888 0 50,400 50,400 Changchun Training Base Civil Works 5,185,017 702,874 5,867,891 1,094,283 148,914 1,243,197 Equipment 878,581 1,216,622 2,095,203 186,140 257,759 443,899 Furniture 900,240 0 900,240 190,729 0 190,729 Technical Assistance 72,000 254,880 326,880 15,264 54,000 89,254 1 Training 80s,80 203,904 284,704 17,119 43,200 80,319 co Subtotal Changchun 7,096,838 2,378,281 9,474.919 1,503,525 503,873 2,007,398 Total Training 7,096,838 2,816,189 9,712,807 1,503,525 554,273 2,057,798 Technology Information Equipment 1,732,400 3,714,840 5,447,040 387,034 787,000 1,154,034 Technical Assistance 36,000 361,080 397,080 7,627 78,600 84,127 Training e80,000 67,988 673,968 128,390 14,400 142,790 Program Support 1,864,400 0 1,864,400 395,000 0 395,000 Total Tech. Information 4,238,800 4,143,683 8,382,488 898,051 877,900 1,775,951 Institutional Development _________________________ MIS Subcomponent Equipment 0 578,200 578,200 0 122,600 122,500 Technical Assist./Training 0 198,240 198,240 0 42,000 42,000 Program Support 90,000 0 90,000 19,068 0 s9,068 Subtotal 90,000 776,440 s88,440 19,068 164,500 183,588 D l X Technology Evaluation Subcomp. Technical Assistance 0 141,600 141,600 0 80,000 30,000 Program Support 2S,000 0 26,000 5,297 0 5,297 Subtotal 25,000 141,800 168,600 6,297 30,000 86,297 Financial Intermediary Trg. __________________________ Training 141,800 0 141,600 30,000 0 30,000 Progrsm Support 30,000 0 30,000 6,356 0 8,356 Subtotal 171,600 0 171,600 86,388 0 38,368 Total Inst. Dev't. 286,800 918,040 1,204,640 60,720 194,500 256,220 Total Base Cost 11,622,038 7,677,897 19,299,935 2,462,29e 1,626,673 4,088,969 Cor.tingencies Physical 839,313 419,046 1,268,359 177,821 88,781 288,602 1 Price 2,180,105 1,696,287 3,856,372 76,492 109,048 184,540 co Total Contingencies 2,999,418 2,115,313 5,114,731 253,313 197,829 451,142 1 TOTAL PROJECT COST 14,621,456 9,793,210 24,414,686 2,716,609 1,824,502 4,640,111 m F3 : C D X- 0 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Summary Project Cost - Shanghai Municipality -------------------------------------------- --------------------------------__-------------------------------------------__-------------------------------__,-------- Yuan US$ Local Foreign Total Local Foreign Total _________________________________________________________________________________________________________________________ Tra ining Shanghai STC Technical Assistance 0 84,960 84,960 0 18,000 18,000 Training 0 33,984 33,984 0 7,200 7,200 Subtotal Shanghai 0 118,944 118,944 0 25,200 25,200 Chongming Island Training Center Civil Works 3,882,998 501,193 4,184,191 7o0,296 106,186 888,481 Equipment 2,381,962 2,013,434 4,39S,396 504,653 426,575 921,228 00 Furniture 1,485,396 0 1,486,398 314,703 0 314,703 Tochnical Assistance 100,000 264,880 364,880 21,188 S4,000 76,188 Training 133,200 135,938 289,138 28,220 28,800 57,020 Subtotal Chongming 7,783,558 2,906,443 10,688,999 1,649,058 815,560 2,284,818 Total Training 7,783,5668 3,024,387 10,807,943 1,849,058 840,780 2,289,818 Technology Information _______________________ Equipment 363,301 878,828 1,242,127 76,971 186,192 263,183 Technical Assistance 38,000 110,448 146,448 7,827 23,400 31,027 T-aining 280,000 87,968 347,988 59,322 14,400 73,722 Program Support 276,087 0 276,087 68,281 0 68,281 Total Tech. Information 9S4,388 1,067,242 2,011,630 202,201 223,992 428,193 Institutional Development MIS Subcomponent EquIpmnt 0 0 0 0 0 0 D I" Technical Assistance 0 0 0 0 0 0 > Program Support 0 0 0 0 0 0 Subtotal 0 0 0 0 0 0 Technology Evaluation Subcomp. Technical Assistance 0 94,400 94,400 0 20,000 20,000 Program Support 20,000 0 20,000 4,237 0 4,237 Subtotal 20,000 94,400 114,400 4,237 20,000 24,237 Financial Intermedlary Trg. Training 141,600 0 141,600 30,000 0 30,000 Program Support 30,000 0 30,000 6,365 0 8,386 Subtotal 171,800 0 171,600 38,368 0 38,368 Total Inst. Dev't. 191,600 94,400 286,000 40,S93 20,000 80,593 Total Base Cost 8,929,644 4,178,029 13,105,673 1,891,853 884,752 2,776,605 Contingencies Physical 630,627 233,882 864,489 133,60: 49,647 183,164 Price 1,918,8386 1,075,961 2,992,797 91,7S" 77,542 169,294 OD Total Contingencios 2,647,483 1,309,823 3,857,286 226,3S9 127,089 362,448 TOTAL PROJECT COST 11,477,007 5,486,852 18,962,859 2,117,211 1,011,841 3,129,052 OQ :r (D1H 0 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Sumasry of Total Project Cost Yuan uss Local Foreign Total Local Foreign Total Training Civil Works 17,265,926 2,349,807 19,615,532 3,658,035 497,798 4,165,833 Equipment 4,882,817 6,482,310 10,345,127 1,034,495 1,157,289 2,191,784 Furniture 4,690,250 0 4,690,260 993,897 0 993,697 Technical Assistance 312,000 3,440,880 3,752,880 SS,102 729,000 795,102 Training 898,000 951,562 1,649,552 147,881 201,600 349,481 Study on L.T. Training Improv 240,000 0 240,000 60,847 0 50,847 Total Training 28,088,992 12,204,349 40,293,341 6,951,068 2,586,687 8,536,725 Technology Information Equipment 9,387,951 11,776,031 21,142,982 1,984,736 2,494,710 4,479,445 4 Technical Assistance 296,000 1,231,920 1,527,920 62,712 261,000 323,712 Training 1,668,000 305,865 1,973,868 353,390 64,800 418,190 Program Support 4,699,987 0 4,599,987 974,674 0 974,574 Total Tech. Inform. 15,931,938 13,312,807 29,244,746 3,375,411 2,820,610 6,195,921 Institutional Development _________________________ MIS Subcomponent _________________ Equipment 0 1,050,200 1,050,200 0 222,500 222,500 Tech. Assist./ Training 0 1,076,160 1,076,160 0 228,000 22e 000 Progrom Support 300,000 0 300,000 83,559 0 63,559 Subtotal 300,000 2,128,38O 2,428,360 63,659 450,S00 514,059 Technology Evaluation Subcomp. Technical Assistance 0 944,000 944,000 0 200,000 200,000 I. 'd Program Support 100,000 0 100,000 21,186 0 21,186 lb CD 1- " Subtotal 100,000 944,000 1,044,000 21,186 200,000 221,188 ,. > U,- Finacial IZnrosdiery Trg. Training 60,00 0 660,800 140,000 0 140,000 Program Support 160,000 0 160,000 88,89W 0 33,18W Subtotal 820,800 0 820,800 178,898 0 178,896 Total Inst. D 't. 1,220,800 8,070,860 4,291,160 258,04 650,500 909,144 Total Base Co"t 46,241,730 28,687,510 78,629,248 9,586,112 6,056,677 16,641,789 Contingoncles Physical 8,126,348 1,646,867 4,872,210 662,149 327,726 989,876 Price 8,723,012 6,481,464 1S,20D4,476 387,571 428,083 763,664 Total Contingncl.s 11,848,355 8,028,381 19,87686 M,720 753,809 1,753,S29 00 TOTAL PROJECT COST 67,090,086 86,615,847 93,705,932 10,584,832 6,810,486 17,396,318 _= = c _ _ _ _ _ p ipiZ IaI CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Derivation of IBRO/IDA and JGF Financing ( uSS '000 ) National Jiangsu Jilin Shanghai (JCF) (IBRO/IDA) (IBRD/IDA) (IBRD/IDA) (1) Enterprise Modernization Compon6nt Comercial Credit Subcomponent 0.0 61,04S.0 23,475.0 18,780.0 Precomercial Credit Subcomponent 0.0 788.0 0.0 0.0 Subtotal 0.0 84,378.0 23,475.0 18,780.0 (2) Spark Training Component ________________________ Civil Works 0.0 718.5 687.7 496.9 Equipment 0.0 876.9 462.1 916.3 Technical Assistance 412.6 220.4 100.2 80.1 o Overseas Training 15.5 100.5 61.5 38. 