/ - C Document of The World Bank Report No. 12415-CHA STAFF APPRAISAL REPORT CHINA SE-ENYANG INDUSTRIAL REFORM PROJECT AUGUST 10, 1994 MICROGRAPHICS Report No: e2415 CHA Type: SAR Industry and Energy Operations Division China and Mongolia Department East Asia & Pacific Regional Office CURRENCY EQUIVALENTS (as of February 1994) Currency Name - Renminbi (RMB) Currency Unit - Yuan (Y) I Yuan =100 fen Y I0 = $0.11 $1.00 Y 8.7 WEIGHTS AND MEASURES I milimeter (mm) = 0.039 inches I meter (m) = 3.28 feet 1 square meter (m2) = 10.76 square feet 1 cubic meter (m3) = 35.3 cubic feet 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 10,000 square meters 15 mu 1 kdlogram (kg) = 2.204 pounds 1 megawatt (W) = 1,000,000 watts 1 gigajoule (GJ) = 1 billion (109) joules FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOCOM Bank of Communications CNC Computerized Numecally Controlled CRISPP China Reform, Institutional Support and Preinvestment Project EA Envirommental Assessment ERR Economic Rate of Return FRR Financial Rate of Return FSR Feasibility Study Report GDP Gross Domestic Product GNP Gross National Prodlct GOC Govemnment of China GVIO Gross Value of Industr Output HWTF Hazardous Waste Treatment Facility ICB Iternational Competitive Bidding ICBC Industial and Commercial Bank of China JGF Japanese Grant Facility LLCs Limited Liability Companies LLSCs Limited Liability Shareholding Companies LPS Letter of Policy Statement MCE Municipal-Controlled Enterprise M Ministy of Machinery Industry MOF Ministry of Finance NBFI Non-Bank Fmancial Insdtution NEPA National Environmental Protection Agency PBC People's Bank of China PFI Participating Financial lIstitution PMO Project Management Office SAMB State Asset Management Bureau SAMC State Asset Mnagement Corporation SCL Single Currency Loan SEPB Shenyang Eanvinmental Protection Bureau SMG Shenyang Municipal Govemment SMICL Shenyang Machine Tool Company Limited SOEs State-Owned Enterpises TOR Terms of Reference TVEs Township and Village Enterprises - i - CHINA SHENYANG INDUSTRIAL REFORM PROJECT LOAN AND PROJECT SUMMARY Borrower. People's Republic of China Beneficaries: Shenyang Municipal Govemnment (SMG), Shenyang Machine Tool Company Limited (SMTCL), and Participating Financial Institutions (PF1s) Amouft $175 million equivalent Terms: US Dollar Single Currency Loan for 20 years, including 5 years of gace, at Bank's standard LrBOR-based variable interest rate for US dollar denominated Single Currency Loans. Onlending Terms: Te proceeds of the loan would be made available by the Borrower to SMO on the same terms and interest rate as that of the Bank loan. SMG would onlend (a) $121 million to SMTCL for 15 years including five years of grace at the Bank's variable interest rate plus at least 1.2 percnt; and (b) $40 million to PFIs for a term of 20 years, including 5 years of grace, at the Bank's variable interest rate. The commitment charges would be passed on to SMTCL and PFIs and the loans will be denominated in US dollars. The PFIs would in tun extend US dollar subloans to eligible enterprises for a maximum period of 12 years including a maximum grace period of three years at a variable interest rate equal to the Bank rate plus at least 1.2 percent SMG would allocate the balance of the loan of (a) $10 million to Shenyang Environmental Protection Bureau for the environmental protection component; and (b) $4.0 million for the reform program support component. Project Description: The project would support SMG's reform program through the joint SMGtBank monitoring of implementation of a Reform Action Program and the provision of technical assistance and training to undepin key aspects of SMG's reorganization. The project would also support two investment components: industial restructuring and coaon ($161 million) and environmental protection ($10 million). The financial assstae for industrial resucturing includes (a) a - ii - restructing loan of $121 million through SMG to SMTCL; and (b) a line of credit of $40 million to be chneled through partiipaig banks to finance the moderzation and restructuring of other eligible entrprises (with a minimum amount of $10 million allocated for private firms). The environmienl protection component would finance the implementation of hazardous waste collection and teatment facilities, an automatic waste water monitoring network to Improve enforement of discharge standards that will cover some 70 pewe!t of industial waste water discharges, and Technical Assistance for *he environmental protection bureaus to enhance their ca,abilitdes to monitor and enforce pollution control standards. Project Benefits: The major benefits of the project would include (a) the development of market-based policies and strategies at the government level; (b) efficiency gains epected through corporaization in the industria sector, (c) improved capability of SMG to deal with industi pollution control; and (d) the accelaion of private sector development. The project would sponsor reform measures across the industial sector in Shenyang municipality and would achieve a more market-oriented machine tool subsector, thereby serving as a model for industrial reforms elsewhere in China. Prqject Risks: The major risk stems from the counterparts' lack of experience in implementing a Bank-financed project This risk would be midgated by the enthusiasm and commitment of SMG's senior officials, which h already been demonstated by the active participation of the Mayor's office in project preparaion and implementation. Another risk inherent in this transiional phase of the Chinese economy is that effective implementation of industrial resucnng may take longer than programmed, with the attendant risk of cost overrun. This isk is being addressed by an ongoing management consuting eercise to help build corporate goals and manag nt systems; and internal consultants will advise the project teams during implementtion. Povety Categoxr: Not applicable. M-11 sidmated Costs: Local Foreign Total ($ million) SMTCL restructuring 42.6 104.8 147.4 hine of credit 200 40.0 60.0 Environmental protection 3.8 8.6 12.4 T.A. and tainig 2.1 4.0 6.1 Tota Base Cost f 157.4= Physical contingency 1.8 6.' 8.1 Price contingency 3.7 11.8 15.5 Ir a jLect La 74.0 15 2& Interest during construction fb 14.2 17.4 31.6 Incremental worldng capital 75.5 6.6 82.1 Inancing PF13 IBRD 0.0 175.0 175.0 SMTCL 40.2 23.2 63.4 Domestc banlm 110.6 0.0 110.6 Sponsoring enteises 6.0 0.0 6.0 SM(3 6.9 0.0 6.9 CRISPP (reparation) 0.0 0.9 0.9 JGF {repation) 0.0 0.4 0.4 Estinated Dbibewents: Bank PY 1M9 196 M7 IM I99 QQ 2MQ (S million) Annual 10 26 58 42 27 10 2 Cumulative 10 36 94 136 163 173 175 Ecoomi Rate of Retumr 25.6 percent Lc La Prect-fianced goods are exempt from import duties and taxes. LB lntres dung construction (ID) is based on onedng rates fr projected disburse- ment of loan proceeds. Forign exchange porion of IDC is based on tie Bankls standard variable interest rate for US dolar denominated Single Currency Loans. LS SMTCL component. - iv - CONTENTS I The lndstrialSector nChina ............................. 1 A. China's Industria Structure and Pformance ................ I B. Iist rical Sources of the IndustrW Sectr's Problems ........... 3 C. China's Industial Reform Achievements To Date ........ ...... S D. Objectives for Strengtning the Reform of China's Indusal Sector: The Development Agenda .......................... 7 E. The Bank's Role in China's Industial Sector To Date ....... ..... 10 F. The Rationale for Bank Acdvity in Shenyang ................ 11 2 Shenyang's Economy, Industry, and Reform Program ........ ..... 13 A. Background . ........... . 13 B. Shenyang's Economy . ....................... ........ 13 C. Shenyang's Industri Sector . ......... . 15 D. Shenyang's ReformnP m .......................... 17 E. The Machine Tool Sector-A Case Study of Shenyang's Approach to IndustrialRestrcturing ...... ...................... 24 3 Ie ProJect .......................................,. 29 A. ProjectObjectives ......... ..... ............ . . . .... 29 B. Prqect Desciipton ........... ... .............. . 30 C. ProjectOrpanizationandM. .ement.... . ..... * ...... 41 D. PoectpmentaionSdidue .........u............... 43 Th report is based on th findings of a preapprasal mission in June 1993 and appisal mission n January 1994. The report was prepared by the following: A. Hu (Sior Operations Officer, Task Manager), H. Broadman (Eo3nomist), J. Fritz (Senior Environmental Specialist), R. Heath (Principal Engie), F. Jease (Pincip Fiacdal Specist), E. Sun (Financial Analyst), K Sato (r.A. Speciaist), N. Lu (Opeaton Officer), R. Amin (Industrial Consutant), H. Rohs (ConsdtanUMachine Tools Spcia), B. Su (Consultant/Financial. hIntittn Speciali), and S. Wu (ConsultantFmiancial Anlyst). R. Schee and X. Ln prvided asstance in pxumen t and X Hu in satstcd tables and charts. Th peer reviewers incude B. Kafla (Diision Chief), A. Ewing (Maer, Pivate Sector De opment) and H. Sethi ( u ntAdviso). The Division Chief is R. Newfrmer and the Dqertment Direct is Nihola C. Hope. 4 Project Cost, nhancing Plan, Prcurement, an Disbursement ........ 44 A. P1rojeaCost ............................ ... * .... 44 B. Elgbility for SingleCurrencyLoans ..................... 44 C. Financing Plan.............. ..... 46 D. Procurement .......................... 47 E. Disbursenient .................................... 50 F. Monitoring and Reprting ............................ 50 S lncidAspects . .................................... 51 A. The Shenyang Municipal Govemment'sFnan ..... ......... 51 B. Financial ementofEnterpris .......es.............. 52 C. Accounting ................................... 53 D. Audits ................................... 54 B. Future Finances of SMTCL ........................... 54 F. FinancialCovemnt andReporting Rquirements ....... ....... 57 0. Benefits and Risks of Single Currency Loan ................ . 58 6 Project usfionand Riss ...ks.......................... 59 A. Assunmptions Used ................................. 59 B. EconomicBenefitsofSMTCLComponent .................. 59 C. Economic Benefits of Envionmental Component . ............. 61 D. Major ProjectRisks ................................ 62 7 AenetsReached andRouneatlon .... . ....... .. . 63 AMNxN s 2.1 SMG's Statement on the Economic and Enterprise Reform Program ... ... 67 2.2 Fourteen Autonomous Rights for State-Own edEr ...es............ 82 2.3 Market Prospects for the Machine Tools Industry: China and SMrCL .... 83 2.4 Financial Performance of SMTCL's Sponsoring Enterprse (1986-92) ... ... 97 2.5 Price Comparison of Domestic and Imported Machine Tools . ......... 99 2.6 SMCL Management System Design and Implemation .... ...... 100 3.1 Reform Support Program for Shenyang Municipal Govenment (SMG) ... 111 3.2 SMTCL Enhancement of Product Design Capabilities-TOR for Conslting Services .................... .............. 123 3.3 Compaison of SMT's Product Mx: 1993 vs. 2002 .... ........ 128 3.4 SMM'L's Taining Program ..... ........................ 130 3.5 IndusutralnCommneriBank ofChina (ICBC) ................ 133 - vi - ANNEs (cont'd) 3.6 BankofCommunications(BOCOM) ........................ 141 3.7 Detled Project Description for the Enviromnental Component ........ 149 3.8 ProjectnImplementationSchedule ............ ......... 156 4.1 Project Cost Esates .............................. 16 4.2 Disbursement Schedule ....... ....................... 165 4.3 BankSupervision nputinto KeyActivities .................... 166 4.4 Key Monitoring Indicators ............................ 167 5.1 SMTCI TypcalProduct'sPrice,Variable CostandMargins ......... 169 5.2 Assumiofor SMTCL Financial and Fconomic Analyses SMCL'sFinancial Projecdon(1994-2000) ............. 170 8.1 Slected DocumntsandDataAvailableintheProjectFile ........... 182 CHRTS 1 Orgaization Chart of SMG . ............................. 183 2 O izi Chart of SMTL ..CL,.. ...... . 184 3 Pzojectimolenentaio Orgnization and geent............. 185 TABIES IN TETr 2.1 China'sand Shenyang's Economic Sucture ............... ..... 14 2.2 Shenyang's LaborStructureinthe Eonomic Sector ................ 15 2.3 Number ofILss-Making SOEs. Shenyang, 1990 and IM ............ 16 2.4 Shenyang's Engineerng Industry Branches, 1992 .................. 24 2.5 Key Financial Indicators for Pincipal MT Producers . ....... ....... .26 4.1 Summary of Eime Project Costs . . . 45 4.2 Project Financing Plan .. .... 47 4.3 Procurement Arrangements ..... 48 5.1 SMTCL Summary of Financial Projections under Base-Case Scenario .55 5.2 SMTCL Summary of Financial Projections under Low-Case Scenario .56 5.3 Sensitivity Analysis ............57 6.1 SmTCLSensitivity Analysis ........... . . . 60 6.2 S).PMTCL-Efficiency Gains, 1993 and 200W.. . . 60 MAS IBRD No. 25546 IBED No. 25697 IBRD No. 25698 1. TE INDUSTRIAL SECTOR IN CNA A. C=A'S INDUsIa SThImn AD PIoRmC 1.1 Industry is China's largest productive sector, accounting for almost half ( percent) of its gross domestic product (GDP) and employing approximatly a fifth (17 percent) of the country's total labor force. Gross industrial output, which amounted to $639 billion equivalent in 1992, is divided almost equally between light and heavy industries. As of 1992, China had about 8.6 mllion industrial entepis, of which 103,300 were "stae-owned enrprises (SOEs); 1.6 miLion were 'collectives-both rural, township and village enterprises (IVEs) and urban collectives; 6.9 million were 'individual businesses," which are family or individually owned private entities with no moce than seven employees; and 14,200 were "other types" of enteris, incuding piniate firms employing more than eight persons, foreign-owned eaterprises, joint vent , and joint-stock co-nipanies. 1.2 It is conventional to categonze the various types of Chinese enterprs ownership forms into two groups: SOEs, on the one hand, and nonstate entities, which includes collectives, individual businesses and other firms, on the other. Most SOEs are controLled by municipal, county, or provincial govemments, and about 77 percent of SOE employees work in enterprises controlled by subcentral governments. In genera, SOEs concentrate on heavy industry, whicn accounts for about 65 percent of SOEs' sales revenues, and produce mostly important raw materials, capital goods, and stategic commodides. Nonstate enteises, especially TVEs, individual, and other private fim, mainly produce downstream consumer products. 1.3 Among the total population I/ of industrial enterise for which Chinese authorities collect statistics, in 1992 the share of the gross value of industrial output (GVIO) accounted for by SOEs was about 48 percent, collectives accounted for about 38 percent, individual firms accounted for about 7 percent, and other firms accounted for 7 percent. This pattern is in stark contrast to that at the begning of reform: in 1978, SOEs accounted for around 78 percent of the GVIO and collectives accounted for about 22 percent (at that time the other entprise ownership forms did not exist). These data clearly reveal the sizeable growth of the nonstate and private sectors in China's indusia oranization. However, they also suggest that SOEs still make up a dgnificant share of enteprises. Indeed, while nonstate enterprises are growing more rpidly than SOEs, the SOEs' rate of growth is still substantial: from 1978 to 1985 the value of output of SOBs 1/ See below, which disuss te importx subset of industr enteprises Chineo stie autties define as Oidepment acooting stems. - 2 - almost doubled, and from 1986 to 1992 it almost tripled. Today, among aU industial enterrs, about 68 percent of Chiese workers in the industry sector are employed in SOEs. 1.4 Data on the population of industral enterprises that the statistical authorities classify as 'independent accountng systems"Z/ provide an additional perspective on the significant role SOEs still play in China's econumy. Such entexprises account for 75 percent of the gross value of indusial output for the whole industrial sector. Among these enteprises, SOEs generate 62 percent of the gross value of ndwtrial output and account for about 78 percent of the comtry's industrial net fixed asset. 1.5 While nonstate entepises tend to opeate on a very small scale, they have proven to be powerful geneators of employment, output, and exports, and are generally efficient and dynamic. Perhaps most important, the emergence and rapid growth of these firms has done much to change the competitive market environmet in which all enterpi operate, including SOEs. This is confirmed by the fact that markets whem TVEs are present exhibit a convergence of factor retuns between SOEs and TVEs, a dine in SOE profit rates, and a positive relaionship between SOB pmd&. - ity and the TVE's market stare. 1.6 Notwithstandirg the salutary effects of entry by nonstae firms on the degree of competition in the market, many-though by no means all-SOEs continue to have serious problems. These problems are partly structul in naure, namely: (a) the cessive and rigid patterns of corpate integrtion (for exampl, extensive vertca integraton and/or exggerated diversity of product lines); (b) the use of obsolete and often inpproprI technology; (c) the virual absence of multiplant economies of scale, especially across adminve boundaries; (d) the prevalence of plant production designs at a less tan mnimum efficient scale; and (e) the excessive investment in heavy industry at the expense of higher value-added activities, including seavices. 1.7 To be sure, China's economic reform program (pams. 1.16-1.25) has bad a strong, positive impact on SOEs' growth and performance: total factor productivity in SOEs grew 1.8 percent annually from 1980 to 1984, and acually accelerted to an annual growth rate of 3 percent from 1984 to 1988. Thousands of otherwe unprofitable, smaLer SOEs have been closed, primized, or ansformed into joint ventures or TVEs. Several large military enterprises have been converted into sucessil civilian firms (often with foreign direct investment). A growing number of SOEs are economically succeful, and many have become sbareholding companies. 