10 Study on long-term training improvement 0.0 0.0 0.0 0.0 Subtotal 428.1 1,915.3 1,311.8 1,632.0 (3) Technology Information Component Equipment 736.6 956.9 87f.9 207.2 Technical Assistance 83.7 94.2 85.1 26.0 Overseas Training 24.0 18.2 16.2 16.2 Subtotal 844.3 1,087.3 977.2 249.4 (4) Institutional Development Component MIS Subcomponent Equipment 86.9 20.7 131.6 0.0 Technical Assistance/ Training 159.4 46.8 6.5 0.0 Subtotal 246.3 87.5 170.0 0.0 Technology Evaluation Subcomponent Technical ssistance 181.9 88.2 88.0 22.0 Financial Intermediary Training Training 0.0 88.7 0.0 31.0 Total Inst. Devt. 878.2 184.4 211.0 63.0 (6) Unallocated 49.4 1/ 0.0 0.0 165.8 2/ TOTAL 1,700.0 87,54S.0 25,975.0 20,780.0 === _= = 1/ Since JGF allocation2 .re made in yen terms, their dollar value is approximate as of early 1990 exchange rate. The small unallocated item shown has been tentatively split between technical assistance and equipment categories under the technology information component. 2/ Pending final agreement on the training laboratory equipment list, this sum has been tentatively allocated to training oquipment. If any surplus remains, the amount will be reallocated to the Enterprise Modernisation Component. I-.| ANNEX 12 - 91 - CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Projected Schedule of Disbursements Projected Cumulative Profile US$'000 US$'000 x % FY91 II 6.00 6.00 4.8 FY92 I 1.10 7.10 6.2 1.0 UI 5.00 12.10 10.6 FY93 I 13.70 25.80 22.6 18.0 It 17.70 43.50 38.1 FY94 I 17.60 61.10 53.5 50.0 U1 14.80 75.90 66.4 FY95 I 12.50 88.40 77.3 73.0 1I 10.30 98.70 86.4 FY96 I 10.10 108.80 95.2 90.0 II 5.50 114.30 100.0 100.0 la Standard disbursement profile for industrial credit projects in China. Notes Changes made to the standard disbursement profile reflect the ( ,-ration of the Special Accounts. ANNEX 13 - 92 - Page 1 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Jilin Province Economic Development Investment Corporation (JEDIC) The Institution 1. The Jilin Province Economic Development Investment Corporation (JEDIC) was established in January 1985, as a nonbank financial institution constituted under guidelines then newly prepared by the People's Bank of China (PBC) for the operation and management of such institutions in the country. JEDIC had its origin in the Jilin Province Finance Bureau, under which it had served as a department from its inception in the early 19609. In March 1988, JEDIC was formally approved by PBC as a nonbank finax.-I.al institution and came under PBC's direct supervisory responsibility. At the end of 1989, JEDIC had total assets of Y 1,449.4 million, of which the net long term loan portfolio was Y 708.2 million and equity investments were Y 197.8 million. 2. Although its financial resources have come mainly from the Jilin provincial budget, JEDIC is an independent financial institution operating under an arm's length relationship with the Jilin Provincial Government. JEDIC has the autonomy and independence selectively to approve or reject proj- ect proposals presented to it, and to bear the credit risks without imnediate recourse to the provincial and local level administrations. On the average, JEDIC selects for detailed review only 20Z of the projects presented to it, and approves only about two-thirds of those selected. JEDIC management is appointed by PBC upon recommendation by the Governor of Jilin Province. Although JEDIC comes under the administrative jurisdiction of the Jilin Prov- ince Finance Bureau, its operations are under the leadership, administration, coordination, supervision and examination of PBC. Organization, Staffing and Training 3. The JEDIC organization consists of the headquarters in Changchun, the capital of Jilin Province, and a network of 52 independent but closely affili- ated branch and subbranch offices in all the main cities, and prefectural and county seats. Each branch functions independently of the headquarters in terms of its resources, lending operations and staffing, but provides the headquarters with support for project management and supervision through a contractual relationship, for which a fee is charged to the project benefici- ary either directly or as part of the interest rate spread. The branches thus receive a substantial portion of their resources through management and admin- istration fees paid by project beneficiaries supplemented by allocations from the appropriate local budgets. The two largest branches have assets of between Y 300 and Y 500 million, and several medium-sized branches have assets of Y 100-150 million, while the smallest branches are of Y 7-10 million in size. Approximately 0.4 percentage points of the interest rate to the project beneficiaries is typically retained by the branches as their share of the total intermediation margin charged by JEDIC. ANNEX 13 - 93 - Page 2 4. The headquarters staff of JEDIC is organized into seven major units. Under the general manager, there are five deputy managers, one responsible for both the Financial Planning and the Spark Project Departments; one for the Economic Development Department and the Foreign Economic Relations and Infor- mation Department, one for the Technical Transformation Department, one for the Bonds Management Department and one (currently vacant) for the Administra- tive Services Department. Five of the Departments--the Spark Project Depart- ment, the Bonds Management Department, the Foreign Economic Relations and Information Department and the Administrative Services Department--were estab- lished in mid-1988 as part of a general reorganization preparing for further expanston in JEDIC's size and scope of activities. 5. At the end of 1989, JEDIC headquarters staff numbered 45, including eight staff and managers at senior professional level. Twenty-five staff have been recruited since April 1988. While the Jilin Provincial Government has approved an increase to 100 in JEDIC's personnel quota, JEDIC is conscious of the need to l ire competent staff and does not plan to increase its staff beyond 50 in 1990. JEDIC headquarters staff are mainly college graduates; many have extensive experience in project evaluation and supervision. There are 15 engineers among the professional staff, with the remainder all accoun- tants, economists and/or financial analysts. JEDIC also employs external technical consultants for specific project analyses to supplement ite own technical expertise. The Spark Project Department includes, in addition to the acting chief (an accountant who is concurrently the Deputy Manager in charge of the Department) (para. 7), three engineers, one accountant and two economists. The Spark Department's Chief and Deputy Chief recently resigned from the Corporation, but replacements are expected to be recruited by April 1990. An understanding towards this end was reached at negotiations. 6. The overall quality of JEDIC staff is good. During 1989, JEDIC orga- nized formal training programs for its staff and those of the branches. JEDIC management proposes to continue these efforts in 1990-93. At negotiations, JEDIC provided for Bank Group review a proposed future training program, and understandings were reached that JEDIC would implement the agreed program from its own resources. The program envisages six different training courses for each of the four years from 1990 to 1993 on project appraisal (one course per year), procurement (two courses per year), project management (two courses per year), disbursement and financial reporting (two courses per year), computer for project analysis (two courses per year) and English training. Proposed teaching staff would come from within JEDIC and a variety of other Chinese entities. 7. The principal functions of JEDIC's units and departments are as fol- l9ws: (a) Financial Planning Department: This Department, under the overall leadership of a Deputy Manager (who is a qualified accountant) and the day-to-day leadership of a full-time division chief, has the following functions: (i) preparing JEDIC's annual financial plan; ANNEX 13 94 Page 3 (ii) carrying out treasury functions for JEDIC, i.e., raising resources, managing and disbursing loan funds; (iii) conducting financial contract nrgotiations and approving and signing all loan contracts; (iv) taking part in the management of all investment and joint ven- ture projects and supervising their financial performance; (v) providing guarantees to joint venture projects; (vi) handling all types of account settlements; and (vii) providing the cost accounting and financial controi services for JEDIC. (b) Techni al Transformation Department: This Department, under the leade -ship of a Deputy Manager, (a trained economist), has the fol- lowing functions: (1) preparing sectoral investment plans covering primarily small scale enterprises and their technical transformation require- ments; (ii) selecting and appraising technical transformation projects; (iii) recommending projects for JEDIC approval; and (iv) carrying out project supervision and follow-up. (c) Economic Development Department: This Department, headed by a Deputy Manager, (a senior economist), is responsible for: 'i) investigating the economic situation of underdeveloped counties and making investment plans; (ii) selecting and appraising development projects in such backward areas; (iii) recommending projects for JEDIC approval; and (iv) carrying out project supervision and follow-up. (d) Spark Project Department: This Department comes under the overall leadership of one of JEDIC's Deputy Managers and has a full-time chief and deputy chief (positions vacant but to be filled shortly). It has or will have the following responsibilities: (i) serve as the liaison between the Jilin STC office and JEDIC; (ii) appraise and approve Spark projects, including those presented for funding under the Bank Group supported project; ANNEX 13 - 95 ~Page 4 (iii) supervise all projects funded under Spark, and provide periodic reports to the Bank Group. (e) Bonds Management Department: This Department, under the leadership of an accountant, is responsible for JEDIC's newly initiated activi- ties in stocks and bond trading. While the Department currently deals only in government bonds, it plans, as it gains experience, to become involved in non-government bonds and stocks. (f) Foreign Economic Relations and Information Department: This Depart- ment was responsible for the establishment in 1988 of a small JEDIC branch in Hong Kong. Key functions will be to provide JEDIC with international market information and to open up access to foreign borrowings, which JEDIC has yet to tap. (g) Administrative Services Department: This Department has taken over some of the administrative functions previously undertaken by the Financial Planning Department. Policiea 8. JEDIC recently adopted a Policy Statement (Attachment 1), which was developed in consultation with the Bank Group. As articulated in the State- ment, JEDIC policies permit the following types of loans: (a) technology transformation loans for renewing equipment, carrying out technological transformation and importing technology; (b) economic development loans for enterprises in backward areas; (c) export promotion loans to support projects and entities in entering or expanding production destined for export; and (d) new product development loans to support the spread and the applica- tion of new technology. The Policy Statement also enunciates policies covering maximum exposure to individual enterprises, and minimum equity contribution (10-3 ,') on the part of project sponsors. With regard to JEDIC's own financial policies, the Pol- icy Statement confirms JEDIC's commitment to seek to protect itself against foreign exchange risk, to maintain provisions against loan loss, to ensure that the spread on its operations is adequate and to maintain an appropriate match between the maturities of its assets and liabilities. JEDIC would also maintain a debt to equity ratio of no more than 3:1. The Policy Statement notes that JEDIC will provide financial assistance only to projects which are viable in all respects; at negotiations understandings were reached that if JEDIC is called upon to provide assistance to projects which do not conform to its criteria, this would be provided at no risk to JEDIC under a managed fund arrangement with the Province or with provincial government guarantee. 9. JEDIC's structure of interest rates and repayment terms at end 1989 was us shown below. Standard rates are in conformity with those established by PBC; special rates have been established for programs funded from budgetary resources/equity. ANNEX 13 -96 - Page 5 Type of loan Loan terms interest rate (per annum) Technical transformation 1 year 11.34 >1 < 3 years 12.78 >3 < 5 years 14.40 >5 years 19.26 Economic Development & Export All terms 7.02 New product development All terms 7.02 Loans financed from bond issues All terms 17.50 Working capital loans 1-3 months 11.34 3-6 months 14.42 Notes Loan interest penalty amounts to 20Z of above interest rates in case of repayment delays. 10. In 1989, JEDIC began extending a significant amount of short term working capital loans in response to the tight credit situation resulting from ceilings imposed on commercial banks. These loans were directed mainly to enterprises to which JEDIC had provided long term loans (although other enter- prises are also eligible) and which required adequate working capital funds to enable them to meet their production schedules. At the Bank Group's request, JEDIC prepared a policy statement covering this type of lending which speci- fies the purposes of the loans, criteria for evaluation of loan requests and loan terms and conditions. Procedures 11. JEDIC project selection, appraisal and approval procedures are as follows: (a) Branches make a preliminary "selection" of projects from lists approved by the appropriate level of provincial, prefectural, city or county planning bureaus. Headquarters confirms the selections and prepares a preliminary list for further investigation. These selec- tions are carried out by first examining the project proposals in relation to the JEDIC loan policies and criteria. (b) Feasibility studies are carried out by the enterprises and e-ither provincial or (for large projects) national design institutes. (c) Project appraisal is then assigned to a project team, which is responsible for completion of all further tasks in the project cycle, through loan contract negotiation to project implementation and com- pletion; the team is composed of staff from JEDIC headquarters and from the branches, the latter being mainly oriented to the ongoing supervision of project implementation. Small projects (i.e., those with investments of below Y 10 million), may have up to three staff ANNEX 13 - 97 - Page 6 on the team, while larger projects have between five and six persons on the team. Appraisal is carried out using the formats and method- ologies in the CIB Appraisal Manual, prepared in consultation with the Bank Group. Use is also made of the State Planning Commission (SPC) Economic Appraisal Manual, which includes shadow prices and conversion factors applicable to economic analysis of projects in China. Financial