2f An industria enterpris is cassfied as an independent accounting system if it pos Wpno admnisttive management and independet financi accountng. In parula, theo ao list thefollowing criteria for an ixndusra enterprise to be conidered as an independent acoounting :sstf on of an ndpedet administaive organiztion, abit to count indepenldy for its prfits and loses, and to prpwe independen financial balne sets, and power to sign cotacswit ote uit nd cono a in udnde bak acout -3- 1.8 Nevertheless, many large SOEs in China continue to perform poorly. For example, while annual total factor productivity gowth for SOES is ring, it is only about one hiird to one half the coespondig rate for nonstate enterprises, even after accounting for differences in the mix of productive and social functions carried out by the different. types of enterprises. 1.9 Chinese authorities estimate that approximately one tiird of SOEs bave been running losses. The major SOEs owned at the national level, for emple, have incurred annual losses of over $16 billion equivalent in recent years, which amounts to about 3 to 5 percent of GDP. A significant portion of such losses have been due to policy fctr (e.g., controlled sales prices set below cost) and concentated in the grain, coal, petroleum, and imported timber and wool sectors. With the virtual elimination of price controls these losses should disappear. However, SOEs in other sects, notably heavy engineering and metallurgy, maeals, commerce (wholesaling and retailing), light industry, textiles, and tobacco, have also incurred losses. The result is that many SOEs-although accurate estimates of the acual number of entepris are hard to come by-have tended to require substantial fiscal and quasi-fiscal public subsidies, often occuring in a disguised manner thugh the financial system. Subsidies paid out of the central budget to all unprofitable enterprises have amounted to roughly $8 billion annually in recent yeas, which accounts for a little more than 11 percent of budget revenues. 1.10 Many SOEs, along with othe types of enteprises, are the major genertors of massive water and air pollution. in 1991, for example, such enterprises emitted 11 rillion cubic meters of waste gases and 16 million metric tons of soot. Wbhe China ranks third in the world in emissions of greenhouse gases (behind the United States and the former Soviet Union), it is the fastest-growing source of such gases. B. HWWRICAL SOURCES OF TE INDUSIAL SeCTOR'S PROULEMS 1.11 The principal historical sources of the remaining problems assoiated with Chinaes indusuia strucue and performance today are rooted in the legacy of (a) a system of enterprise stre and gomernance in which the ownership of business assets, firm management and social servce functions bave been woven into a common bureaucracy; (b) the lingering distortions in the incenive and regulatory regime as manifested in various policies that affect business decision-making with respect to investment, input purchases, producin, and sales of output; and (c) the absence of developedfacor mar*en for labor, capital, and technology. 1.12 The historical problems associated with enterprise stmure and govemnance are rooted in (a) the earLher regime of central economic planning, under which SOEs were generally established by admnirve fiat rather than by market forces, and thus tended to suffer from poor "initial condition- decisions wit respect to location, scale, product lines, capital-labor mix, and technology; (b) the sheltering of SOBs from the discipline of 'hard budget constraints"; (c) the linling of SOEs' productive functions with the provision of social services and lifetime employment, and the resulting slow pace with which SOEs have been able to alter their capital and labor combinations in response to changes in -4- relative prices and business cycles; (d) the administative involvement of govenment in SOEs' business decision-maling; and (e) the partial insuation of SOEs from domestc and inteational competition. Today, however, Chinese authorities are incasngly poised to permit the development of China's unque style of marrying public ownership with marke compedtion of a bona fide "market for firms," into which there would be free entry by acquisition, divestitures, exit, changes in management, and market-driven ass to infusions of capital from both domestic and foreign sources, all of which are the key elements for a flexible, dynamic industrial organization. 1.13 Over time, China's incentive and regulatory regine-comprised of poiie and other measures concerning taxation, credit, pnce regulations, direct subsidies, taiff and nontariff trade barriers, foreign direct investment rules, and environmental regulations-has attempted to channel incipient market fes to serve policy goals that often conflict. Many of these policies were incoherent and uneven in application, causing ditortions in resource allocation, both across regions and across industres. Whbe improvement on many of these fronts has been truly significant in recent years, problems remain. For example, lingering price regullations have depressed energy costs to selected ndustries, which has encouraged excessive energy consumption. 1.14 A particularly visible weakness of the regulatory regime is in the area of environmental protection. Industral pollution-of atmospheric, water and othr natual resources-has risen to levels that cause widerad environmental degadation and health hazards, particularly in urban industial centers. Much has been accomplished in putfing n place systems for industrial pollution control, however, the government rognizes that the effectiveness of regulation is wealc pollution levies (penalties for exceeding national or local standards) are considerably below the marginal cost of treatment, the levy system has structual deficiencies, the system relies too heavily on self-reporting by enterprises, monitoring capability is poor, and the disposal of toxic and hazardous waste is largely unregulated. 1.15 The absence of viable and flexiblefactor mar*es-evident in weaknesses in the financial system, restrictions on labor mobility, and inadequate development and diffusion of technology-has also made the transtion to a market economy difficult. With capital markets still at an early stage of development, dynamic firms have tended to have to rely mainly on intemally generated savings, while money-losing firms have condaued to receive subsidies from the govemment and bankrupt firms have been ardficially kept in business and their reorganiation for subsequent merger bas been often delayed. Rigidities in labor markets because of the absence of a frestanding 'social safety net"-comprising pensions, work retraining, unemployment compensation, and health care-have made it difficult for SOEs to shed labor as they have sought to become more efficient. While technology markets have emerged, the restricdons on internal labor mobility by scientific pasnnel and on the entry of cerin foreign investments still impede the transfmato of research and development (R&D) discoveries into marketable products and processes and the process of technological diffusion. C. CH 'S INDumA REFORM ACHIVMEm To DAT5 The Period 1M75 to 1M 1.16 The Chinese authorities have recoized that the nation must sustain its pace and patten of industrial growth if economic development is to proceed. As a result, since the market opening of the country in 1978, the govemment has launched a seies of reforms that have decentrald economic decision-maldng, introduced market forces and competion into the industrial sector, and libealized the external sector. Reforms introduced in the 1980s doubled the industral sector's average annual g ,wth rate of totl factor productivity in the second half of the decade relative to the first half. Achieving even better industial performance and sustaining high rates of econonuc growth have required that China acoelrte the earlier reforms of its overall industr organization, and more recent reforms have tended in that direction. 1.17 Throughout the 1978-92 period, numerous reforms were introduced, almost always in the Chinese gradualist and incremental style, and often first as experiments in cerin regions that were later replicated in other locales. Within the area of enterprwe stnacure and governance, the most salient policy expiments included (a) introducing the *contract responsibility system," which determined SOEs' obligations to the state on the basis of certain firm-specific performance parameters; 0b) introducing the "corportzaon of SOEs, wherein the state's ownership rights are reflected through its shares and the firm s granted management autonomy from the traditional line ministries in its production, price-setting, and input purchase decisions; (c) extending direct foreign trade rights to cetain SOEs; (d) recognizing enterpri' rights to engage in mergers, acqusitions and divestitures; (e) maldng enteprises accountable for their profits and losses, and sepaing pxofit remittances from tax payments; (f) allowing enterpiises the autonomy to close down andlor declare bankrupcy; and (g) permitting the formation of limited liability and limited liability sarcholding companies. 1.18 Witiin the area of the inwentve and regultory regme, dgnifcant policy changes during this period included (a) introducing upward ceiaing adjustments or decontrling prices for consumer, producer, and agricultural goods; (b) phasing out mandatory production targets; (c) reducing import tariffs; (d) lihbalizing the regime governing foeign direct investment; (e) introducing "swap* forign exchange markets and initiating a phased movement toward a single floating exchange rate; (1) initiafing the development of unfair competition laws; (g) developing laws governing the protectin of intelleca property; and (h) reforming the tax system, including introducing a cororate income tax. 1.19 Regarding factor market deelopment, significant reforms included (a) initiating the transformation of the People's Bank of China into a nationwide central bank, with the phased separaon of its central bang functions from its commercial functions; (b) encourag the nation's speialized banks to function as commeil intermeiaries; (c) introducing a labor contact system to replace the 'iron rice bowl," witf the rest that employers and workers had greater disretion in negotiating terms of -6- employment, job description, and job tenure; (d) creating cross-enteise pension and medical insurance pools, unemployment compensation systems, and worker retaining and employment mformation serices, and movming toward the creation of commercial housng markets; and (e) reforming the science and technology system, including encouraging the development of a technology marect and enbancing the linge between research and production. From 1993 to Present 1.20 The period since late 1992 has witnessed several significant new tranches of enterprise reforms. The eirmton of the leadership's commitment to the economic reform launched in the 1980s was first made evident in the positions ta by the newly elected Fourteenth Party Congress in October 1992, which included the symbolic, but critical, step in March 1993 of changing the official economic philosophy from a planned economy on the basis of socialist public ownership" to a "socialist market economy.' 1.21 In November 1993, the Third Plenary Session of the Fourteenth Party Congress issued the 'Decision on Issues Conceming the Establishment of a Socilist Market Economic Structure.' This Decision outlines a 50-point agenda for economic reform to be attained by the end of the century across an unprecedented array of interrlated fronts, including (a) creating a 'modern enterprise system' of corporate structure, govemance, and management, based on the principle of corporatzatin that provides for full separation of the state's exercise of ownership rights from the enterprise's eecise of legal person property rights; (b) encouraging the development of diversified forms of enterprse ownership, including the 'privately owned, individually owned, and foreign-invested' enterprises; and (c) requiring the state to provide the conditions for enterpises under different forms of ownership to be able to compete on "equal terms' in the markelace. 1.22 The Decision of the Third Plenum of the Fourteenth Party Congress is undoubtedly the most ambitious plan for China's economic reform since the launching of reform in 1978, and may well prove to be a watershed in China's modern economic history. But it is important to emphasize that it is only a bluepnnt statement of principles and does not contain a detailed plan for implementation. Establishing a program for mklmenation of the agenda embodied in the Decision is the chalenge now being undertaken by the Chinese, and supporting and serving as a catalyst for the design of such an implementation program is a key role for the Bank to play. 1.23 Several components of such a progam are already emerging. Indeed, at about the same time the Decision was issued, and in the intervening months, a significant experiment dealing directly with entexprise reform has been announced: the '10,000-1,000- 100-10' enteprise reform experiment (to be introduced during the course of two to three years), which will provide for 10,000 SOEs to adopt new accounting stndards and asset evaluation techniques; 1,000 SOEs to transfer the management of corporate assets to a state assets management supervision committee charged with deciding on methods to enhance asset value; 100 SOEs to be fully corporatized as limited liability or lited liability -7- sharehlolding companies; and 10 municipalites to undergo comprehensive enteprise, economic, and social policy reform.Y/ the Shenyang Machine Tool Company Lmuted (SMTaC) is designated as one of the "100 enterprises, and Shenyang Municipaity has been designated as one of the *10" cides. 1.24 Clearly dealing with "the SOE problem" is still a central concern. In principle, there are three potential ways to address the problems in thae SOE sector: (a) continue to allow the more dynamic firms to compete with the inefficient SOEs, resulting in continuing shrinkage of SOEs' market shares; (b) apply the discipliae of hard budget constraints (both fiscal and quasi-fiscal) and bankruptcy laws immediately and radically to hasten unprofiable SOEs' exit; or (c) stengthen the existing market-based, proactive policy regime, which combines the disciplinaiy measures with supportive mechanisms to restructure potentially competitive SOEs and to foster nonstate enterprises to thnve and serve as a countervailing competitive force to SOEs. During the 1980s, policy relied primarily on the first approach. The authorities, however, realize that this approach is insufficient because so much capacity and so many resources remain botded up in, and continue to flow into, the SOE sector. However, an immediate and radical application of measures to discipline SOEs without supportive policies would clearly engender enormous economic costs and not be politically viable; potentially competitive firms, labor skills, and otherwise productive assets might be unnecessarily remnoved from production and become idle. High levels of unemployment could even threaten the reform process itself. 1.25 What is required is for the government to strengthen the existing proactive policy regime by phasing out SOEs' fiscal and quasi-fiscal subsidies comoined with the provision of a nurturing environment that allows for ganiing management, recombining corporate assets, and open exit and entry; shedding redundant labor and eliminating enterprises' social service responsibilities, while simultaneously ensuring the existence of a government-sponsored "social safety net"; and creating employment growth conditions, particularly in the service sector. D. OBjECTnVEs FoR SGTNG TE REFORM OF CHA'S INDUSnUAL SECTOR. THE DEVELOPIT AGENDA 1.26 The emerging development agenda for China's industial sector reflects the objectives articulated earlier of directly acedfleating industrial reform, particularly the areas of moderiing enterprise structure and govenmance and diversifying ownership, to introduce added flexibility into the country's industrial organization; improvingfurther the incentve and regulatory regine, to continue to reduce distortions and negative exenalities; and developing factor markets, to enhance productivity and fluidity in capital, labor, and technology markets. In partcular, the development agenda focuses on the elements outlined in the following pargraphs. l/ In fiat, 16 adthr than 10 municipaties have beem co for compehenive reform - 8 - Modernizing Enterprise Structure and Govemance and Diversifying Ownershp 1.27 Separating the Government and Productive Sectors. Reforms have begun to delegate business decision-making to SOEs and to break up some of the line ministries that have historicaly managed them, as well as to create the institutional framework required for the state to assert its ownership rights over its assets through state asset management entities. However, a number of issues remain to be addressed. First, SOEs' governance and managerial prerogatives, especially powers to divest practically assets and to change management, still need elaboration so that they can be prcticaly implemented. Second, a significant number of SOEs still maintain privileged access to capital through the fiscal system and quasi-fiscal subsidies via the financial system, and thus escape the discipline of 'hard budget constraints," maldng imperative the need to make all subsidies to SOEs transparent and curbed, if not eliminated. Third, the roles and functions of state asset management bureaus and state asset management (investment) companies are inadequately defined. Finally, beyond the recent promulgation of the Company Law, the corporate legal system still requires further development and regulatory implementation to meet the requirements of a market-based economy. 