sensitivity analysis is carried out using the norms in the CIB manual. Key financial ratios, i.e., profit/sales, inven- tory turnover ratio and long term debt/fixed capital are checked on a before and after project basis; the first ratio should be over 15Z, the second should be greater than three, and the third should be less than 20Z for a sound technical transformation project. Raw material consumption and raw material price sensitivities are also verified. For projects below Y 1 million, only the financial rate of return is computed. (d) The recommendations of the Project Team are then examined by the deputy managers and the gener&l manager. The deputy managers are responsible for loans below Y 1 million, while loan approvals above this amount are the joint responsibility of the management team. (e) Loan contracts are signed in accordance with the financial plan for the loan; agreements are also signed covering the responsibilities of JEDIC branches with regard to loan supervision and project implemen- tation. (f) The Project Team is responsible for the supervision of the project during all phases of implementation. In cases where the loan is made through a JEDIC branch, the branch takes responsibility for providing periodic financial reports and for technical data on project imple- mentation. Procurement procedures permit the project entity to use technical catalogues for procurement of standard equipment and parts and supplies; for specialized equipment, quotations from at least three manufacturers are required for JEDIC approval. JEDIC also uses the services of design institutes to verify price quotations, before approval, (g) The Financial Planning Department keeps track of loan disbursements and repayment schedules, and issues appropriate remiiiders prior to maturities falling due. The Project Team maintains client contact to ensure repayment and to alvise on possible rescheduling of maturities in line with projected project implementation progress and financial performance of the borrowing entity. JEDIC disburses against land purchase for new projects, the codt of the preliminary feasibility study (at 2.5Z of project cost), purchase of equipment, civil con- struction (not to exceed 30Z of total project coFt for technical transformation projects) and training. A disbursement plan is drawn up and monitored during project implementation. The procedures applicable for Spark project subloans will be modified as appropriate from JEDIC's normal procedures as described above inter alia to conform to Bank Group guidelines on procureirent and disbursement. ANNEX 13 - 98 - Page 7 Operations and Portfolio 12. In the past five years of operations as an independent financial institution (and including the inherited portfolio of its predecessor agency operating within the Jilin Province Finance Bureau), JEDIC has financed over 1,120 projects for a total amount of nearly Y 1,586 millicn in medium- and long-term loans. Of these, about 750 projects (or some 66Z by number) for a total amount of Y 1,250 million (or 79? of the total by volume) have been in four main industry sectors: chemicals (35Z of amount), light industry (192), machinery and parts (15X), and metallurgical industries (10Z). About 15? of loan approvals have been in three other sectors: building materials, electron- ics and pharmaceuticals, each with about 5Z. Over 722 of loans approved were for amounts below Y 1 million; however, these loans amounted to only 172 of the portfolio value. Large loans, i.e, over Y 4 million, amounted to over 51? of the portfolio, although they represented only 5? of the loans approved. The remaining portfolio (i.e. 32Z) comprised medium-sized loans, i.e., those between Y 1 and 4 million. About 50? of JEDIC loans are for terms of between 3-4 years, and most of the remainder for terms of between one and three years. In terms of its total loan approvals and portfolio outstanding, JEDIC is the principal institution for provision of term financing for small and medium- scale industry in Jilin province (far ahead of CIB). To date, JEDIC's portfo- lio has been denominated entirely in renminbi (in contrast to CIB's portfolio, which is largely in foreign exchange). With the approval by PBC and the State Administration for Exchange Control, JEDIC has now been authorized to carry out business in foreign exchange as wells the proposed involvement in the Spark project will be the first foreign exchange intermediation operation for JEDIC. Financial Performance and Condition 13. At the end of 1989, about 11% of JEDIC's long term portfolio had arrears in repayment of principal, of which about 70? were over 12 months old. About 51 companies were in arrears, and ten loans represented 55? of the total arrears over 12 months. JEDIC confirms that the enterprises concerned in most (ases have been current on their interest payments. The principal causes of arrears have been: project completion delays, arising from longer construction and procurement time than originally envisaged; changed market conditions, leading to inability to achieve production and sales targets; and operating losses arising from price increases of inputs, raw materials, energy, trans- portation, etc. JEDIC now estimates that about 2-3? of loans approved may eventually have to be written down and guarantees invoked. JEDIC will increase provisions in line with existing regulations. However, JEDIC mana- gers recognize that this may not provide sufficient coverage of potential portfolio losses, particularly in view of the increase in the value of the portfolio in arrears at the end of 1989, partly reflecting current economic conditions. At present, there are no precedents in China for writing off bad debts and charging such write-offs to bad debt reserves; JEDIC will continue to maintain annual provisions to this end. External audit of JEDIC's past performance does not fully meet the standard requirements of the Bank Group. Accordingly, JEDIC has agreed that, commencing with the 1989 audit report, improved coverage would involve verification of the main assets, liabilities and capital accounts, including reconciliation of the balances in these ANNEX 13 - 99 - Page 8 accounts with the main borrowers and lenders, and complete assessment of port- folio quality. At negotiations, understandings were reached that JELIC would not seek to withdraw funds under the project until after the audit of its 1989 accounts had been submitted to the Bank Group and found satisfactory. Under- standings were also reached that JEDIC, and as appropriate the Jilin Provin- cial Government, in consultation with the Bank Group, would take prompt action to correct any deficiencies revealed by the audit. 