1.28 Restructurig SOEs and Fostering Ownerhip Diversification. Because of their continued significant role in the economy, many SOEs require a s he d proactive policy of restrring to facilitate further the transition to a market economy. By ignoring the problems, these SOEs pose risks by incurring unnecessary resource costs and possibly initiating social reversals that could delay the transition. Market-based restucturing programs require furnher changes in the incentive and regulatory regime, including continuing the move to a more open and competitive economy. Busines discipline-through both domestic and international competition and the imposition of hard budget constaints-is the linchpin to any restructuring program. Further reform efforts must focus on (a) increasing the pace of corporatizing entrprs within the framework of the Company Law, thereby providing for the formation of limited liability and limited liability shareholding companies; (b) creating a nationwide, market-driven restructunng capability that would have a multiplier effect across many industries and allow enterprises to exit, divest, and engage in asset sales so as to combine capital and labor in new ways; (c) establishing mechanisms for enteprises to pass social service provisions back to the govenunent to be financed through public revenues, or in the case of housing, to newly developed markets; and (d) creating credible and politically viable venues for shedding redundant labor, easing the adjustment of displaced workers back into the labor market, and creatng new employment opportunities, partcularly in the service sector. 1.29 StrengthenIng the "Enablng Environment" 41 for the Nonstate Sector. The Third Plenum's Decision advocates a policy context that moves from 'benign neglect' to active encouragement and the endunng development of nonstate enteprses, whether i/ Ths Werm enabling e refe to the wideging set of policies which actively foster the growth of new entt nteprim -in such a way tbat allows them to compete on equd terms with firms eady in the maet-and, m tun, creat pressu on inumbent firms to perfrm moe efficiety. -9 - TVEs, collectives, private enteprises, individual firms, foreign invested enterprises, or domestic-foreagn joint ventures. Implementation of this policy objective will necessitate the establishment of: (a) clearly and well-defined property rights and the autonomy and obligations that go with them; (b) broad neutrality in industrial policies as among ownership groups; and (c) equal access to bank loans and capital markets for nonstate enterpnses. Overall, the goal should be to devise a practical policy regime that brings into reality a 'market for different corporate structures and diversified ownership forms'-one that strengthens the compedtion among various types of firms to continue to redress the historical imbalance between state and nonstate enterprises. Inproving the Incentive and Regulatory Regime 1.30 Eliminating Distortions in Industrial PoLicies. Although much progress has been made in recent years, the stance of the country's incentive and regulatory regime still requires improvement. Policies need to focus on reforms regarding (a) prices, to decontrol completely the lingering pnce ceilings and further rationalize prices (e.g., in the energy sector); (b) investment policy, to eliminate directed credit allocation schemes and rationalize investment approval plans; (c) tax policy, to establish greater neutrality among economic acdvities and across income groups; (d) foreign trade policy, to continue liberalition of import tariff and nontariff barriers, especialy the import license regime; (e) foreign direct investment policy, to streamline the regulatory apparatus goveming the screening of foreign direct investment and to open further the sectors in which such investment is permitted; and (f) competition poLicy, beyond te recently promulgated Competition Law, to establish measures that provide for freedom of entry and exit for new competitors (both domestic and foreign) and to enforme fully against monopolistic enterpnse behavior on price gouging and collusion, and other forms of anticompetitive conduct. 1.31 MitIgating Industrial Pollton and Environmntal Damage. Industry is the largest single source of pollution in China. The Chinese authorities are increasingly aware of the need to address environmental problems in the industral sector, and recent official policy pronouncements call for economic development to proceed in tandem with environmental protecton. The government's good intentions notwithstanding, considerable scope remains for improvements in integrting environmental management effectively into economic policies. The pollution maagement system still relies heavily on adminisve command rather than performance-based mechanisms. The need therefore exists to strengthen the "polluter pays' approach, which includes fees, fines, and compensation payments levied on any entepise that fails to meet environmental standards. Developing Factor Markets 1.32 Developing the Labor Market. SOEs remain burdened with social service functions, notably, the provision of housing, education, medical care, and social secwity, and to a lesser extent, in light of the gradual introduction of the labor contract system, the prion of permanent employment. These obligations prevent SOEs from acting like the commemial entities the Chinese authonties now beleve they should be, and hamper the - 10- development of a freely funcdoning and flexible labor market, which is a necessary condition for the full development of China's modem enterprise system. In the wak-e of the Third Plenum's Decision, the need is now apparent to design implementable programs to establish the government provision or sponsorship of education, labor retaining, medical care, job information networks, and unemployment compensation; employer and employee-funded portable pensions; and self-standing commercalized housing stocks. 1.33 Furthering FInancIal Sector Reform and Capital Market Development. Capital market development, including the creation of an intemediation capacity to channel national savings into investment capital effectively, is necessary to facilitate the restructuring of the real sector. Restructuring requires that commercial, investment, and merchant banks, and nonbank financial institutions have an incentive to extend credit or to mobilize funds so that firms can afford new investments in technology and machines and the cost of severance for workers. Planned reforms include development of indirect monetary policy instruments, such as open marlkt operations, gradual liberalization of interest rates, development of government securities markets, and creation of a modern payment system; institutional restn of the People's Bank of China (PBC) to fiate centralized monetary policy magment; the transformation of the spedalized banks into commercial banks; and the establishment of a system of policy banks, including - a state development bank, an agricultural policy bank, and an export-import bankL 1.34 Promoting the Diffusion of Technology. In the mid-1980s, China undertook a major effort to transfonn its R&D system, from a highly centralized system isolated from the real economy into one that was more decentralized and better tied to productive activities. As oudined in the Third Plenum's Decision, the government is now committed to speeding up technological innovation by improving the enforcement of recently implemented intellectual property legislation; providing for the mobility of technical personnel from academic research institutions into the productive sector, creafting market-driven engineering agents to adapt international and domestic technology to local inputs and conditions; and fostering the trnsfer of technology from abroad through foreign investment, licensing, and build-operate-transfer (BOT) or turnky contracts. E. TH BANK'S RoLz IN CHINA'S bUS L SErOR TO DAm .35 The Bank's history of industial economic/sector work (ESW) and lending in China provides valuable expeience upon which new initatives-such as this one in Shenyang-are based. The ESW undeaken 5/ provides a partial assment of the main issues and options facing China's industry as the economy undergoes a transition to a market-oriented system, including analyses of past and current economic conditions of selected sectors/regions, measures the Chinese authorities have adopted to enhance S/1 PNeious ESW include (a) a cem machinery mannufcturg scto sty (Report No. 6551-CHA), 02187; (1) an electroics seor report (Report No. 7962-CHA), 06/90; (c) China Industrial Policies for an Economy in Transitio (Report No. 8312-CHA), 06/90; (d) lIndustral Restructuring: A Tale of Tlr Chinese Cities (Rt No. 10479-CHA), 12/92; (e) an ndustrl orgnzation and efficiency caSe study: the automotive sector (Report No. 9761-CHA), 06/93; and (f) a mchine tool sector study (Repot No. 10688), 04/93. - 11 - industrial performance, posibilities for strengthening and refing reforms drawn from lesons from other economies in transition, and proposed programs for industial retucnig. 1.36 Lending to China in the areas of industi restructuring and entepise reform includes a loan of $100 million for the Shanghai Machine Tools Project; a Ioan of $154 million for the Tianjin Light Industry Project; a loan of $150 million for the Shanghai Industrial Development Project and a loan of $150 million for the Tianjin Industial Development Project. These projects have been designed to undetake, in targeted secors and in diffeing orders of magtude, physical rationalizn and technical upgrading, enteprise reform, inf u strer.gthening, and industrial development strategy.fi/ 1.37 The Bank's program in the industrial sector in China now focuses on modelnizing enterprise smtu and governane, strengthening the inceve regine, and developing factor maws. Achieving these objectives requires greater attention to the overall pocliy framework and a cross-sectoral focus. The dialogue at the national level allows the Bank to help the government clarify its broad legal and regulatory regime; however, the actual implementation of poliies occurs at the provincial and municipal levels. Bank industial projects in China are being designed to provide (a) support in the desn of provincial and municipal policies that implement reforms in ownership and rngulati within the overall framework set by centrally determined laws and other measures; (b) assistance to both provinces and specific entepis underaldng key investment projects in important industrial sectors within the context of enterprise reform; and (c) suport for developing financial, labor and technology markets to provide for factor markets that will underpin industrial development 1.38 Direct Bank support for industial pollution control in China includes specific industial pollution components within the Beijing Environment Project, and the Southern Jiangsu Environmental Protecton Project. The Bank has also provided asistance for central environmental policy formaion tirough the Environmental Technical Assistance Project.7/ For details on the environmental situation and strategy for Liaoning Province, please refer to 'China: Liaoning Environment Project SAR' (Report No. 12708-CHA). F. MT RATONAJZ FOR BANK ACITVII IN SIENYG 1.39 Shenyang would constitute the third provinal city in the series of industrial lending, on the heels of projects in Shanghai and Tianjin. This city has been selected for he main reasons. First, it is th largest repository of accumulated capital and sklls in f/ Other Bank loans in the industil soeto includo four ferze loans, a proc4 a region cemnt proect, a rurd teholon proet (Spak), and five lines of credt for light induty deveopnt tough the China Investm Ban 7/ For a detile discuss of issus and drategy, pleasfer to *Chin Environmet Strawt PperW (po No. 9669-CHA, April 1992. - 12 - the Northeast, with seious productivity and pollution problems, yet it has the potential to be internationally competitive. Second, it has a municipal government committed to reform, including revamping enterprise structures to permit a more flexible industral organizaton and dynamic business decision-maling, as well as having a regulatory framework that allows for the rapid growth of the nonstate, private sector. Third, it has the strong support of the central government to become a pilot city for both economic and industrial reform. 1.40 The reform momentum in China has provided Shenyang with an opportunity to cxpedite the marketion of its economy by introducing policy reforms, reraiing the municipal government, restructuring its industry, and promoting the private sector. The Shenyang Municipal Govemment (SMG) has requested Bank assisance to identify reform priorities, to introduce systems for implementing reforms, to restructure Shenyang's engineering industry, to support pnvate sector development, and to abate industral pollution. 1.41 The Bank is uniquely positioned to respond to SMG's request and contribute to the revival of Shenyang's economy. A Bank-financed operation would help asse that the reform measures were compatible with the requirements of a market economy, and that ihese reforms were effectvely impmented. The Bank would thus play an instnumental role in Shenyang's transformation into an efficient and interationally competitive marklet eonomy that would be atuactive to both domestic and foreign private investors. Moreover, achievements and lessons from this operation would have a "demonstration effect' on other Norteastern cities and provinces and influence and shape national policy in the area of combining industrial restruchring with enteprise reform. - 13 - 2. SIIENYANG'S ECONOMY INDUSTRY, AND REFORM PROGRAM A. BACKGROUND 2.1 Shenyang,j/ the capital of Liaoning province and China's fourth largest city, with an area of 8,515 km2 and a popuation of about 6.5 million at the end of 1993, has traditionally been the most important center of industry, commerce, and distribution in the northeast. Shenyang's diversified natural resource base and skilled workforce have supported petrleum refining and metllurgical, chemical, petrochemical, timber, and engineering industries. However, despite its histoxical legacy and resource endowments, Shenyang did not benefit from the 1980s boom as much as many of China's coastal provinces. The reatively slow growth of Shenyang's economy was Particularly noticeable during 1987-91, when its GDP grew by an annual average rate of 4.1 percent, compared with the conesponding national annual average growth rate of 6.1 percent. 2.2 Shenyang's relatively slow economic growth during the 1980s was in large part caused by the lingering effects of the central planning system. The passive approach to system reform and the misallocation of resources 2/ resulted in an inefficient, echnologicaly obsolete industrial base, with a bacldog of environmental and worker health and safety problems. As elsewhere in China, Shenyang's pursuit of economic autarky led to an industial organization c tized by excessive self-sufficiency, suboptimal plant scales, and inflexdble combinations of assets and labor. Furthermore, the prvalence of poorly performing SOEs resulted in redundant labor, outdated manucturing management systems, and weak financial and cost controls. B. SUENYANG'S ECONOMY 2.3 With a 16.0 pecent GDP growth rate in 1992, well above the national average of 13.3 percent, Shenyang experienced a drmatic change from its 4.6 percent growth rate in 1991, which had been far below the national average of 8.0 percent. This change can be explained largely by the dominance of capital goods manu g in 1/ Acorded autonomous eonomic stat in 1985, Shanyag repoted direty to te centralgovmnt on eonomic Caffaira til the end of 1993, when tdis pfivleg was canceled. However, in Febua 1994, Shaayang's utonom eonomic staus was renstad and stengthened by its clhui as one of Xt 016* cities tie centrd govemment sdeced for comprehensive ecnomic reforms. I For example, in the machine tool industry, investments in nonprductive asset grw at twice the gowt rat of investmes in productive assets during the second half of the 1980s. - 14- Shenyang, which is highly dependent on national capital construction projects,Y and to a lesser extent, by reform measures introduced in late 1991 (pa 2.13). Even though the standard of living in Shenyang in 1992 exceeded the national average,A/ it was about 15 percent lower than the aveage for the coastal cities. 2.4 During 198092, Shenyang's economic structure changed substandally conmpared to changes in the national economy as shown in Table 2.1. While the decrease in the share of Shenyang's agncultural sector was commensurate with that of the average for the country, the decrease in the she of the industrial sector and the increase in the share of the tade and services sector in Shenyang exceeded by far the correspoding changes in China. Nevertheless, despite a decrease in industry's share of Shenyang's economy, industry remains the domint sector, and accounted for about 52 percent of GDP in 1992. Table 2.1: CmIA's AND SyMNANG'S ECONOMIC STRUCTIE Year Shaes of GDP bv Sector (in oernt _ iculture Indut Trad andsvices China Shenysag China Shenyang China Shenyan 1980 30.4 9.5 49.0 67.2 20.6 23.2 1992 23.9 7.9 48.2 51.6 27.9 40.5 Sarces: COun Sausical Y60xolb ad Senyg Econdc Ybook, 1992. 2.5 As Table 2.2 indicates, the changes in Shenyang's economy resulted in a shift in the struchte of employment during 1980-92. While employment in the agricultura sector decreased, industy's share of employment remained relatively stable and that of trade and service increased. 2.6 Shenyang's foreign trade expanded rapidly during 1985-92. Its exports increased from $21 million to $650 million and its imports grew from $43 milLion to $290 million. In 1992, industrial products accounted for about 90 percent of exports and more than 90 percent of imports. 2.7 Although the economy is becoming more open and competitive, Shenyang's industry is still inefficient, and continues to be an impediment to future growth. Indusial labor productivity has grown more slowly han the national average in the years since I/ In 1990, when Chin adopted an autr prgam, my cal constuctio projects wreh cacl or posponed. =hin y i Shmyang was srously athced ntil 192, wh a nationwide cal countsuction boom pvided a owing miket for cpital goods. 1In 1992, Siyang's ban ad rura per capitm (in currant prices) reached Y 1,943 and Y 1,155, respectively, compared with the corresponding national averages of Y 1,826 and Y 784. - 15 - Table 2.2: SriANG'S LABOs STRucWE IN TME ECONOMIC SwroR Sector 1980 Employment 1992 Employment (in percent) (in percent) All sectors 100.0 100.0 Agriculture 24.0 17.4 Inustry 53.6 51.3 Trde and srvices 22.4 31.3 Source: Shenyang Economic Year Book, 1992. 1985. Shenyang's output per worker increased from Y 17,430 (1980 prices) in 1985 to Y 28,060 (1990 prices) in 1992, but the national average increased from Y 12,370 (1980 prices) to Y 34,340 (1990 prices) in the corresponding years. C. SHEYANG'S INDUSrAL SEC)R Structure and Performance of Industry 2.8 Like other industial cities such as Shanghai and lianjin, Shenyang stated to develop its industry in the early part of the century. GOC invested lare sums in Shenyang during the 1950s and 1960s to turn the city into a base for heavy industry. However, industry expanded at a slower pace during the subsequent decades and, as noted earlier (para 2.4), industry's share in Shenyang's GDP declined. Nevertheless, because of the earlier investments, Shenyang's economy is chaizd by the dominance of heavy industry. In 1992, the industrial output value totaled approimately Y 48 billion, with the share of heavy and light industries standing at 67 percent and 33 percent, resectively. Within heavy industry, engineering / is the most impornt subsector, accounting for 40 percent of industial output value, dwarfing the next largest industry, chemical and perochemical industries, which account for 12 percent. The metallal industry acounts for 9 percent and other industries for 6 percent. 2.9 Shenyang's industa strucue changed damaticay during 1980-92. The share of SOEs in industial output declined from 76.1 percent to 47.4 percent At the 1/ A diversifie and hbtogenous subetor, t«e geerdig iNdy inudes _nfacuw of fbdcated metl produc electrical andnonelectrical _mchey; t_sportequiment; dadsentific, muri and controllig equpnt It. _eitlly consit of the of prodct group 38 in Xth UN In _latioa Stndard bIdustdal Classification. - 16- same time, the combined share of the private sector f/ and foreign joint ventures increased from virtually nil to 15.1 percent. 2.10 Shenyang's large and medium enterprses (LMEs), which totalled 324 in 1992, are a major feature of Shenyang industiy.7/ Although the number of LMEs is small compared to the total number of industial enterprises, twy generated about 54 percent of gross industral output and accounted for about 45 percent of indusial employment. 2.11 Like elsewhere in China, many of the state-owned industi enterprises in Shenyang suffer significant fiancial losses. In the past, the financial losses of Shenyang's SOEs have displayed a marked cyclical pattern. In 1988, when the economy was overheated, about 16 percent of the total number of SOEs suffered financial losses, but this figure rose to 32 pent in 1990 when GOC's stabilization program was in full force. By 1992, when the economy was again on a cyclical upswing, the percentage of loss-making SOEs dropped to 21 percent C(able 2.3). Table 2.3: NumB OF Loss-MAKG SOEs, SHNANG, 1990 AND 192 Description eC= iduAy. Light indusgr 1990 1992 1990 1992 Total no. of SOES 344 358 268 281 No. of loss-maling SOEs 111 72 83 64 Source: Shenyang Statisdcal Bureau. 2.12 Shenyang is one of China's most heavily polluted cities, pimarily because of its old heavy industry base. Air quality is a severe environmental problem because of the dependence on coal. During the cold winter months average ambient sulfur dioxide and particulate levels are three to four tir.e the World Health O izaion's recommended levels, with some districts experiencng considerably hir levels than the city's averages. Surface water quality is also a major problem: the poor quality of the Hun River rsulting from upstram pollution suffers furter degradation at Shenyang because of the lack of wastewater treatment Ufities and the high level of industrial wastewater !kl / nlude both sole proprietor hat loy eg or fewer and enterpiss owned by individuas t emloy morm than eight people. Z/ Mhe definiton of large and medium scalo enterp_ie diffeirs fon one subsect to wother. Some subsectos use only a sng indicator such a ccity, while otes use multiple critea. For instance, an enterprie with a historical vdue of fixed assets more than Y 40 million is demed to be a large etprise in th macine tool subsector, &a. one with fied ase betwee Y 10 and Y 39.99 million is a medium eterpise. Ihe criteria ame set by the Chinese State Council. - 17- discharge, which amounts to 70 percent of total discharge. Shenyang generates considerable quantities of hazardous wast, estimated in a rect study at around 350,000 tons, whose storage, trnsport, and diWosal, as in the rest of China, is basically unregulated. ). SENYANG'S REFORM PROGRAM 2.13 In 1985, GOC designated Shenyang City as an "exiental zone for comprehensive reforms, n an outcome of the Government's recognition th at efficiency g could only be achieved through further reforms. Following several years of experimentation, SMG issued the Economic Strucural Rcjbrm Plan of Shenyang City in November 1991, an ambitious 10-year agenda that includes a wide tange of reforms of entePris; urban infrastructure; prices; foreign trade; housing; social secuity; and the scientific research, financial, and tax systems. 2.14 In mid-1993, with Bank assistance, SMG developed a more focused medium-term reform program that addresses (a) SMG's role and organizaton, (b) the need to corporatize and harden the budget constaint on tht municipally controlled sta-owned enterpises (MCEs), (c) the social sector, (d) fiscal policies and the financial sector, (e) private sector development, and (i) the environment. To implement these reforms, SMG, in consultaion with the Bank, has prepared an action program that identifies reform measures already taken and time-bound actions still to be taen. SMG's commitment to concurrent implementation of the remaining economic and ate reforms is reflected in its Leter of Policy Statement (LPS) addressed to the Bank as weJl as in its action program (Anex 2 1). 2.15 As a central part of its reform program, SMG has developed an industdal development strategy. The objectives upon which the strategy based are consistent with those outlined in Chapter 1. The srate focuses on hardening SMG's budget constaint on Shenyang's SOEs, revitalizing and optimizing the large and medium-scale SOEs, establshing independent enterprise management systems, and subjecting these entepises to market forces. The other areas emphasized in the strategy are divrsitying the ownership of SOEs; developing TVEs and the private sector; attracting foreign investment and technology; encouraging close cooperation between R&D institutions and industrial enterpises; easing entry; simplifying exit; facilitating mergers; enforcing natonal workplace safety standards and developing supplementuy reglations to assure workers' safety; relocating polluting enterpises and abting pollution; and developing financial, social, and physical infrasucture. SMG's industdal develm strategy was presented to and discussed in the Shenyang Economic Development and Strategy Itonal Workshop, held in Shenyang during July 12-13, 1993. Based on comments made by the workshop partcipants, the sttegy was revised and subsequenty adopted by SMO. 2.16 As discussed in Chapter 1, for such reforms to be effective, the authorties must simultaneously pursue parallel reforms in government funcdons, the fiscal and financial systems, and the .ocial sector, and further develop the market economy and the private sector. Shenyang's economic refrms spond to this need. Shenyang has - 18- organized its reform program, summarzed as a policy matrix in Ang= 2.1., under the follow g topics: municipa government reform, enterprise reform, socil sector reform, fiscal and financial sector reform, private sector development, and environmental policy refom. Munidpl Governmemt Refonm 2.17 To realign govement functions so that they are appropriate for a market economy, SMG intends to change its role. In particular, diret management of MCEs will be replaced by indirect control, thereby reducing government intervention in their a tions. SMG has developee a plan to eiminate line bureaus that previously controLed SOB operations. This entails restuicturing and downsizitLg the govemment's opeations. For more details see A= 2.1. Enterprise Reform 2.18 The principal objective of the enteprse reform program is to increase the effia mmim wM be psyabk to loea govem_eu-si While haw ta xlvldenOiaMw M bepay"blto mrn _aldr_ tye otaaqrl wl bepaya to I R.sponibbhy & Babjant ame Objectisg Mears taIND Measures to be tabn linin Untarpeis. To' treucmpsatcyand Uni srcent, a taxlidon tcna Ipbnot _h ewly _adod inma tX ratlons, FlnceTU Taoes - treatamat of enterpulm vari batmnpd vadd y. With the onmlgalo of Sta ad am MC8 tam ad profib oan ser bass. wue, 1994. _tW to taX 7_a C an rcet nowwlonl regulaton r Incoeo tax, a nifom rt of33% w be applIed to a pes of owne exetioa verse. wbich an sujec to th Incom tax rats stpulted in di jol*ventre kw (appBcabi, ra to Sbaeyang, 24%). Fuh, do pad pacie of ombining DMC xitoo tax an profi. as per te co reqiawbty sysem, ka been _diacon as of bJas 1, 994. IL rIaca Set R@1m MG'.sopapof actions asfn In tarer la*rgeydepedeoapproa by th cer.) Reform of To regthen bank' epealo. nternational accountigstdars ha been bIntoed Introdce incen to ensure repayment of overdue PBC and SMO, Bang as of July 1,993. Bansa requited to prepare loas by MCs to the bans. Seek PBC's agreeme ead-1994. hnatioa financal and managemen pots allowing for an for revision of bad debt prision in order to a Bame of o* CAML componet (capial, ass ccuraly rflect port stdt. qualit, manageme, canings, an Gdity). Bak' expandon andlor enty into additional nodbank atvies wil be conagent upon vedficatio of ppo ae of thir as quat and financad ams as wes as th intral proedur and syms to sggateS betwee banking and nonbankiew atvites. Rem of To nsom the speciaed bans ICC and BOCOM Sheyang b hes hav been As this exercis and exted it to othec specialized PBC, end- Specialized ino commmial bns. seecd to experimat with eparaion oi the policy and ba. Consider expeimental introduction of 1995. Bunks commerial lnding portfolios. The rs of this loaWdeposit tio as will as mues to impove risk e is expecued in 1995. managenent. Bank To stre n PBC Shenyang BOCOM Shanyang Branch has been incnded in the Asess the resut of the pilot examination and extend PBC, end- Supersion Branch's perviso capacity. piot bank examination tat PBC (ed by the Head the prio to odher banks duing di EIghth-Five-Year 199S. Offc) wil implement dring 1993194. Plan Follwing aopon of pendig anenes to bank upervionby *e center, supevie banks accri to itrnaton pratc. 1.11178 0NE[. [ ii ii 1111 M ts j 1 'i 111 I HII it l l1 ttX]t l Jii,IIr ' ji'i ,,,,i lil,.., I i *11l0 t I ii} i }i i 0 I 11 1.ii 1II ResponsIIiuty& Subjec ae Objectives Measures Taken Measm ito be Taken tuming Allevisao of To enconraw participation of the A:ccs to credit wa cosidered a major containt to Absure avaabity of edequate edit to the prive sew- Bankg Sedor Co znis priva or in economic acvi- PSD. bakg sectors avaiable cdit to th pi- tot. ties. val ector hincad fiom, Y 42 mn I 19n 2 to Y 120 rlimon in 1993. To compensate for indquacy of coateld, three m fis (Y 1.8 miol inn agge- ga) etabhed by do privt sec woudd prvide mpplaly guarntees for bank baowing. 0. hnb_Asp J Air Qualiy To deease aint Udioxide Wustrial cod boiles hav been renovatd ad Introducpemi sysem for mjor air polutes. SEPB, 1994- nd paticuat ls to wein perators trained. Levy sysm is in fonce to control Reloca smehe (40% of total SQ emissons). 97. WHO stadars. ad penalize pothders. Heavy ndom monoring for particlte is care out in the wer Decras dhect cod burnig by substuon of ectkic- sason sod fine e imposd on violato. ity, ditdct heatng, and towns' gs: SMO & Centrl Coness sy financing of poli conto prjec is Gonm . aaable (ai and war). Te plai to control Dirict Heting (2 million in) cogenaion fkom W. o mnmmer tmn dust lev is enouaged. Ditict beating Power Plant. 1997-2000 for 3 mlionsquar mtes, via cog_nration from 1L Powr Staion is in place. Cenr han plant (2 mi m). 199-97 Utn power plat W district hetng cogeetn (1.S to 2 mon n). 199-99 Wae Quality To impo quty of nrfce Prmit ad levy cg systm is in fe to contd Im forceftlness of permit and levy charep system: SEPB wr. and penlize polu . Monit Sy is hIn place to enore st ar. Wdaer cservation sb e_ougd Exind pem sy from 5? to 300 eqntises. 1994-97, SEPS tbog a taiff system. Nordern was r taeanunt pla (400,000 tpd) under _onrion. Cn to mipb pollt stem for permit and levy To be ageed, charge. SMG& 1996 onwrb . Iroueprtstmea rpeguaions fbr remkoval Of insolu0e. SEPS. Estalis adiltorml nuoipe wafte waler tretmen Pb: . C. No. 2, 02 l n tpd N No. 3, 0.2 =milon ipi - 81- -X2" I i§ i 1 i fI l 111 1 II I iii1 liiilllX - 82 - ANNEX 2,2 FOURTEEN AUTONOMOUS RIGHll FOR STATE-OWNED ENTERPRISES Regulation on Transforming the Management ms of State-Owned Indusial Eprises 1/ State enterprise autonomy refers to the authority to occupy, use and dispose accordin to law the property entrusted to them by the state for manage and buiness purposes. Under this autonomy, state enterprises enjoy the following fourteen ghts, provide they are executed accoring to the responsibility system that defines the reaionship between the state and enteprises: * producdon and management decision-making power, * products and labor services pricing power; * right to sell their products; * right to purchase goods and materials; * imp and export rights; * investment decision-making power, * right to decide an the distribution of reained eamings; * right to dispose of their assets; * right to enter joint opeaons and to merge with other enties; * right to hire workers; * pson management power, * fight to decide on the distribution of wages and bonuses; * right to decide on the enterpnse organizaion structure; and * right to refuse proaions of their physical, financial, and human rsuree 1.11 ThI a¶sgl_ was pomulgaed by Xt Sato Council i July 1993. -83 - ANNEX 2.3 ARKET PROSPECTS FOR MACHE TOOLS INDUSTRY: CHINA AND SHENYANG MACHINE TOOL COMPANY, LTD. Desciption of the Machine Tool Sector 1. The machine tool sector-in China as in other counties worldwide-represents the core of an economy's industrial capacity. Indeed, among industial sectors none is more strategic for investment and economic growth tan machine tools. A machine tool is a machine that can shape or form metals and other matrials by means of cutting, pressure, impact or electrical techniques. Machine tool manuf s make machine tools and sell them to firms that produce products made of metal or other mateals. In tun, these products are either sold as final output, such as airplanes, or as productive machinery used to make something els. For example, when a farmer needs a new mechanized plow to plant crops, it goes to a plow manufacrer. But the plow manufacturer must use machine tools to make plows. When it needs improved or new machine tools, the plow manufcturr does not have the ability to make them itself, and must buy them from machine tool makers. In this technical sense, then, the machine tool industry is the source of all equipment-even of machine tools mselves, since it takes machine toos to make machine tools. lhe madhine tool indusny dtu serves as the eingering backbonefor vrtualy allU maacring idustries, incding mjfor idutrial sectors, such as capital goods and consumer durabk goods. 2. The machine tool sector is a combination of specialized metal and other mateial-working crafts and capabilities. For metal working-machine tools, for example, it can include processes for forging and casting metal; cutting raw metal sheets and rods; bending, preing and otherwise shaping coarse metal forms; drlling and borng holes in metals; grinding metals; measuring the parts produced for consistency with standrds and tolernces; and assembling complete machine tool machines for delivery as final output. While a single firm can cary out many of these oprations at one location, in general, throughout the world, countries' machine tools sectors are comprised of specialized firms, each of which concentrates on one or a few processes or on a category of basic parts or sbassemlies. PFor example, the manufacture of iron and steel castings can be carried out in indepedt foundries, who sell these castings to machine tool makers.l/ 3. In fact, the machine tool sector is much broader than its engineering core. The notion that machine tools manufacture themselves can lead to an overemphasis on verical integration and other fonns of self-sufficiency as well as on technological autarky. 