14, JEDIC's net income has increased rapidly since 1985 (Attachment 2, Table 3). Dividend and other income, which amounted to between 45 and 88Z of gross revenues in 1986-88 declined in 1989 to only about 172 of gross revenues reflecting mainly the higher interest rates effective as of early 1989 and also sharply lower dividends due to the d'fficult economic situation in China. Interest expenses have been the main item of expenses, with administrative costs only a small fraction of the total. Net income in the first five years has not been subject to income tax, as JEDIC has enjoyed a five-year tax holi- day. JEDIC has retained its net profit. The primary source of JEDIC funds has been the provincial government; in addition to transferring the loan port- folio of its predecessor agency to JEDIC's books as equity, Jilin Province has provided about Y 515 million over the past five years, so that the total paid- in capital on JEDIC's books now stands at Y 918 million, and allowil JEDIC to maintain a relatively low overall cost of its resources. The other main source of JEDIC funds has been annual bond issues, which have raised Y 165 million in the five year period. In addition to these two sources, JEDIC also obtained about Y 269 million as a revolving credit line from the provincial government in 1989 to develop an active short term portfolio of working capi- tal loans. As a result of the nearly Y 1,570 million of total resources available to JEDIC from the above three sources, at the end of 1989 JEDIC's resource position showed Y 225 million available for new approvals. At pres- ent, JEDIC policy is to charge substantially higher interest on funds derived from domestic borrowings, and to blend funds derived from the provincial allo- cations to lower the cost to borrowers in backward areas and for development of new products. JEDIC's continued ability to provide such special rates will diminish over time. At negotiations, understandings were reached that JEDIC would gradually reduce the share of its lending provided at subsidized rates, reduce the extent of subsidization involved by increasing the interest rate on such lending closer to market levels and maintain an adequate spread on all such lending. Forecast Operations and Financial Performance 15. JEDIC's forecast operations and financial projections are detailed in the attached tables (Attachment 2). The levels of forecast approvals are based on projects that, in JEDIC's view, have entered the provincial selection and approval cycle. For the Spark program, approval levels are based on iden- tified subprojects that are likely to meet both Spark program and JEDIC credit criteria. During the forecast period through 1994, about 342 of JEDIC's external funds are assumed to come from provincial government equity injec- tions and the balance from borrowings (the proposed Bank Group loan/credit for Spark, annual bond issues as well as short term borrowings from the provincial government). The proportion of funding from borrowings would be significantly higher than in JEDIC's early years. Loan collections will provide JEDIC with continuing recycling of its equity resources, as well as of its borrowings - 100 - ANNEX 13 Page 9 under Spark, because the repayment cycle for the latter source will be sub- stantially longer than that JEDIC will obtain from its subborrowers. The forecast resource position is satisfactory. 16. Projected financial performance is affected by two factors. First, JEDIC will increase its baa debt provisions in line with existing regulations, which permit an annual allocation of 0.6X of the previous year's outstanding portfolio. Second, the increase in the share of new funding coming in the form of borrowings will result in an increase in the average cost of loanable funds, which nearly doubles from 1.0? in 1989 to 2.2? in 1994. The average spread remains negative because of the concessional element in JEDIC's loans to backward areas and for new product development, which the projections con- servatively assume will maintain their current share of JEDIC's total portfo- lio. The projections indicate profits after tax declining from 7.4Z of aver- age total assets in 1989 to 3.1 in 1990 and between 2.5Z and 2.7Z in subse- quent years. The large decline in profitability after 1989 stems largely from the expiration of JEDIC's five-year tax holiday and also the increase in the cost of its loanable funds. A sensitivity analysis of JEDIC's financial per- formance shows that should JEDIC apply higher p;.visions of around 2? (as compared to 0.6Z) of the previous year's outstariding portfolio, and build up bad debt reserves of around 92 of the portfolio by end 1994, JEDIC's profita- bility as a share of average total assets would decline somewhat to 2.7Z in 1990 and between 2.1? and 2.32 thereafter. 17. At negotiations assurances were obtained that the spread on borrow- ings from the Bank Group will not be less than 2.0, of which JEDIC would retain a minimum 702, passing not more than 302 to its branches. This inter- mediation margin on the proposed Bank Group resources for the Spark project is projected to be sufficient to cover JEDIC's incremental administrative costs, provision for risk and a reasonable profit margin and will be subject to peri- odic review with the Bank Group. Commitment charges would be passed on sepa- rately to subborrowers. ANNEX 13 - 101 Attachment 1 Page 1 CHINA RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Jilin Economic Development Investment Corporation Policy Statement 1/ Introduction 1. The Jilin Economic Development and Investment Corporation (JEDIC), established in 1985, is a nonbank financial institution under the administra- tive jurisdiction of the Jilin Bureau of Finance and under the operational supervision of the People's Bank of China (PBC). JEDIC is an independent accounting and management unit and is responsible for its own profits and losses. The Corporation is under the responsibility of the chief manager, and major policy decisions are determined by the chief manager office meetit.g. Objectives 2. Constituted under the Interim Regulations on Bank Management of the People's Republic of China, the Corporation's objectives are to further the development of the Jilin economy by developing financial activities, support- ing technical restructuring of industry and industrial technology innovation, developing energy, transport and tertiary production, supporting the ecoromic development of backward areas, supporting the development of new and export products and promoting technical progress and econortiic cooperation. Towards this end, the Corporation shall mobilize financial resources for allocation to deserving undertakings. The Corporation's activities shall be in accordance with its charter and with the development programs and priorities of the Jilin Provincial Government. Scope of Operations 3. The Corporation will carry out its operations in accordance with sound management and banking principles and practices. It will support the modernization of existing enterprises and the construction of new projects in the province through the provision of financial assistance, and will endeavor to render management and technical assistance to its clients if needed. JEDIC's local currency operations will include finaa.cial assistance in the form of term loans, equity investments, financial leasing operatians and guar- antees. It may also hold and issue negotiable securities. The Corporation may also undertake the following foreign exchange operationst (i) domestic and foreign currenc) trust accounts; (ii) domestic and foreign exchange bor- rowing; (iII) handling of onlending operations for the World Bank Group- supported Spark Project; (iv) domestic foreign exchange trust loans; (v) domestic foreign exchange loans; (vi) domestic foreign exchange and own investment; and (v) foreign exchunge examination and advisory services. In 1/ Adopted by JEDIC on March 27, 1990. - 102 - ANNEX 13 Attachment 1 Page 2 addition, the Corporation may undertake such other operations approved by the People's Bank of China and the State Foreign Exchange Administration. Selection of Projects and Eligible Enterprises 4. JEDIC will make investment decisions only on the basis of sound investment criteria and standards, and will provide financial assistance only to those projects which are financially and economically sound and technically feasible. Special attention will be given to the managerial and technical capability to implement the project being financed. Enterprises assisted shall be in sound financial condition and shall not be in default on any out- standing financial obligations. Projects undertaken shall conform to existing environmental, health and safety standards and regulations. 