1/ In gum8 , do prhia input to foundiws as cp nd pig irn 84- 3ANNX 2.3 The machine tool seto relies on components from other industial sectors, such as electric parts and electonics; it needs fnnial and management skills, which are very different from the sectr's engining skils; and it is dependent on information-gatheing systems and rquires marketing skls, which have very litde to do with hardware. Thus, in order for the machine tool industry to serve efficiently its pivotal function in an economy's overall induswtial sector, it is most accurtely seen as jit of an entire complex of -pedgizd wctors. 4. Machine tools are typically divided into two principal categories: metal- cutting and metal-fonring machines, with the former accounting for the major share (about 75 percent) of machme tool production worldwide. Technologically, the basic types of machine tools in use today were developed by the end of the nineteenth century. However, with the advent of the motor vehicle industry and the moving assembly line, demand increased for more productive and accurate machines. As a result, during the past two and half decades the major area of machine tool development has been automation and the incorporation of elechtoics into conventional machine tools, as exemplified by the development of sophisticaed numerically controlled (NC) and computerized numeically controled (CNC) machine. Compared with conventional machine tools, NC and CNC machine tools have tremendous advantages in greater flexibility, shorter delivery schedule, easier control, and higher precision, quality and reliability. Use of NC and CNC machines pmits greater economies of scale and product varties in important machine tool products, largely through modular design construon and outsourcing for standardized par. While a relatively modest portion of machine tools in use today are NC or CNC, the share of sch machines in the annual production of machine tools has been risin adily. The tionalMbe Tool Market 5. In 1901, the most recent year for which data are availUable, total machine tool production wolIdvide was $41.2 billion, with the top ten machine tool producing countries accoundtn ior 88 percent of output Crable 1). These ten countres also accounted for the bulk of internafional trade in machine tools in 1991, with an 85 percent dhare of world eports and 66 percent of world imports. Importantly, the globalization of the world economy that has emerged for many sectors and commodities i also a featre of the machine tool industry. Tbe intnationaliation of the machine tool market, with increasing compeion among machine tool producing countries, is reflected in the fact that in 1991 about 44 percent of worldwide machine tool production was exported and about 40 percent of worldwide machine tool purchases were imports. Foreign direct investment (IDI) is not a predominant feature of the machine tool industry.2I Foreig investment in developig countries in the madhine tools sector have generally tkn the form of techology licensing or coproduction arrangements or minority joint ventr. 21 An me a to dt is BDruil, where svra Germa we nuchiaw tood have establided emldam in collborai wi Gwnm and US autmble firma. -85 - ANNE2.3 Table 1: WoRw MAcCniN TOOL PRoDUcTION, DFMmND AND TRADE, 1991 ($ million) Country Production Demand Exports Inports Japan 11,632 8,291 3,975 634 Germany 8,813 6,017 5,104 2,308 Italy 3,470 2,718 1,625 873 United States 3,266 4,430 897 1,971 USSR 2,500 3,400 100 1,000 Switzerland 2,027 720 1,730 423 China 1,446 1,768 202 524 United Kingdom 1,288 1,359 728 798 Taiwan, China 963 627 625 289 France 924 1,827 442 1,346 Rest of World 4,881 7,178 2,780 5,167 WOID 43AL 41210 38.335 108 15.333 Source: The Economic Handbook of the Madhine Tool Industry, 1992-93. 6. The market for machine tools is chaacd by strong demand sensivity to business cycles, which is understadable given that the demand for machine tools is a direct derived demand for many key industrial products and processes. As in other secto, exporting machine tools can serve as a counte-cyclical stmategy for maintaining production, hence profitability, when the domestic economy is soft. However, in light of the glolization of the machine tool market-and the world economy in geneal-a defensive strategy of exporting is not a substitute for maintaining a strong domestic market posin, one where intermarket linkages are diverse and robust. indeed, trade in machine tools is sensitive to intnational changes in aggate demand. This sensitivity is illustataed by the changes that took place during 1990/91, which was a period of recession in many key regions of the world economy. Over the period, while aggregate machine tool demand deeased 9.6 percent, machine tool expozis and imports fell 11.5 percent and 15 percent, repetively.3./ (Importantly, world machine tool production decreased only 8.2 percent, indicating the modest stabilizing effects of trade on output levels.) Beyond shft in the macoeorno envronment, changes inpodua mic demand-brought about by cianges in relate prices and tedhnologcal advances-are also a salient dharactertisc of the internaional macie tool market. Overal, success In the machine tool busness req:ures fleibilty and robustness to such dhanges. a/ Autr' caculWons fom De Economk Hadbook if Me MaUda Tool Iudwty, 1992 (hauftr ufwnd to as AMT Handbook). - 86 - ANNEX 2.3 7. To analyze intenational demand for machine tools it is usfiul to divide the world market into seven regons: North America (United States, Canada, and Mexico); Western Europe; Easten Europe and the CIS; Asia; The Pacific (Austaia); Latin America; and Africa. Table 2 shows for 1291 the portion accounted for by each region of world consumption and of world imports of machine tools, as well as each region's import intety (ratio of imports to consumption) for machine tools. Westen Europe and Asia account for the largest portion of world machine tool consumption and imports; the relatively low import intenites of Asia and Eastn Europe and the CIS indicate potential growth areas for machine tool exporters. Table 2: REGIONAL DEMAM AmND ipORT INIENSY IN ThE WORLD MACINE TOOL M r, 1991 Import Share in Share in Region Domestic intensity world world demand Imports La demand imports - ($ million) - (%) North America 5,165 2,570 50 13 17 Asia 12,975 2,951 23 34 19 Western Europe 15,065 8,012 53 39 52 e. Europe and the CIS 4,456 1,455 33 12 10 Latin America 537 222 41 1 1 Afiica 56 49 88 < 1 < 1 The Pacific 82 75 91 <1 < 1 La Ratio of iMports to demand, in percent. Source: Calculated from lhe Economic Handbook of the Machine Tool Indwtry, 1992-93. 8. Westem Europe. With respect to the Westen European countries, the vast majonty (more than 75 percent) of machine tool trade is camed out among Western Euwpean firms themselves. Regading the types of machine tools imported into Westem European countries, about two thirds are NC or CNC machines, coming mainly from Westen European producers, Japan, and the United States; the remaining one third of the imports are conventional machines, sourced by not only Western European producers, but also by producers in the CIS and Eastem Europe, Taiwan, China and China. 9. Eastern Europe and the CIS. The machine tool market m Eastern Europe and the CIS is still largely self-sufficient from the days of the Soviet Bloc and thus there is rlatirvdy little liance on imports from outside the region, although this is changing rapidly and the market for imported machine tools-both middle and high-levd - 87 - ANNEX 2.3 machines-is potentially large. At present the market is charactrzd by an oversly of machine-tool making capacty, with many facilites operafting at inefficient scale and utiling inferior technology. Joint ventures with Western European machine tool producers are tdang place, fostering consoLdation and modernizaton. 10. North America. The North American machine tool market is chaizd by klrge production capacity and strong demand for all grades of machine tools.4/ High grade, high pnced machine imports into the North Amencan countries are dominated by cross-border trade between the United States and Canada (primarily United States exports to Canada), as well as imports from Western Europe and Japan. Conventional, low pnced machine imports mainly originate from developing countries. 11. Asia. Asia is the fastest growing machine tool market, the result of an increasing emphasis on manufuring investment in the region. The Asian market for machine tools is dominated by Japan, South Korea, China, and Taiwan, China. While conventional machines account for the largest portion of demand in the newly industialized counties and developing countries in the region, as development in these countries increases, the demand mix for conventional and NCICNC machines will change, with growing emphasis on the latter. The main sources of machine tool imports to Japan-which accounted for only about 8 percent of that country's machine tool consumpton in 1991-are the United States and Western Europe (about 75 percent of imports), who shpped mostdy high grade machines. 12. Lat America, Africa, The Padfic. Brazil and Argenina are the major machine tool producers in lAin America, with Bail producing in recent years about ten times the amount of machine tools as Argentina, and xchibiting a level of domestic demand and production that ranks fouteenth and fifteenth, respectvely, worldwide. A sgificant amount of machine tool trade within Latin Atnerica occurs between Argentna and Brazil. Both countries, however, as well as other countries in the region rely heavily on imported machines from Western Europe and the United States. In Africa, South Africa is the only machine tool manufactrer, and its level of output is the smallest in the world. It relies heavily on imported machine tools, with imports accounting for about 88 percent of consumption. Australia's siation is similar. It is one of the smallest machine tool producer in the world, and it imports about 91 percent of domestic demand (althoi'gh Tt exports about half of the machine tools it produces). 13. Ftore World Demand for Machine Tools. Annual growth in world demand for machine tools in the aggregate from 1986 to 1990 exhibits a robust trend, averaging 11.6 percent.5/ As mentioned earlier, the effects of the 1991 recession, which occunred throughout much of the world, resulted in a decrease in machine tool demand in M From 1986 to 1993 he US had inpavomty expc retictois on chit ools wthJapan and Tawn, Cina, which limitedm tool impots f*om t couies. Authores alons fwm data in tins No. 6 Isttuo of Proect Plang and R_mar Miiry of Mahiy and EleBnic, Feabt Sudy for Word Daks Shenyng Engieing I1duty TecdnolocSl Reovato oject, Volume I, p.132 (June 1993). - 88 -2. ta year of about 10 pent. in 1992, while recession still lingered in many regions, in some (notably the United States as well as newly idustrialized countries), economic growth either resumed or was sustained. Consequently, alt'hough statistics are not yet available, world machine tool demand is believed to have inceased slightly to moderately, although not reaching the trend exhibited in the last half of the 1980s In 1993, economic recovery began to spred and solidify, though key countries, such as Japan and Germany, stil exhibited very sluggish growth, if not recessionary charactists. The World Bank's fo0ecast for average annual world GDP growth from 1993-2000 is 3.2 percat (rea terms), somewbat below the growth rate during the last half of the 1980s. Tne successfi conclusion of the GAIT Uruguay Round trade negotiations should insure this target is met, if not exceeded. Taken together, this analysis suggests that, all other things equal, fuue world demand for machine tools is likely to approach its long term trend by 2000..& ChIna's Machine Tool Industry 14. China's machine tool industry generally originated in the early 1950s, when machine tools ben to play a key role in the former Soviet Union's program of indusal assisnce to the country. By the late 1970s the machine tool industry in China bad grown significantly, and the industry's underlying technology was still fundamentally based on the Soviet design, although some Chinese modifications were evident. Because the machine tool mdustry-like other industries in China that played key roles in the centrally planne economy-enjoyed a seUers' market with essentially unlimited derived demand, it faced little pressure to either modernize traditional process and product designs or establish v -tical or horizonta linkges with client industnes, thus filing to exploit ppomnities for product and process specialization and associated economies of scale and scope. iS. Since 1978, when China began market reforms and acceld its comemcial opening to the world economy, and especially in the last few years with the rapid GDP growth, its machine tool industry has grown sizably and expanded its exports; toward the end of the 1980s, following exposure to inteonal technologies, China's machine tool industry began to computeize its products and processes. Price controbls on mhine tools, which began to be eliminated first on special purpose tools in the eary 1980s, have since been diminated on all other machine tool products. Until the mid- 1970s, the Chinese machine tool industry emphasized the production of metal-cutting over metal-forming machines. With growth in the production of metal-forming machines durig the 1980s, by 1991 the prporton of production of the two types of machines was more in line with international pracdtes. 16. In 1991, China's machine tool industry had a producton level of all types of machine tools of $1.4 billion, maldng it the seventh largest producer worldwide, but fi1 If this argumet is correct, the foecst of hins No. 6 Iitute of Prqject Pbling and Resoeh of the Miistry of M schnery and Elctocs Iduty for word demd for metal cuttig mahi tools to 2000 is a consmeative on: the istitu's forast is that by 2000, annual world demand for metl cutliog mchn ill incue about 4 percenL -89 - ANNEX 2.3 acounting for less than 4 percent of the world market (Table 1). Among developing countries, China's machine tool industry is the largest, accounting for more than 25 percent of developing country machin tool pducton Chnese demand for all t of machine tools in 1991 was $1.8 billion, again, the seventh largest domestic maket woddwide, but only accounting for less than 5 percent of world demand (Iable 1). 17. Despbe mcent progress, Ohna's macdne tool lnduty stiU is dharacterhzd by significa problems. Machine tool enterpis are saddled with large amounts of redundant employees, productivity is low, modern technical and managerial labor Skills are rarely udiized, quality control is not emphasized, and there is exaggerated diversity in product ines, and excessive reliance on in-house production of inputs (i.e., excessive upstream verdcal inteion). While the industry made significant strides in technological sophistication during the 1980s, the technology employed presently still lags considerably beuind intaInal practice. As of 1990, NC and CNC macines accounted for only about 10 percent of China's machine tool production, compared to 20 pement for India and neary 30 percent for Taiwan, China, more than 60 percent for Germany, and 70 percent for Japan. Generai, Chnese mahine tools today are good enoughfor geral puposes, bwnotformodern high-tech ivqWremwn. China's slow developmt ofNCICNC machine took Is largely dte es* of the fact dw in convenional macine tools are not of the quaUty and sophistcadon requdred to prodwce NC/CNC machie. Consequently, the industry has largely been rqroducing itself at relatvely low technology levels. While it is true that over ime the technoogical sophistcation and quality of China's conventional machine tools have been increasing, there bas been decdedly inattention to this fundamental infiastucu-building task and more attention to a short-sighted stategy of yqing to leap" to NC/CNC production. Such a stategy is not a substitute for raiing the quality and sophistication of the country's generl conventional machine tool-making capacity and unlily to be self-sustaining. 18. Domestc Market Structure. Lie many other industies in China, owing to the histocal legacy of a planned economy, the concomitant desire for provincial sdf- sufficency, and the absence of a developed intnal transortation inucture, 28 of fte 30 pwvince-leve jurisdictions have varying degrees of machine tool production capacity. While 70 percent of this capacity is in 10 province-level jurisdictions, the top five firms account for only 20 percent of output. Tbis low degree of producer concentration reflects significant regional dispersion. On the one hand, this low degree of concentation-if it is ssaned in the face of further market reform of the Chinese economy and the deveopment of interregional transportation links-portends an element of a compettive maret strucure. On the other hand, it demonstrates an uneconomic duplcaion of facilities and the absence of economies of scale and scope, both at the plant and multiplant (company) level. 9 AN 2.3 Future Chiese Demand and Supply for Machine Tool 19. Demand Forecast. The sector study 7/ has estmated China's domestic demand for machine tools to 2000. As indicated in Table 3, the following annual averge demand growth rates are projected: 12 percent and 14 percent in 1991-95 and 14 percent and 16 percent in 1996-2000 for metal-cutting and metal-forming mchines, repectively. The rao (n terms of output value) for demand of metal-cutftng to metal-forming machines is forecast to fall from its 1990 level of 2.8 to 2.6 in 1995 and to 2.4 in 2000. Among metal-cutting machines, demand for conventional machie tools is forecast to increase at an annual average rate of almost 9 pernt in 1991-95 and almost 7 percent in 1996-2000. The corresponding figures for metal-cutting NC/CNC mahning centers and other metal- cutting NCICNC machines are 3 percent and 4 percent, and 25 percent and 25 percent, respectively. In terms of output value, among metal-cutting machines, in 1995 the shares of total demand accounted for by conventional and NCICNC machines are forecast to be 66 percent and 34 percent, respectively; in 2000 the respecdve shares are forecast to be 48 percent and 52 percent. Thrs indcaes tha over the decade there wiU be a gradwbut teady shft in the composition of machine tool demand in China towwns mow sophircated machines, a shft ta can come about only as the economv's dusal base deepens. Table 3: FbRzCAsr OF CHIA'S M&CHI TOOL DEMAD AND SuPPLY Demand Supplv Avera annua output value .veragenual Output value _g hu! (Y milion. 1990 a- (V miomon L190 1991-95 1996- 1990 1995 2000 1991-95 1996- 1990 1995 2000 2000 2000 Meta cutting 12.0% 14.0% 4,643 8,183 15,756 10.0% 12.0% 4,348 7,003 12,342 Machining center 3.0% 4.0% 101 117 142 3.0% 4.0% 55 63 77 Other NCICNC 25.0% 25.0% 863 2,634 8,039 12.0% 14.0% 491 865 1,665 Conentional 8.8% 6.9% 3,5SS 5,432 7,S75 9.8% 11.8% 3,803 6,075 10,600 Meta formuing 14.0% 16.0% 1,655 3,186 6,691 12.0% 14.0% 1,103 1,943 3,741 Source: 'China: Machine Tools Subsctor Repodt' Report No. 106889-CHA, June 28, 1993. 20. The following factr undergird the demand forecast China's domestic market will have a strong and growing demand for conventional machine tools and low- level simpler NC/CNC machines because of (a) the relafively low cost of modeately skiLed labor compared to the high domestic cost of sophisticated CNC machines (machinig centers); 0) shortages of kled labor needed to perate sophist machines; and (c) much of Cbina's users of machine tools in the short to medium-run will 21 *Chna: Machine Tools Subsector Repoit, RIport No. 106884CHA, June 28, 1993 (bheafter referd to as the 'awo study'). -91- ANE 2.3 continue to manufacture high volumes of relatively standardzed final products and thus will not require the soiicatd machine tools used in industrialized countries (where more modest production runs, highly speialized product desgns, and flexible outsourcing configuations are prevat). In fact, much of the domestic demand for mane tools in China will be to replace existing, obsolete machines. In time, as the economy develops, a more sophisdcated industia structure could support an incasng portion of sophisticated machine tools. 21. supply Forecast. The sector study's supply forecast calls for average annual Chinese production of total metalcutfing machines to grow 10 percent and 12 pecent, and avere annual production of metal-foming machines to grow 12 percent and 14 percent, for 1991-95 and 1996-2000, espedvely. By 2000 the production ratio (in output value) of metal-cutfing to metal-fonning machines will be 3.3, falling from a 1990 level of 3.9; this indicates a continuation of a rebalancing process that will bring China closer to internaipractices (discussed above). Among metal-cutting machines, average annua& roduction of conventional machines is expected to grow 9.8 percent and 11.8 percent for 1991-95 and 1996-2000, repecdvely. The esponding forecasts for metal- cutting NC/CNC machining centers and other metal-cutting NC/CNC machines are 3 prcent and 4 percent, and 12 percent and 14 percent, resectively. In terms of output value, among metal-cutfing machines, in 1995 the shares accounted for by producdon of conventional and NC/CNC machines are forecast to be 87 percent and 13 percent, respecdvely; in 2000 the respectdve shares are forecast to be 86 percent and 14 percent. This indicates that over the decade China's overall coposition of nm ne tool po.ducton-in value tm though not necessariy in owut vowhe-wl not cange appreciably as between convenional and NC/CNCmachnes. As noted above, dtis is kely to be the most efficim down-paymen China can make in posiionng its machne ool dustry for susainable growth in the long run. 22. Demand-Supply Imalances. Taken together, the projections for demand and supply indicate imbalaces in the various ptoduct market segments. For metal-cutting machine tools, production of conventional machines will exceed domestic demand at increasng rate, creaing growing surpluses for the export market (see below). Among NC/CNC metal-cutting machines, while the supply and demand growth rates for machining centers are oected to be equivalent, inasmuch as demand currently exceeds supply, this inba will not improve; for other NC/CNC metal-cutting machines, the lower projected production growth ates imply a worsening of the current excess demand. For NCICNC metal-cuting machines ovemall, then, gross imports wvIl need to increase to fill the gap (tmports are discussed below). A similar, but more modest increase in gross imports is projected for metal-forming machines. Chinese ional Trade In Machine Tools 23. Chinese machine tool trade has increased dignficandy in recent years, mosty on the eport sde. During the latter half of the 1980s, orts increased (n current value terms) at an average anual rate of more than 50 percent; imports were - 92-NE 2.3 relatively stable.1/ However, imports greatly exceeded exports, especially hn the mid- 1980s.2I In 1991, total machine tool exports stood at $202 million, and total machine tool imporn were $524 million.jQI Exports accounted for about 14 percent of producdon, and imports for about 30 percent of consumption.fl/ Although China has achieved very large inceases in machine tool eaports, as of 1991 it ranked as only the fourteenth largest exporter out of the world's thirty four machine tool producers, accounting for a little more than 1 percent of world machine tool exports. By region, the largest export markets for China's machine tools are Asia, especialy the Southeast, and Eaerm Europe and the CIS; Westen Europe, North America and ote regions are less significant export desdnations. Sources of machine tool imports into China include Germany, Japan, the United States, Italy, Switzerland, and France, among others. By product tpe, the vast majority-85 percent-of Chinese machine tool exo are low- gade conventional metal-cuttig machines; about 5 percent of exports are NCICNC metal- cutting machines, and 10 percent are metal-forming machines.12 The product type distribution of imports is high-grade conventional metal-cutting machies, 38 percent; NC/CNC metal-cutting machines, 26 percent, and metal-forming machines, 36 percentjL 24. The poliy regime govenming China's international trade in macie tools, as in other sectors, in general has become increasingly liberalzed in the wake of the open door' poliy in 1978. A biateral marketoening agreement negodated with the United States in 1992 provided additional liblization. While in the future, as China prepares for accession to the GATT, furher liberalization can be expected, at present there stil remainconble nontariff bariers (ie., licensing restrictions) on imports. 25. With respect to China's machine tool exports, trade has been fostered as a reult of domestic supply-side efficienacis-ansing from the elimination of mandatory plans and pice controls, alleviation of import and other consUaints in prcurement of inputs, and a more hospitable regime for technology tansfer through liceng and coproduction agreements-as wel as a result of the official encouragement of exports. Also furtheig exports has been Chinese machine tool firms' adoption of a stategy of export pnce discounting in the range of 10 percent wo 35 percent off domesdc prices, to compensate for the lower quality of Chinese machines. Most of China's exports of machine tools are handled by the China National Machinery and Equipment Import and Export Corporation, I/ See Table 1-7 in to adix of the sector stwdy. 21 Ibid. .lQ/ See Table 1 above. As notd arer, th teeso in 1991 thrughout may parts of the wod lowered Chinas mahie tool expot ad imports sigficany frm thir long un trd (as it did for othr coties) and thmes 1991 dat shu be int aordinly V These dat are in valw term See Table 5-4 m the appeix of the sector study. .lI nd -93- A .3 a centrally controlled orgniation. There are, however, a number of enterprises, including this project's beaieficiary, that are allowed to export directly. 26. On the import side, effective tariff rates on machine tools vary considerably depending on type of machine, location of importer, and the intended use of the imported product. Generally, nominal tariffs for low grade conventional machines are at the highest end of the range-30 percent; however, as a practical matter no countries are attemptin to export these types of machines to China. Nominal tariffs on more sophisticated machines are lower; for example, while until January 1, 1994 the nominal tariff on NC/CNC machines was 15 percent, it is currently 9.7 percent. The applied tariff rates on machine tools, however, are considerably lower than these nominal rates. As is the case for the tariff treatment for many other Chinese industral products, certan preferential discounts and exemptions exist for machine tools. Coastal regions-including Liaoning province, the location of Shenyang-enjoy a 50 percent tariff reduction.l4t Exemptions from tariffs on machine tools are applicable in several situations: (a) the product is not produced domestically-at the present time, a prevalent condition for significant segments of the high end conventional and NC/CNC machine tool markets in China; (b) the product is a component used in the assembly of a final product-also a prevalent condition, particularly for the sophistid end of the market (e.g., imported electronic components incorporated into otherwise 'naked' NCfCNC machines); and (c) the product is an input for a final product destined to be exported (a duty drawback)-again, a relatively common characristic for some of the components used in the high end and also to some extent in the low end of the market. While the general picture that emerges with respect to tariffs on China's machine tool imports is one of considerable effective libealzatio, there still eist nontariff import barriers-import licensing requirements-and these import controls apply to a range of goods in the machinery and electronics sector, they are applied selectively among machine tools, with greater stringency at the low end of the market.I5/ Still, the substantial increase in import flows of machine tools into China since the mid-1980s certainly suggest that the extent of any distoDrons in the import regime governing the sector are not of a major consequence. 27. Prospects for China's Machine Tool Trade. China's cu niche in the intenmational machine tool market is largely in universal purpose conventional macines and, to a lesser et, 'nakzd NCICNC machines, i.e., without dir electronc components. The principal export markets, as noted above, are mainly developing and newly industialzed Asian countres as well as Eastern Europe/CIS, and some sales to North America and Western Europe. Afuure short-nm export strategy thath bdl on ths pattern, but with a pnncipal focus on mromved qu4lky, higher precdsion convetionad machines, is likey to be optial. Competition in these market segments, however, will be stronger than it is today, particularly from Taiwan, China and South Korea, as well as from Eastern European/CIS countries as they modernize their facilities with reforms; W/ For Xt trad regie affecting Shenyang m patia, see the disaaon below. 11I Seo -Ch1n FotipTado Reforn Meetng the Chaleng of the 1990? (Repat No. llS68-CiA), Jun 1993, p. 65. -94- A .3 indeed Eastern European/CIS producers, particularly Russia, have low labor costs and could be very strong competitors, not only on their home turf but also in Western Europe. in the medium and longer run, China could compete effectively by exporting low-end NC/CNC machines, and utimately more sophisticated NCICNC machines, not only in developing, newly industrialized, and transitioning counties, but also perhaps North Amenca and Western Europe (however, again, potental competition in this latter market could be tough with Eastem European/CIS countries). 28. Forecast of China's Machine Tool Imports and ExPorts. The sector study contains a forecast of net imports for the Chinese machine tool sector to 2000. Note, however, the forecast was developed pnor to the unification of exchange rates recently implemented; in light of the devaluation accompanying the unification, the forecast thus overstates imports and understates ewports, leading to an upward bias in net imports. The forecast is as follows: In order to meet the projected demand-supply imbalances, total net imports (mostly metal-cutting NC/CNC and metal-forming machines) will have to increase at least 20 percent annualy. There will be sizeable growth of conventional machine ports (at the low end of the market), which will exceed the growth of conventional nchine imports (at the medium and upper end of the market), thus resulting in conventional machine net export growth of 30-40 percent annually. There will also be some export growth in low end NC/CNC machines, but imports of these machines will grow considerably faster. The overall projection for 2000 is a tzade deficit in metal-cutting NC/CNC machines of $1.4 billion, a trade deficit of $625 million in metal-forming machines, and a trade surplus of $641 million in metal-cutfting conventional machines; the total trade balance is thus expected to be in deficit by $1.3 billion. The Market Prospects for SMTCL 29. Current Domestic Market Position of SMTCL. Shenyang Machine Tool Company, Limited (SMTCL) was formed in April 1993 as a result of consolidation of four preexisting firms: Shenyang No.1 Machine Tool Works, Shenyang No.2 Machine Tool Works (China-Czechoslovakia Pnendship Works), Shenyang No. 3 Machine Tool Works, and Liaoning Precision Tool Instrument Plant. The current product mix of SMTCL in output volume and output value, respwectively, is conventional machine tools-89 percent and 79 percent, and NCICNC machine tools-1l percent and 21 percent. A consoLidated account of the underlying firms' market positions in 1990 indicates that SMTCL has been a dominant competitor in China's machine tool market, which is comprWd of more than 200 firms producing varying product mixes.W/ For example, for universal lathes, SMTCL has the largest output (in volume terms) in the national market, acuntig for appoximately 14 percent of the market (the next largest producer accounts for 10 percent of the market). Among full-functioning CNC lathe producers in China, SMTCL is agan I/ lbs relatively poor and inoansi quality of the data availale an the Chinese macn tool maket prvet robust concluso. For example, the data typicaly are base n producti volume, not sales (hnc quality of output prodced and demand respon are not cntolld for); colledion of dat is segegated by mnstry, not by relvt product madcets; and only national-level data are availble, yet doelevant geogophic ks for certn mchn tooproductsca benarower' broader thntis markt definifi. -95- 2.3 the largest (in volume terms), accounting for about 45 percent of the national market. In tenns of output value for metal-cuttng machines overall, SMTCL accownts for approximately 9 percent of the national market. 30. Future Domestic Market Position of SMTCL. Notwithstanding the picure suggested by these data, SMTCL's national market position has in recent years been challenged by other domestic producers. There is still strong brand loyalty by SMTCL's Wstoric customers and the appeal of SMTCL's lower prices, but the enhanced quality of domestic rivals' products and bundled services reaten SMTCL's position. Imports will also exert competitive pressure on SMTCL. As noted above, China's machine tool market has become increasingly, although not fully, exposed to international competiton. The general liberalization evident for the Chinese machine tool market as a whole, is particularly true for Liaoning province and Shenyang, which enjoys not only a coastal preferential tariff conceseion, but also significant tariff exemptions. A senior trade official in Shenyang estmted that, on average, the range of appled tariff rates facing imports competing with SMTC's products was only 0-5 percent. SMTCL's future prospects in the domestic market, then, hinge on improving the quality of machines produced to meet increased potential competition from both home and abroad. That, of course, is a core objective of this project's investment component. Under the project it is forecast (under the base case scenario) that the global product mix of SMTCL by 2002 wi}l be, in tems of output volume and output value, repectively, conventional machine tools-53 percent and 14 percent, and NC/CNC machine tools-47 percent and 86 percent. 31. Curnt Export Market Position of SMTCL. SMTL 's currentprofile Qf exports in tenns of both geographic distribution and product mtt is pical of China's machine tool producers overall. Exports of the firms now comprising SMTCL have a thty year history. In recent years (1990-92), the aggregated export sales of SMTCL's three principal underlying companies accounted for between 26 percent and 69 percent of total sales revenue. The product mix has included universal (low-end) and multspindle (mid-range) lathes, as well as low-end NC/CNC machines, generally coproduced or produced under licensing agreements with industralized country machine tool firms. Traditionally, the main markets of SMTCL were Asia and the former Soviet Union and Eastern Europe (low and medium end lathes). The cent geographic mix of SMTC's export markets, as shown in Table 4, is still focused on the company's traditional marke,t but there is a declining trend in recent years in serving Eastern Europe and the CIS as well as non-Southeast Asian counties. On the other hand, the company has met with modest success in exportig to North Amerca (low end lathes as well as simple NCICNC machines without etonic components), Western Europe (low end lathes) and Lafin America, Africa and the Pacific (low end lathes). 