5. JEDIC's loans and inzestments will include the following: (a) the technical transformation loan for renewing equipment, carrying out technological transformation, and importing technology; (b) the economic development loan for enterprises in backward areas as well as for projects of comprehensive development; (c) the new product development loan to support the spread and the appli- cation of new technology; and (d) the export promotion loan to support enterprises in entering or expanding production destined for export. 6. In evaluating the suitability of a project for financing, JEDIC will conduct a comprehensive appraisal. Criteria for providing financial assis- tance shall include a minimum financial and economic rate of return of 12% and satisfactory financial ratios, including profit to sales, inventory turnover and long term debt to fixed capital ratios. Sensitivity analyses shall be conducted to evaluate the ability of the project and enterprises to withstand unanticipated changes in such factors as sales prices and cost of inputs. Lending and Investment Policies 7. JEDIC shall normally be guided by the following policies for its lending, investment and guarantee operations: (a) JEDIC shall not normally invest more than 10% of its net worth in the share capital of any enterprise; (b) JEDIC's total aggregate investments in share capital of enterprises shall at no time exceed 30% of JEDIC's net worth; (c) JEDIC's total financial commitment (equity, loans, guarantees) in any single enterprise shall normally not exceed 20% of JEDIC's net worth; (d) JEDIC shall normally require an equity contribution of 10-30% (the latter in the case of the World Bank Spark Pr-ject) from the project ANNEX 13 - 103 - Attachment 1 Page 3 sponsor for each of the projects it finances, and, accordingly, JEDIC shall normally not finance more than 70? of the total capital cost of a project. In addition, JEDIC shall ensure that the enterprises it finances have satisfactory debt to equity ratios; and (e) JEDIC shall normally not take a controlling interest in the share capital of an enterprise in which it invests, and ownership shall be limited to a maximum 49? of the share capital of the enterprise. Financial Policies 8. In order to undertake its financial assistance operations, JEDIC snaill utilize its own funds, allocations provided by the provincial govern- ment, bond issues and other borrowings in foreign and domestic currency. In mohilizing and allocating its resources, JEDIC shall endeavor to maintain a satisfactory match between the maturities of its liabilities and those of its assets. JEDIC's loan interest charges, fees and commissions shall be in ccordance with those rates prescribed by the People's Bank of China for domestic currency loans. However, special rates may be charged on budgetary allocations provided for select specified purposes. JEDIC shall ensure, through continual review, that the spread on the fund used for its operations is in keeping with sound financial practices. ln the event a loan is used for purposes other than that for which it was granted, a fine will be imposed equivalent to 50Z of the original interest charge. Overdue loans shall incur penalty rates of 20? of the original loan rate. JEDIC shall seek to protect itself against the exchange risks of foreign borrowings. Taking into account the size and quality of its portfolio, JEDIC shall make adequate provisions against potential losses (doubtful loans and investments) and build up reserves as required by government regulations and as considered necessary by management to levels consistent with prudent financial practices. JEDIC shall supervise its loans, investments and guarantees to protect its stake in proj- ect ventures and to enable it to assist its client to the maximum extent pos- sible. The Corporation's financial policy will aim at maintaining the value of its capital and at managing its funds in such a manner to permit it, at all times, to honor its obligations on time and to achieve a profit margin that enables it to cover its operation costs and build up adequate reserves. 9. JEDIC's debt (including guarantees) shall not at any time exceed three times its equity (unimpaired paid-up capital plus retained earnings and reserves). Management and Organization 10. To build up and strengthen its own management and staff, as well as to assist clients in the formulation and execution of their projects, JEDIC shall maintain an effective organization and an adequate staff, and develop training programs to ensure that the necessary professional competencies are available within the institution to undertake the operational work in an effi- cient and effective manner. ANNEX 18 - 104 - Attachmnt 2 Tmble I CHINA RURAL INDUSTRIAL TECNOLOOY (SPARit) PROJECT Jilin Econoeic Dovelopment Investmnt Corporatlon (JEDIC) Actuol on4 Forecast Approalso Comitments Disbursa_nts and ReEayments (In Y million) Actual Estimated Forecost Ive5 1938 1937 19W8 --o1i9 1990 1991 1992 1998 1994 ApprovaIe '7iiIljn currency (US$ millIon) - - 12.1 10.4 - 0.7 2.8 Foreign currency (Y equivalent) - - - - - 67.1 49.1 0.0 8.8 10.9 Local counterport (Spark Project) - - - - - 22.8 19.6 0.0 1.8 4.8 Other local (long term) 76.0 468.2 446.7 849.0 247.4 864.0 815.5 261.2 461.8 845.4 Other local (short term) - - - - 268.9 268.9 286.9 268.9 268.9 266.9 Equity investments 90.1 - 5.6 69.2 45.6 60.0 66.0 55.0 65.0 66.0 Total Approvals 166.0 408.2 461.5 406.2 56l.8 782.6 707.9 676.1 700.8 664.6 Comi tmnts Foroign currency (USS million) - - - 0.0 0.0 7.8 11.1 4.2 0.4 1.7 Forolgn currency (Y equivalent) - - - 0.0 0.0 34.8 62.8 19.6 2.0 7.8 Local countorpart (Spark Project) - * - - 0.0 0.0 22.6 19.0 0.0 1.8 4.8 Other local (long term) 76.0 468.2 445.7 849.0 247.4 884.0 816.8 261.2 461.8 846.4 Other local (ahort term) - - - - 268.9 268.9 268.9 268.9 268.9 268.9 Ef!ulty Investments 90.1 0.0 6.8 69.2 45.6 60.0 66.0 66.0 56.0 66.0 Total Comitents 16.0 468.2 451.5 400.2 661.8 760.0 711.1 694.7 779.0 091.6 Di sbursments Foreign currer._y (US$ million) - - - 0.0 0.0 1.1 9.9 8.9 2.6 1.4 Foreign currency (Y equivalent) - - - 0.0 0.0 5.1 46.8 42.1 12.4 6.4 of which disbursed as FC loans - - - 0.0 0.0 8.6 82.8 29.6 8.7 dlabursed *o Y loons - - - 0.0 0.0 1.5 14.0 12.6 8.7 Locol counterpart (Spork Proj)et) - - - 0.0 40.0 0.0 l8.7 19.8 6.9 0.8 Other local (long term) 71.8 42rt.7 424.2 846.2 271.4 818.8 297.6 277.2 893.1 867.8 Other local (short term) - - - - 268.9 268.9 260.9 268.9 268.9 268.9 Equity Investments 67.2 24.7 8.6 69.2 45.5 - 66.0 55.0 66.0 55.0 Total Disbursements 189.1 445.4 427.7 405.4 681.8 692.8 681.9 66o.0 741.8 688.4 Ropoyentu .oTrgln curroncy (USM million) - - - - - - 0.1 0.9 2.1 8.4 Forolon curroney (Y equlvlent) - - - - - - 0.6 4.4 9.9 16.9 of whleh repaid as FC - - - - - - 0.5 8.1 6.9 11.1 repaid as Y - - - - - - 0.2 1.8 8.0 4.8 Local counterpart (Spark Proj et) - - - - - - 6.8 4.7 7.7 11.8 Other local (long tem) - 68.2 128.9 220.6 199.0 178.7 182.8 208.6 226.9 242.9 Other local (short term) - - - - - 208.9 268.9 268.9 268.9 268.9 Equity investment. - - - 2.8 - - - - - - Total Repsyments 0.0 68.2 128.9 222.9 199.0 447.6 461.1 481.6 512.6 659.5 Not Loan and Investment Portfolio Fo-FiTr currency (WUi-ltlThn 0.0 0.0 0.0 0.0 0.0 1.1 10.9 18.8 19.4 17.4 Foreign currency (Y equivalent) 0.0 0.0 0.0 0.0 0.0 6.1 61.8 88.9 91.4 81.9 of which designated as FC 0.0 0.0 0.0 0.0 0.0 8.6 86.9 62.8 64.0 57.8 deslgnoted as Y 0.0 0.0 0.0 0.0 0.0 1.5 16.4 26.7 27.4 24.6 Local counterpart (Spark Project) 0.0 0.0 0.0 0.0 46.0 46.0 68.9 69.0 88.2 67.2 Other local (long term) 71.8 429.8 724.6 850.2 922.0 1,062.? 