32. The typical export consumers of SMTCL's products are small and medium- size firms. strically, the nature of the competition SMTCL has faced has been largely price competition rather than competition on machine features, operating precision, and other nonprice attdbutes. This emphasis on pice competition is unlikely to be as doinating in the future, as quality is becoming an incrsigly important attribute in machine tool purchases, driven by the fact that the products made by machine tools have - 96 - ANNEX 2.3 Table 4: EXPORT MARKEIS OF SMTCL, 1990-92 (percent) Reg!o 1990 1991 1992 Southeast Asia 10 9 14 Other Asia 32 30 25 Western Europe 8 9 10 Eastern Eurpe and the CIS 34 30 28 North America 11 10 12 Latin America, Africa and the Pacific 5 12 11 WORLD TOTAL 100 100 100 Source: SMTCL. become very sophisticated with precision designs. In addition to its domestic-based rivals, the firms with whom SMTCL competes in its overseas market segments are generally based in Spain, South Korea, and Taiwan, China. 33. Projected Exports of SMTCL. It is projected that the main future export market of SMTCL will continue to be Asia (the Southeast as well as other locales); that SMTCL's exprt penetration in Western Europe and North America will ince inrementaly; that the exort share accounted for by SMTCL's customers in Latin Amei, Africa and the Pacific will be essentially unchanged from the current siaton; and that SMTCL's export share in Eastern Europe and the CIS will decline. In terms of prduct mix, by 2002 it is projected that, on a output volume basis, 70 percent of SMTCL's exports will be conventional machines and 30 percent will be (low end) NC/CNC machines. In terms of output value, the ratio of SMTCL's export revenue to total sales revenue is projected to be approximately 8 percent. This ratio is lower than the present circumstance (see para. 31) and reveals at SMTCL wll, in the medium tWnm, focus its attenon on improving the qualiy of convenional machine tools and conentrate on strengdning its domestc market position as a way of achving a strengthned and sustainable expot strategy. 34. Conclusion: Resliency to the Market. After the implementation of this project, SMTCL's product mix wil be substantially changed from its current output configuration (paras. 29-32), i.e., some of the current products will be discontinued, others will be upgraded, and new products will be introduced. Most important, however, as the sensifivity analysis in ths report shows (Chapter 6), upon completion of the physical restructun mprogm, SMTCL will have the capability to respond quickly to market signals by altering its new product mix, a capacty it does not effectively possess at present. As the analysis in this annex of the structure and nature of the machine tool market d ates, this capability will help ensure SMTCL's future success. -97 - 2.4 Table 1: Shenyang Machine Tool Company Limited Consolidated Income Statements (1986 - 1992) a/ (Y million) Year EndDecember 31 1986 1987 1988 1989 1990 191 1992 Gross Sales Revenue 287 336 398 426 416 506 740 Lss: Sales Tax 21 24 27 26 17 30 51 Net MA 2 37LZ 1 40 400 396 Material & Components 118 138 166 205 190 217 337 Total Variable Cot11 138 166 M 190 m Ehd & Seni-Thed Cost Depreciation 21 22 23 25 26 28 36 Wags and Slaries 21 34 45 51 55 59 60 Manufactring Overhead I Admin. 44 52 61 65 62 87 127 Marketing 2 6 11 4 8 18 42 Non-opeating expenses 7 11 1S 19 20 21 27 Tot bed Cost22 125 155 164 IU7 U 2 gmne 53 49 so 3 1 38 la 60 blterestEse 8 13 1S 38 42 40 46 HE4QnWL IbQffe 1 3 3 7 3 6 Net home Before Tax 45 38 39 .1 Mf 2 ;Q hncomsTax 16 16 14 5 2 Nd Igo1 ue 29 2_ 25 4 1 m 9 22 Ratios Net Icome Before Tax/Sales(%) 16.9 12.2 10.5 0.3 (1.3) 1.9 2.9 Not noomelSales (%) 10.9 7.1 6.7 (1.0) (1.8) 1.9 2.9 a/ As SMTCL was established in 1993, the histrical finaicial saements (1986 - 1992) reset the consolidated statements of four sponsoring enprses under SMTCL, namely, Shwyang No.1, No.2, No.3 Machine Tool Works and Liaoning Precision Inshument Plant. -98- AN= 2.4 Table 2: Shenyang Machine Tool Company Limited Consolidated Balance Sheets (1986 - 1992) a/ (Y milon) Year Ended Decanber 31 1986 1987 1988 1989 1990 1991 1992 An Cashand Ban 13 11 12 i2 16 36 41 Receivable 21 24 18 22 28 29 52 Inventories 137 ISO 172 238 244 332 408 Other Curet Asseu 44 52 78 128 184 190 181 Total QRXN&obe 238 280Q £ 473 La il ymed AAsi ros Fixed Assets 330 388 393 419 477 558 595 LA sDepreciation 184 205 222 245 265 288 315 Nz Pizet Bu Ago146 183 171 173 209 269 281 Work-in-Process 91 122 167 138 175 258 382 7_91d X2ed Asses 237 3Q 311 334 Im 66 Tota &%Al S452 S44 61 857 .1. 1.34 Cunwent Liet s Account Payable 52 66 68 92 133 174 215 Short Tenm Lois 4 2 Odoer Canent Liabiities 15 16 25 59 70 111 139 Tothlt ies Qu z 83 93 fIn 20 7 3 Low ermiab&:g LTD for Working Capitd 119 138 179 270 306 364 392 LD for Fixed Assets 43 58 69 78 88 140 241 Tota IgL]r Ilebt R2 196 Z41 347 3 6 Stue Funds 183 219 207 210 248 309 326 Speci Funds 38 42 65 (1) 7 7 (23) EapriseFunds 3 4 5 5 S 6 8 lowl 2A 20 Z7A m 2Q N2 35 TtFA LWAbi A ,tmds ASl 54 M M ss LM LIO a/ As SMTCL ias established in 1993, th historical financial satements (1986-1992) represt t consoidated d ments of four sponsoring enterpris under SMTCL, namely, Sbenyang No.1, No.2, No.3 Macbine Tool Works and Liaoning Precison I_unt Plnt. -99- AN 2.5 PRICE COMPARISON OF DOMESTIC AND IMPORTED MACHINE TOOLS Domesdc/ Domestic Similar import selling imports price Machine name Specifications price ratio ($'000) ($'000) (%) 5-F machining center 1500 x 3000 655 1,400 46.8 5-F machning center 2000 x 4800 900 1,900 47.4 Horizontal MC 800 x 800 349 636 54.9 Vertical MC 630 x 1500 127 384 33.1 Machinng center 450 x 300 190 500 38.0 CNC lathe 630 x 1000 90 350 25.7 2-:haft CNC lathe 320 x 200 145 400 36.3 2-T, 4 Cd. CNC lathe 305 x 200 145 450 32.2 Geneal CNC lathe - 55 150 36.7 Mulishaft auto lathe 50 x 140 35 120 29.2 Source: No. 6 Design Instit&te. -100 - AN= 26 SMTCL AMNAGEMENT SYSTM DESIGN AN IMPLEMTATION SUMMARY OF PRNCIPAL AGREEMIS A. INEOIDUCMION 1. This document contains a summary of the principal elements of the orgization structure and management system which Shenyang Machire Tool Company Ltd. (SMTCL) has agreed to adopt in the future. Bull deails of the den are contained in the extenal consultants's Final Report. The principal agreements regrding the dtchment of non-productive assets as well as labor reduction progams are also included. D. SIIThGC RATIONAlM 2. The fute tchnicl requm ts for both prducts and procsses have been agreed separately and are included in the Prdiminary Design for rsrcturing, isued by the No. 6 Institute. The Plinary Design includes detailed production volume foecasts. 3. The objective of the agreed new oanizational sucture and mae systm is to enable (SMI) to achieve the buiness objectives shown in the Piminary Design and, at the same tie, to give it the flexibility to meet changes in market condicns which will inevitly occur. Development of the Organizonal Structure 4. SMTCL will cost of a head s and a number of busies unit (BUs) which will be profit centers. Over time, the sre will move from the pnt situation, where BUS are self-contained, vertically integrated profit centers, to a situation where SMTCL is a fully tegrated corporaton. At this time, there wil be sepate assembly BUs and BUs which are centers for excelence for component or sub-assembly manuficture and which serve a number of assembly BUs. This development is planned to be in thrue phases: (a) Phase 1: The Exstn Situation. In this phase the four former stae- owned enterpries (SOEs) which initially formed SMICL are separate BUs During Phase 1, SMTCL headquar wil be set up, with a number of functional units (FUs) to ensure a common strateg approwach and the adption of common standards and poLcies. New finmacial management procedures will be introduced to give the CEO clear silit fr the - 101 - ANNEX2.6 corporations future financial performance and to cor.solidate the accounts at SMTCL level. (b) Pbase 2: The Introduction of BUs for Fabrication and Foundry. The centaized fabrication workshop and a certal foundry are planned to be established as sepate BUs by the end of the first half of 1995. These BUs will operate, like others, as profit centers, primarily serving the other SM1CL manufactung BUs, but possibly also carrying out outside work. (c) These 3: The Establis of Separate BUs for Asmbly and ComponentsSubasse/biles. As new assembly workshops come on stream, separate assembly BUs will be created, to focus on final assembly of machine tools. The first of these is expected to be established in 1996, with a second in 1997 and a third in 1998. As the assembly BUs are established, the components/sub-assemblies will be ring-fenced and swected items pulled out into "centers of excellence" where manufacture for the whole corporation wil be focused in one BU. These component BUs may well operate across several sites. The first component/sub-assembly BUs re planned to be established in the first half of 1997 and to be centers of ecellence for the manufacture of gears and tufrets. As the manufacue of futher components and subassemblies is treated in this way over time, a maijor rationaliion of component manufacture will take place, so that SMTCL will achieve the economies of scale and the improved quality which it needs. Prinples for SBICL M agement System S. The following are among the key principles which SMTC, has agreed should guide the design of the management system: (a) SMTCL will be committed at all levels to implementation of the new system. (b) The system is designed to sut a market economy. (c) Management will have clear responsibility for the future performance of the business, including profitability, cash flow and the effective management of assets. (d) Significant reductions in the numbers of employees will take place over time, as SMTCL achieves competitive overheads and greater efficiencies, and as new investments cause it to move towards a capital intensive rather than a labor intensive situation. The manpower reductions brought about by plans to move welfire services and tertiary businesses outside SMTCL wil show a sgificant reduction in employee numbers. However, further reductions wi}l be necessary in the number of people employed in overhead -102- ANNEX 2.6 functions and in production m order to achieve the productivity increases called for in the business plan. (e) Management will have full discretion to move any employee within the corporation. (f) A major training and management development program will be undertaken to enable managers to adopt their new roles. (g) The new system wil call for real rensbility to be given to people at a much lower level. Achieving this will involve training and a change in attitudes. Corporate Governance 6. SMTCL is established as a shareolding company and its legal structure is defined by Chinese company law. 7. The Shenyang Municipal Government (SMG) is the principal shareholder and is represented on the Shareholder's Congress, the Board of Directors and the Board of Superviso. The roles and duties of each of these are specfically described in Chinese company law (Articles 103, 112, and 126 respecdvely). 8. The Board of Directors. The SMTCL President (CEO) will be a member of the board of directors. The Board will consist of represetatives of each major group of shareholders and a number of non-eecutive directors, whose role is to add value and provide a sound commercial viewpoint. Certain other SMTCL managers may be appointed directors (initially we recommend only the finance director). However, non-SMTCL employees will always outnumber SMTCL employees on the board of directors, so that the Board will essentially represent shreholders' rather than management's interests. 9. Board of Supervisors. The Board of supervisors will consist of a small number of senior members. Should it need legal or financial experts, these will be engaged as required. The principal role of the Board of Supervis is to protect the shareholders by investigating and reporting on suspicions of, or evidence of illegal actions or financial mismanagement within SMTCL. E xecutive Mnagement 10. The President (CEO) is the head of the executive management and has ultimate responsibility for aU aspects of SMTCL's perfomance. He also acts a pivot between the executive management and the Board of Directors. 11. The CEO works thrugh an executive committee of senior managers who are his advisors. Initially, the executive committee wil consist of the head of each of the - 103- A-2 headquartrs PUs and the general manager of each of the BUs. This strucue and the key roles of each of the FUs, is shown in Figute 1. Figure 1: SMTCL CEO Initial structure _ I CEO Sales & 0 Inanco ||Personnel | Technology | Business| Marketing Pu chasing AdMin Director Units avrgting Stratgy * Group buying *pnencil polUcy Polcies for * Technical design * Prollt Centre Publc Relations Sttao *Plnnngilludget * Peronnel satndesre Corporate marting policies end co-ordinatin * Training * Researci, pofrtyf proee dues *Fmebil s * Administration * T"hcnial ASALES PROPTf C. * Contralbuying *h ametnt * Wdlare Appraisal appraisal - Product eTrosury unctlon * Training Centre Sponsorship * Internal audit - *Me polloy & a a cntV07-i central ope TohklOrr 12. At a later stage, when assembly and corpate BUs are creatd, it wil be necesr to move to a divisional structure, in order to keep the headquartes executive cemmittee to a reasonable size. At this stage, the headquarters executive assembly will consist of the headquarters functional directors and three directors, responsible respectively for the assembly BU division, the component BU division and the foundry BU division. This structWe is shown in Figure 2. 13. Certain central B'is will be established and will report to headquarers PUs. This will be the case where there are clear grounds for centalzng activities to achieve improved quality or economies of scale. It is planned that the centwal BUs will be the sas BU (under the sales and markeing PU), the training center (under the peone and administrive FU) and the R&D center (under the technology PU). 14. In all ca , BUs will be profit centers. The generl manager of each BU will have overall profit responbility for his activities and will operate through a BU eocutive committee, along the lines of the SMT executive committee. Tbe standard sture of a BU, with a definiton of the ey role of each department, is shown in Pigure 3. - 104 - Figure 2: L&ngSm structureMTCLCEO Imnplbmen,twatilon~ CE CEQ" ofince, Offce _.I+Lega Sales & ~~~Finance Personnel Technology Assembly Marketing Purchasing & Admin Director S MketIng Strate *Group buyng * FInaOSi Poicey PoOlces for. *Tochnle desi Componsnt * Public Reltions stbty, *PlanningfBudget * Pr5OIi5 standarts BU Cotport marktng polis and co-ordtnatlon *Tralntng * Research piofl Divison procedures *R Fa rsumf * Admknllron *Technical -SALES PROFTC. *Centralbuying * lnvewstent * Welfr Apprdas appraisa a productFon e Tres" functin Training Centre S pnsor sU * Intwrda audit *MIS pcy & R Centre central ape Tacnkl Ihqt Figure 3: [ BUSINESS UNIT General Manager Impwmen"Non GtOlflce a Quslity 1 | Sales & Finance Personnel Developme Production Management Marketing & Admin Engineering * Quality * Market Plan*ing Fnanoe Acounts * P * Entgin * M IIS Mgmt * gaiety * Mart PromoL *Pannlgfaudgets * TrainIng Suppot * Production * Environment * Sales * ms * Admhhltration * Proc pmg EvSalrosmuppot * Wolfe,. Engineering *- Mtenance Customer S * Product * Aembly Work- * Dlopment * Componont Work- Workspop -105 - ANX2.6 15. The BUs wil have to follow the strategies, policies, systems and standards set by SMTCL er. The managers of functional departmts m BUs will report to the BU general manager, but will have strong fuional lationship with te headquarters funcdional director. Funcdonal directors (heads of headquartrs FUs) ar at the same level and have the same status as the general manager of a BU. *nance Function 16. A staard accounting package will be introduced, using coputerized modules for some of the basic accounting functions. Ti will considerably increase the speed and accuray of data prcessing. 17. A new budgeting prcedure will be introduced, as part of the panning process. The fince PU will develop a financial model to forecast balance sheets, income statements and future cash flows. Budgetig will be dnven by the sales budget rather than the production plan, as is currently the case. 18. Major improvements will be made in cost control and the provision of accountg information by the introduction of a cost center sucture, the use of computid job-order cost sheets and the introduction of new cost allocation methodL 19. A sparate cdit control section wiR be established in each BU which has outside customers, in order to gain better contrl of exstig and potential debtors. 20. Separate amuing for teriary businesses will be introduced in orde to give a clear picure of the profitabiity of the core business, as well as an evaluation of the performance of each teriay business. 21. All investment projects will be submitted to a technical, markelt ad financial apprsl and will be proridzed by the expected finacial retun. 