1,177.4 1,261.0 1,428.2 1,587.6 Other locol (short term) 0.0 0.0 0.0 0.0 268.9 268.9 260.9 268.9 268.9 268.9 Equlty Investments 67.2 91.9 93.4 152.8 197.8 197.8 262.8 807.9 862.8 417.8 Total Loon and Investment -ort0olio 189.1 521.0 820.1 1,002.6 1,485.4 1,585.7 1656.6 2,074.6 2,805.9 2,445.8 CHIM RURAL DIDUSTRIAL TECHOLOGY (SPARK) PROJECT Jilin Economic Devolose et Invostmnt Corporatlon (JEDIC) Actual and Forecost Reoure Position (Y ElIion) Actual Esti-mted Forecast 19i6 1986 1967 1963 TiN 1990 1991 1992 1993 1994 Resources Shore capital and retained oarnings 97.5 516.6 742.2 901.8 1,187.9 1,276.2 1,414.4 1,559.3 1,708.6 1,389.4 Borrowings World Bank Group - - - - - 106.2 106.2 106.2 106.2 106.2 Domestic bond lss.u 45.2 115.2 116.0 105.2 165.2 215.2 265.2 J1S.2 866.2 41S.2 Other 7.7 27.8 80.4 127.8 837.4 262.4 262.4 262.4 812.4 262.4 Total Resure 1S0.4 469.8 M.6 1.194.3 18399 1.S2.0 2.048.2 2.243.6 2.492.4 2.e4s.2 Uses tng-term loans outstanding 71.6 429.8 724.6 860.2 966.6 1,118.8 1,232.6 1,409.0 1,562.8 1,676.6 Short-tern loan portfolio 0.0 0.0 0.0 0.0 268.9 266.9 268.9 266.9 266.9 266.9 n Equity investments 67.2 91.9 95.4 162.8 197.6 197.8 252.8 807.6 862.8 417.6 "at change In working capital 11.8 117.9 (52.2) (80-9) (27.0) (9.8) 86.9 24.1 0.2 (26.9) Total Uss 150.4 689.2 767.9 971.7 1.406.4 1.671.3 1.641.S 2,009.t 2.214.7 2.137.4 Resources Avallable for Disbursement 0.0 20.6 120.7 222.8 281.5 290.7 200.9 288.6 277.8 806.7 Lesw: Undisbursad comitments 26.9 49.6 78.5 76.8 6.8 178.6 202.7 184.5 172.2 165.8 Reources Available for Comeitments (26.9) (29.2) 47.2 146.8 225.2 117.8 4.2 99.8 106.4 140.4 Les: U_com itted approvals (0-0) (0-0) (0.0) (0.0) (0.0) 22.0 19.6 (0.0) 1.8 4.S Rseourese Availablo for Nee Approval* (20.9) (29.2) 47.2 146.8 225.2 94.5 (15.4) 99.8 104.1 186.1 Ia ft 3.. 04DM RURAL _ USSRIAL TECHNOLOGY (SPARIO PROJECT Jilin Economic Dowelom_nt Iavestaent Corporation (JEDIC) Actual and For es Income statement cr mililon) Actual Estimated Fe.reca. 19o 196 19M ---9-T 6 EI 1990 1991 Fe92 19 94 Income !IrWOOt, income from Ion Local currecy 0.2 8.7 34.5 31.8 u9.0 125.6 18#.8 149.1 161.5 178.3 Foreigo currency 0.0 0.0 0.0 0.0 0.0 1.6 1.4 8.4 4.8 4.1 Subtotal 0.8 S .7 84.5 40.1 96.0 127.2 1309. 152.5 166.0 176.1 Interest income from deposits Local currency 0.4 0.1 1.6 2.5 2.0 0.? 0.7 0.7 0.7 0.7 7 Foreign currency 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 o Subtotal 0.4 0.1 1.6 2.5 2.0 0.7 0.7 0.7 0.7 0.7 OtA. Incomo 0.0 2n.2 83.4 83.7 20.0 20.0 20.0 80.0 80.0 80.0 Total I noe o0.7 82.0 09.1 74.5 117.0 147.9 160.5 19#8.2 196.5 206.3 Es_on Plmilexpenses Local currs"n interet 0.6 16.0 14.7 12.2 18.0 24.6 4S.9 41.4 42.3 45.2 Forelip carsenc interest 0.0 0.0 0.0 0.0 0.0 0.1 0.7 2.6 5.0 5.3 Foreign curreny *ee_ 0.0 0.0 0.0 0.0 0.0 0.S 0.1 0.0 0.0 0.0 Subbotol 0.6 16.9 14.7 12.2 18.0 25.0 44.8 44.0 47.8 51.0 A lznstatl,e & other expense 0.1 0.1 0.2 0.4 0.6 1.0 1.0 1.0 1.0 1.0 Provision for doubtful acceosat 0.0 0.0 0.0 0.0 5.1 7.4 6.8 9.0 9.5 10.6 Tot al Expenses 0.7 17.0 14.9 12.6 10.7 88.5 54.0 34.0 57.9 62.6 Ircom _Bfore Tax 0.0 15.0 54.6 61.9 911. 114.4 106.4 129.1 12.7 146.2 -3, Taxes other thea Income tax 0.0 0.0 0.0 0.0 5.8 7.0 7.7 6.8 9.1 9.7 Not Income for Tax 0.0 15.0 54.6 61.9 93.0 107.6 26.3 120.0 129.6 186.4 t X Inceo, tax 0.0 0.0 0.0 0.0 0.0 59.1 54.8 66.4 71.3 8 7.0 Not Income 0.0 15.0 64.6 61.9 93.0 46.4 44.4 54.4 5.8 61.4 OCINA RURAL IDOUSTRIAL TECHNOLOGY (SPARK) PROJECT Jilin Econoeic leDloen nt Investment Corporation (JEDIC) Actual and Forecast Statment of Source and Apwlicstlon of Funds (" aln ion) Actual Estimated Forecast 1965 19E6 1967 16 1990 1991 im 1993 199 Source P-Fi operations Net prof It before In com tax 0.0 15.0 54.6 01.9 93.0 107.5 96.6 120.3 128.0 136.4 Add: Provisions for doubtful accounts 0.0 0.0 0.0 0.0 5.1 7.4 3.3 9.0 9.5 10.6 Total Fio Operations 0.0 16.0 54.8 61.9 96.1 114.9 107.0 129.8 189.1 147.0 Paid-in capital 97.5 404.3 170.8 97.7 147.6 100.0 100.0 100.0 100.0 100.0 Borroe lnge Demetic borrowing 45.2 70.0 0.3 49.2 0.0 60.0 60.0 60.0 50.0 50.0 I9RD/IDA 0.0 0.0 0.0 0.0 0.0 6.1 46.3 42.1 11.2 1.0 Other 7.7 20.1 2.6 100.5 268.9 100.0 100.0 100.0 100.0 100.0 Total Borrowinns 62.9 90.1 8.4 149.7 268.9 166.1 196.6 162.1 161.2 151.0 Loa collections Local currency 0.0 63.2 128.9 222.9 1G;.O 447.6 457.7 470.5 506.6 523.4 Foreign currency 0.0 0.0 0.0 0.0 0.0 0.0 0.6 3.1 0.9 11.1 Total Loan Coilections 0.0 63.2 128.9 272.9 199.0 447.8 456.1 491.6 612.5 S39.5 TOTAL SOURCES 160.4 672.6 857.7 682.2 718.6 617.7 062.0 903.5 912.6 937.6 a,rt~ * w ft t- Actual Estimeted Forcast 196S 19i5 197 09 S199 1990 1991 1992 1998 1994 Loan dlsburee nft Local currency 71.3 420.7 424.2 846.2 36M.8 589.2 S94.1 673.5 677.6 e2.9 Foreign currency 0.0 0.0 0.0 0.0 0.0 8.6 82.6 29.5 8.7 4.5 Total Loan Disbursment 71.6 420.7 424.2 846.2 596.8 592.8 626.9 606.0 666.8 688.4 Disbursements on equity investmant 67.2 24.7 3.5 59.2 46.5 0.0 65.0 65.0 56.0 55.0 Repeyment of borrosingp Domestic borrowing 0.0 0.0 0.0 115.2 50.0 0.0 0.0 60.0 60.0 50.0 19RA/IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 8.6 56. 1756.0 100.0 100.0 50.0 160.0 Total Reayment of Borrowinas 0.0 0.0 0.0 118.3 103.3 176.0 100.0 150.0 100.0 200.0 Othor applications Income taxes paid 0.0 0.0 0.0 0.0 0.0 0.0 59.1 54.8 66.4 7. C Other 2.7 7.7 0.0 19.9 0.0 0.0 0.0 0.0 0.0 0.0 Total Other Apsilications 2.8 Y.7 0.0 19.9 0.0 0.0 59.1 54.8 66.4 711 TOTAL APPLICATIONS 141.9 45U.1 427.7 544.1 740.6 767.3 341.0 667.8 907.7 969.6 Surplus (deficit) 6.5 119.5 (70.0) (11.9) (27.0) 49.3 21.0 86.2 5.1 (22.1) Opening cash blonce 0.0 8.6 123.0 68.0 46.1 19.1 69.0 39.9 126.1 131.2 Closing c h blance .5 123.0 58.0 46.1 19.1 69.0 39.9 126.1 138.2 109.1 I rtn ii- * t. N) CUN AL DUSTRIAL IEaUOLOor crAMO PROJECT Jilll Ecetmic Oeeloenst Investment Corporatlio (.IDIC) Actual an Forecast blneo Shoet CT ofI on) Actul Estimted Forecst 195 95 197 15E 1990 191 1991 m 199 1994 Assets cur-rent Cash A bank deposite 3.5 123.0 5.0 46.1 19.1 69.0 39.9 126.1 131.2 109.1 Short-toqm l.a 0.0 0.0 0.0 0.0 263.9 263.9 26".9 263.9 25".9 263.9 Current metoritli.. of teem looms LoCal currency 20.6 232.9 250.0 234.3 255.8 261.1 290.9 322.7 847.0 836.? Foreign currency 0.0 0.0 0.0 0.0 0.0 9.2 18.0 2.2 39.6 44.6 Subtotal 20.6 282.9 260.0 2U4.3 265.8 270.9 3.9 U47.9 M83.6 433.3 Other reeivable. 2.3 1.2 19.0 0.0 0.0 0.0 11.2 11.2 11.2 11.2 Total Current Asset 81.9 a62.1 327.0 380.4 54J.4 601.2 673.9 754.2 797.9 322.5 o Long-toer Loans: Loal carreny nl.3 429.8 74.6 30.2 906.0 1,106.7 1,231.3 1,320.0 1,491.C 1,5"4. I Foreign currency 0.0 0.0 0.0 0.0 0.0 5.1 51.3 33.9 91.4 31.9 Loess: Previsio, for doubtfu accounts 0.0 0.0 0.0 0.0 5.1 12.5 20.3 29.3 39.3 49.9 Curreat msturitlOe of term loans 20.5 232.9 250.0 204.3 2CS.3 270.8 303.9 347.9 33.6 4U3. Net Lono-Tots Loan Portfolio 51.2 136.4 474.6 65.9 70.2 331.0 957.9 1.081.2 1.in.5 1.16.4 Equity inveetomat 67.2 91.9 95.4 152.1 197.9 197.3 262.9 307.3 8#2.3 417.0 Total Loon-Te Asset. 113.5 23.4 570.1 714.1 906.0 1.021.9 1.210.0 1.#39.1 1.519.7 1.611.3 TOTAL ASSETS 10.4 650.5 39.1 1.040.? 1.449.4 1.617.O 1.334.7 2.093.2 2.317.6 2.4#3.7 M W Ft Actual Estimated Forecnst 1985 1986 1907 19e8 1989 1990 1991 1992 1993 1994 Liabilities and Not Worth Liabili ties Current liabilities Current payables 7.7 9.6 0.0 91.4 307.0 228.3 228.3 228.3 278.* 228.3 Currant portion of long-term debt 0.0 0.0 154.1 55.6 0.0 0.0 61.3 61.3 61.3 61.3 Taxes payable 0.0 0.0 0.0 0.0 0.0 69.1 54.3 68.4 71.3 76.0 Total Currant Liabilities 7.7 9.6 154.1 146.0 307.0 287.4 343.8 356.9 410.8 384.5 Long-term liabilities Local borrowings 46.2 116.2 116.0 60.0 0.0 50.0 100.0 100.0 100.0 100.0 I8RD/IDA 0.0 0.0 0.0 0.0 0.0 5.1 51.9 94.0 105.2 106.2 Other 0.0 8.9 38.9 6.6 0.0 3.9 16.0 15.0 1.0 16.0 Loss: Current mturities 0.0 0.0 164.1 56.6 0.0 0.0 61.3 61.3 61.3 61.3 Total Long-Term Liabilities 46.2 124.1 0.8 0.0 0.0 68.9 105.7 147.8 169.0 160.0 Total Liabilities 52.9 133.7 164.9 146.9 307.0 346.2 449.5 503.7 569.7 624.5 0 Net worth Paid-in capital 97.6 601.8 672.8 770.3 917.9 1,017.9 1,117.9 1,217.9 1,317.9 1,417.9 Reserves & reained earnings 0.0 16.0 89.6 131.5 224.6 272.9 317.3 371.7 430.0 431.4 Total Not Worth 97.6 161.8 742.2 901.8 1.142.4 1,290.8 1,436.2 1i.89.e 1.747.9 .L909.3 TOTAL LIABILITIES A NET WORTH 160.4 660.6 897.1 1.048.7 1.449.4 1.637.0 1.884.7 2.093.3 2.317.6 2.433.8 rD w tn rD CHINA RURAL INDUsTRIAL TECHNOLOGY (SPARK) PROJECT Jilin Economic Development Investment Corporation (JEDIC) Actual and Forecbst Indicators of Financial Position and Performance (Y million) Actual Estimated Forecast 1985 1988 1987 1988 1989 1990 1991 1992 1993 1994 Total assets 150.4 860.5 897.1 1,048.7 1,449.4 1,837.0 1,884.7 2,093.2 2,317.6 2,433.7 Of which total loan portfolio 71.8 429.3 724.5 850.2 1,237.6 1,377.8 1,500.2 1,688.9 1,760.3 1,883.6 Of which total equity portfolio 67.2 91.9 95.4 157.3 197.8 197.8 252.8 307.8 382.8 417.8 Short-term debt 7.7 9.6 0.0 91.4 307.0 228.3 228.3 228.3 278.3 228.3 Long-term debt 45.2 124.1 154.9 65.5 0.0 58.9 166.9 209.0 220.2 221.2 Of which local currency 46.2 124.1 154.9 66.6 0.0 53.8 116.0 115.0 115.0 115.0 Of which foreign borrowings (IBRO/IDA) 0.0 0.0 0.0 0.0 0.0 5.1 51.9 94.0 105.2 106.2 Tota' equity 97.5 518.8 742.2 901.8 1,142.4 1,290.8 1,435.2 1,589.6 1,747.9 1,909.3 1 Ratios Financial ratios Current 4.1 37.7 2.1 2.3 1.8 2.1 2.0 2.1 1.9 2.3 1 Long-term debt/equity 0.5 0.2 0.2 0.1 0.0 0.1 0.1 0.1 0.1 0.1 Profitability ratios as percent of average total assets Gross earnings 0.9 8.0 9.0 7.7 9.4 9.6 9.1 9.2 8.9 8.8 Financial expenses 0.8 4.2 1.9 1.3 1.0 1.6 2.5 2.2 2.1 2.1 General and administrative expenses 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.0 0.0 Provisions (annual) 0.0 0.0 0.0 0.0 0.4 0.5 0.5 0.6 0.4 0.4 Profit before income tax 0.0 3.7 7.1 6.4 7.4 7.0 5.6 6.1 6.9 5.7 Net profit 0.0 3.7 7.1 6.4 7.4 3.1 2.5 2.7 2.6 2.8 Income from loan portfolio as percent of average loan portfolio 0.8 1.5 6.0 4.9 9.1 9.7 9.7 9.9 9.9 9.8 Cost of debt as percent of average term debt 2.3 18.1 10.2 8.1 5.7 8.4 13.1 10.6 10.1 10.8 Average spread on borrowed funds (1.4) (16.8) (4.2) (3.2) 3.4 1.3 (3.4) (0.7) (0.2) (0.9) 3> Weighted average cost of loanable funds 0.8 4.2 1.9 1.3 1.0 1.7 2.6 2.3 2.2 2.2 sr ,.2 Total portfolio income as percent of 0 tm average total portfolio 0.4 9.7 10.1 7.9 9.4 9.8 9.6 10.0 9.7 9.4 m 0 > Net return on funds used (0.4) 5.4 8.2 6.6 8.4 8.1 7.0 7.7 7.6 7.2 0% X w Profit after tax as percent of average ) w equity 0.0 4.9 8.7 7.5 9.1 4.0 3.3 3.6 3.6 3.4 > Provisions as percent of year-end out- standing loan portfolio 0.0 0.0 0.0 0.0 0.4 0.9 1.4 1.9 2.2 2.7 Debt service coverage ratio n.a. n.a. n.a. 2.3 2.6 2.8 4.4 3.3 5.0 2.8 ANNEX 14 - 112 - Page 1 CHINh' RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT Monitorable Indicators of Project Implementation FY91 FY92 FY93 FY94 FY96 I II I II I II I II I II ENTERPRISE MODERNIZATION COMPONENT Commercial Credit Subcomponent Commitment (%) (cumulative) 30 60 80 100 Disbursements (%) (cumulative) 9 27 47 89 86 94 98 99 100 Precommercial Credit Subcomponent (Jiangsu) Commitment (%) (cumulative) 30 60 80 100 Disbursements (%) (cumulative) 12 38 69 81 94 98 100 SPARK TRAINING COIPCNENT (see also Annex S1) Contract signature for TA x Arrival contractor x Implement TA (see Annex S1) x K X X X X X Training center construction Ground-breaking x x % completion (cumulative) 30 64 78 88 98 99 100 Equipment procurement commences x % completion (cumulative) 9 19 50 81 91 100 Spark Training Study (Annex S2) Team convenes x Submission of draft report x TECHNOLOGY INFORMATION COMPONENT (see also Annex S3) Contract signature for TA x Arrival advisor x Assignment database/computer specialists x Assignment training team x Equipment procurement commences x % completion (cumulative) 19 60 81 91 100 Database construction ISTIC central data base x Local databases x Local information consulting services Staff training commences x Staff training completed x INSTITUTIONAL DEVELOPMENT COMPONENT (see also Annex S4) MIS Subcomponent Contract signature for TA x Working Group convenes x Design phase commences x Design phase completed x System establishment commences x System establishment completed x System operations manual finalized x Operational phase commences x Technology Evaluation Subcomponent Contract signature x Course design commences x Course l and 2 delivered x Manuals finalized x Financial Intermediary Training x x x x x x x x -o' hI0a 420\ _ ____ _ ____ IBRD 21063R PROPOSED INOUSTRIAL ZONES L. Gu+onn >, IA ANGSU P' hQ)L V/N (- I . . . Food P'ocecc--9 U. S. S. R. U. S. S. R. Eei AppIoo-ns .n ,4 d _~~~~~~~~ ~ ~ ~~ Zoct,tes '/- I, 7,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 X -> -y ( ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ . / ,!t' $0Jc5 ^o--S RA o- CSook y 9y , / \..' 8 S4m Xcc Boc,odc, ec 1,0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OO~B-c,c,,y MONGOLIA yYr b : ,Bo;hrn 2~~~~~~~C ChenOnongk ,SUXW, '>, hAFt_Xz| -40 Hothet t REP OF KORE PRO V1 NC F < tR&s, ^ tC402AdilA4k tq~~~~~~~~~~~~~C 4T'~~~~~~~~~~~~4 JIA N.SU Nocc0ngcn - GEM. PEOPLEJ S /R 'J.C REP. OF KOREA EoRh V I REPUBLIC A a OF KOREA JAPAN FeFAh- O. T4 400"- t 1o yvoq G rla s ,i A N -S( H P I - o-g . CHANGXING / .GI-on 0 5 10 15 20 8 SHA _ --so / K11EE' A!.71 4 E llO - O- 1O-44 B'o'. L4onoocgang , f K LGM 18 mETE R * 0^ )I/GSI/ CHINA . ,.; 3Q4 RURAL INDUSTRIAL TECHNOLOGY (SPARK) PROJECT 3r C'4.g,. 0 4 . - 0 ' r Project Areas A SPARK Training Facilities to be Upgraded Under the Project Roads Railroads _X G, rom9 o I -~ - Province Boundaries Ggo"g ho-m>' f ~ Xlumen l,\ , -- - International Boundaries 00 * *S' 7 honnnto' CCHONG KONG (UK)l '- ACAO (PORT} )9 _ A \ U viE IT NAN, wm .hehl MYANMAR . I N 0 250 500 750 40(0 0onn 4N . [AO PEOPLE'S IO- 00I4ER$ Z 4'_ = i >O1 DEM REP PHILIFNNES THAILAND > e_'smx I ' {< '110 120 P ___ s I _ I ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~ OCTOdER N.0~~~~~~~~~~~~~~~~~~~~~~OCCLR19