22. The detailed role split between the finance FU and the finace department in the BUs is given in Knight Wending's Final Report Sales and Marketing 23. At the start of project implementation, a les coveage project (SCP) wl be caried out to determine the best method for conveying the various domestic and oveseas markets, using distbutors where appropriate, and avoiding unnesy duphication of diret sales efort 24. A sales and marketing funcional unit (SMU) will be established at SMTCL headquarter. Tbe SUFU will manage the actvities which can be operated centaly in a more cost-effectve way, including the development of a centmal sales BU. It wil have a key role in advising the CBO on the sales and mating pespective for key busnes decion. It will parday need to provide market forecasts and sales proecdons so ta -106- 2.6 the long-term business plan can be updated regularly in the lght of changig market cicustnes. 25. The scope and speed of development of central sales budness unit (CSBU) will be determined by the sales coverage project. The SCBU will be created to asist in the dimination of duplicated sales coverage and to develop increased sales revenue. However, at the same time, the sales coverage project will ensure that exsting customer, distibutor, or agent raonships are not damaged. The CSBU will be developed to concentate on areas where centralized sdling is more cost-effective, such as exots, remote regions in Cbina, and national accounts (e.g., customers using a wide range of SMTCL products). 26. The BU sales department will ope within the guidelines laid down by SMTCL SMFU, coveng areas such as product portfolio and pricing standards. The BU sales departments will be responsible for al aspects of sales and marketing within the agred geoaphial areas and customer segments resulting from the sales coverage project. EngineerIn and Technology 27. An engineering and technology PU will be established at SMTCL headquartrs with the role of coordinating all research and engineaing development activity. Its objective will be to ensure that optimum use is made of SMITC's overall skl and resources and that BU demaraton lines do not diminish the R&D effort. 28. Engine and technology departments in BUs will manage the introduction of new products, accong to the new project development program established by SM.L. Production 29. As desrbed in pagraph 5, production will initially be the responsibility of BUs, repotng directy to the CEO. At a later stage, BUs will be grouped into divions for assembly, component manufre, and core processes (e.g., foundry and fabrication). At this time, the BUs will report to a divisional directo, who wil report to tlf. CEO. agemt Ifoa System (M 30. A new MIS will be installed throughout the corporati. SMTCL will specify the ouWut requied form the system and potenal suppliers will be invited to tender for solutions. 31. Standard software wiU be used and will be upgaded on a regular basis by the suppLher. SMTCL staff will not perform any programming which, if they did, would mean that SMTC was unable to benefit from supplier software upgrades. -107- ARM26 32. The solution chosen is likely to be a system of distributed hardware with modula software which enables the systms to be installed on a department-by-depatment and module-by-module basis. 33. The system will cover all the key processes required by SMTCL Management Procesm and Systems 34. The followig are the agreed priorities for new managemet prccesses and systems: (a) a nev corporate planning process; (b) a complete financial management process (including budgeting, cost control, cash control, investment control); (c) a new sles order process; (d) a new production management process, to control all aspects of poducim, based on a common MRP2 system architecture; (e) standadization of CAD/CAM procedures and systems to enable moduar dein tansfer; and (f) introduction of common PC-based standard applicafions for word proceing, planning and project management. 35. Pie-implementation tning will be canried out for senior managers in the following subjects: (a) bu s planning; (b) finan ageme (c) ales and marketing; and (d) project emet. 36. A full progm of management, technical, operations, and langage taining will be deveoped and caried out dwing the main implementation phase. 37. The implemenaion project will include a core development progm for assting top manager to develop their capbility in stategic planning. A concentad tring cowse will also be carried out for the board of directors to assist them in - 108 - ANNEX 2.6 undertanding their roles and reWonsibilities and to give an ovemr of the actions required in carrying out a dir's duties. 38. The overall implementtion plan for SMTCL is shown in Figure 4. 39. The immediate piorities are the appointment of FU diors, BU general managers, and BU departmental managers, with the relevant sldlls or the ability to develop them. The initial project teams need to be established for the priority subprojects. 40. Before the main implementation project commences, SMTCL will carry out a number of preparatory projects. These will include: (a) pre-implementation training for top managers, focusing on strtec and business planning, financial management, sales and marketing management, and project implementation; 0b) writing the business user specification for the new MIS system; (c) a stndtion project, to define a standard methodology for part numbaing, bils of matrals and routing amongst all BUs and FUs prior to any data being input to the MIS; and (d) a communications project to ensure that managers at all levels understand and are committed to the project 41. The pre-implementation training and business us pecification prep ry projects will require consulting assistance. The main implementation project will follow on directly for the prepartory projects. Detachment of Nonproductive Asets. 42. SMTCL's nonproductive assets, valued at Y 565 million, were removed from its balance sheet at the ime of the establish t of the company. Although the ownerhip of these assets, which include housing, hospitals, schools and service facilities were subsequently tasferred to the State Asset M ement Bureau (SAMB), the responsibit for managing thie assets remained with SMTCL. SAMB and SMTCL have joindy developed a prom for the disposal of these asset over a five-year period that would relieve SMTCL from its responsibility for opatng and maintaining these assets and would consequently result in reducing SMTCL's workforce by about 1,400 persons. The agreed progam J considered reasonable by the Bank and is included in the project file. Labor Reduction Program. 43. SMTCL's employees totalled 23,437 at the end of 1992. A progam for reducing its total employment by about 7,000 workers during 1993-98 has been developed -109 - ANNEX 2.6 and is under implementaion by the company. The program entails reducing aproximately: (a) 2,300 employees through retirement, long-term leaves and dismissal; (b) 3,600 employees through detachment of nonproductive assets and establishment of separe tear industdes for services currently rendered by the company; and (c) 1,100 employees through severing ties with periphery collectives and enterpnses. By the end of April 1994, SMTCL had reduced its workforce to 21,250 and the company's management is committed to the implementation of the program. The agreed labor reduction program is considered realistic and is included in the project file. 44. This document contains a synopsis of the main contents of the management system design. Full details are contained in Consultants' Final Report and SMTCL has accepted the full report and agreed to implement all of its recommendations. Fue 4: Ov=ML IMNaWITrAION PLAN FOR SMTCL Ovwa plmntn pan for SMTCL 1994 199 19989 199 Action 3rd a4tho Q stQ 2ndl Q d Q 4thQ 10t Q 2nd Q 3rd Q 4thQ 1st Q 2nd Q 3rdQ thQ 12 Q rd Q rd 4th0 aemok"" UnIt Creation Igi BUs (= 1_23_ f.r=tion= EBt S mt d- X Ass 8U2 _ X AnU3 Othw Ointee of x . to Nowr Sabas Stroatm Covenre t powsa st ru ct=re d= ==*l==) T onlwStawdard lroWct to etandas des n, spe ticons_=_ bil of mate :s e. prelmnbay to system dsn) ___ Imdmentatbon phoa_ Kpy d -- -……- = = == Fkw hnmprocs _________Om FInancial sa 0:!2_ PRoduction system X NO. 1 _ I 1N.3 _ l CAD/CAM tem or _hIerud cr _ wdeto swd outma _ r . techncal op ationst lua,eg Nunlbr reductbons 117 231 93 924 ho _ t s pw Iao outcom Log | I I I I I 1 3W kd:ntao 12eO No wytma - 111 - ANNE 3.1 REFORM SUPPORT PROGRAM FOR SENYANG MUNICIPAL GOVERNMENT (SMG) 1. I nmid-1993, with the World Bank assistance, Shenyang MunicW Govemment (SMG) developed a medium-term reform program that addresses (a) SMG's role, iztion, and fiscal policies; (b) the financial sector; (c) the industry and service sectors; (d) the municipally controlled enterpries; (e) the private sector's development; and (f) t. The program includes, among other things, acttons to separate producive finctos from government through (a) reorganiton of SMG and downsizing the work force by 30 percent from its end 1991 level by June 1994, ) granting autonomous right to all mumicipal controled stateowned enterprises (SOEs) and (c) prpF ng suptig reorms in the housing, pension, and health systems. The program also includes actons to pwomote ownersbip diversification and to improve worker's safety. 2. In order for the municipal government to strengthen its administ. capacit to manage reform, the government wishes to train key officials who are in chage of economic affairs and those who will be responsible for new mandates. To this effect, MG, in consultation with the World Bank, has prepared a comprehensive program of the capacity of key staff and employees of public service companies. The progam, which will consist of six subcomponents, will be supported by the World Bank through the Shenyang Engineering Industry Project Loan. 3. Cunrently there are 30 commissions, bureaus and enterprises in the municipal government responsible for economic and social sector development activities. 3,120 staff work in these offices. In addition, more than 300 staff work in such public serice entte as Labor Sevice Company, Property Rights Transaction Center and State Asset Operating Company. The staff in these companies are not in the govemment payroll system but provide necessry public services and considered to be a part of the municial civil servan Te stucture and staff numbers are the situation after the reform of the municipal government and will not be reorganized further in the near future. Objectives 4. The main objective of the reform support program is to assist the smooth implna of SMG's reform program and industrial development stategy. Specificaly, the progam will (a) further the ueanding of key officials responsible for economic acdvities and social development work the role of government and function of the market in a market economy; (b) strengthen capabilty of SMG officials in maaging refms induding reforms of planning, investment, fiscal, picing, and state asset - 112 - AMNE 3.1 management systems; (c) train staff of Labor Bureau and employees of the Employment Service Company to better respond to the changing needs of entrpfises as well as laba¢ (d) increase the number of qualified industria safety inspectors and upgrade their cacty so that industrial occupation safety and health be improved; (e) help set up a prpt rights transaction center for mergers and acquisitions; and (f) strengthen the teaching capability of Shenyang College of Economics and Finance faculty members. Reform Support Program 5. The program is composed of the following: (a) Training for key officials responsible for economic activities; and (b) Strengthening of institutional capabilities of (i) Labor Bureau and Employment Service Company, (ii) industial safety inspors, (iii) Property Rights Transaction Center, (iv) State Asset Management Bureau and State Asset Operating Company, and (v) Shenyang College of Fimance and Economics. Mnlgement Arrangement of the Overall Program 6. A Leading Group for the Reform Support Progm will be established unde the leadership of Director, Shenyang Planning and Economic Commission and with Dep Director of Planning and Economwv Commission and Director of Finance Bureau as deputies. Officials from the Personnel Bureau, System Reform Commission, Labor Bureau, State Asset Management Bureau, Machinery Building Bureau, and World Bank Project Management Office will join the Group. The group will be responsible for formulating guidelines for the use of loan for the program, allocating the fund, reviewing annual work programs and progress reports, securing local counterpart funds and repaying the loan. 7. The following sections discuss an oudine of individual subcomponent programs. A. KzY OFfcAs TaANNG PROGRAM Subcomponent Programs 8. The trning program for the goverment officials will be composed of (a) a basic course, (b) courses on selectd topics on economic tores and the government's role in a market economy, (c) research and workshops, (d) degree training and (e) study tours. (a) The basic course is intended for about 1,800 official. It will be provided in four weeks covering such topics as micro economics, macro economics, the government's role in a market economy and finance. Each session is for -113- ANEX3.1 100 staff. It is excd that 5 sessions will take place during the firt year of the project so that key 500 officials can finish the basic course. Overall, 20 sessions will be conducted over the period of 4 years. The course will be mandatory to all the officials who are to take courses on selected topics as it gives them basic understnding of how the market functons and what the government's role be in a market economy. In particular, the basic course will provide key officials a concept of the government as a provider of public goods, as an allocator of resources through taxation, user charges, transfers and subsidies, as a regulator of macro economic acdvity and as owner of state-owned enterprises. (b) Selected topics on finance, accounting, international trade & finance, coxporate finance, social issues, etc. will be provided two or three times a year taking into consideration the needs of various bureaus and institudons. The content of the courses, duration, participants and lecturers will be detrmined by the Training Office. (c) In addition to the basic courses and courses on selected topics, several research projects and workshops will be undertaken. Research projects and workshops may focus on such topics as social safety net, securities mna:ket development and foreign investment. The topics will be disussed betwteen bureaus and the Leading Group and winl be determined at the start of each fiscal year. (d) A few selected officials will be sent to univsities in Chna and overseas for degree training to further their undending of the government's role in a market economy. (e) After the completion of the first year, the Leading Group and Training Office in consultation with relevant bureaus will organize severl study tours overseas for investigation. Topics to be studied and places of visits will be dicussed further with the World Bank during the first year of the program. (f) In addition to all the above, there will be an intensive English twning Program. Matnagemenlt Arrangent of the Key Offkials Trining Progrm 9. The key officials training program will be managed by the Training Office of Shenyang Planning and Economic Commission. The office will be responsible for dedging and implementng training courses, monitoring the progress and coordinafing with bureaus concerned. It will also prepare an annual work program and calendar of taining courses to be reviewed by the Leading Group and the World Bank The office will be assted by ane foreign and one local advisors. -114- A E 31 Indicators for Montoring Progrs/Effectivenem 10. The Trining Office will be responsible for moniting the progress and effectivens of the key officas tining. Quantitative as well as qualitative monitoing wr be conductd by the office with e assince of advisos to be reined by the office. Major milestoe of the progress are: (a) imptation of basic course for 500 key officials during the fr year,li (b) implemention of at least two selectd topcs course duing the latter half of the firA year, (c) hosting of two workshops durng the second year, (d) implementation of overseas investgion in the secd year, and (e) st of English taining duning the first year. Budget 11. The cost of the taning program will be $2.25 million a1f! Y 3 mi. The Waold Bank loan of $2.25 milion will be used for. (a) lectu. and adviso for courses-820,000; (b) teaching mateials $100,000; (c) overseas training-$180,000; (d) overseas $300,000; (e) semiresearches-40 ,000; and (f) equipment for the taining center-$200,000. B. DzVzLDOPMDT OF IM LABOR M4AREr INFORMATION Swm AND TRAINIG OF STAFF 12. The main objective of this program is to help stegthen the existng is ona and techical framework in Shenyang Labor Buremu (SLB) and Shenyang Labor Service Company (SLSC) for more effective labor market information as a basis for impoed employment sevice opeatio By improving the emplyment seavice opeatins, It aIms to safeguard workers against cnsues of unemployment. 13. The work program conists of the following two subcomp_ (a) develoment of an ifomatin network system and () training of staff engaged in employment sevies. I 13 fist sesion of to bsic.cours w be conductd as a plot p _ugrm 1he, tainig of togeadv wi adom wi valute the ctvns of td cous by _ntvwwng tran, lecen and buea directosm. 1u1 coum content, teaing ethod, mnteis, leturc, dration, etc will be modified to inrpa thde edbacL -115- ANEX 3.1 Development of an Inforaton Network System 14. With the recommendafon of the World Bank mission, SLB and SISC have strted worlkng closely with the Dalian Employment Serice Center, which have already estabished the infrmation system with the support of the Swedish govmnt and Inrnational Labor Organiaon through the central govemment. Shenyang's ystem will be developed with the assistance of the Dalian Center and will be fully compatible with the system that the cetral government has established. 15. The information network will enable the employment sevice centers to handle the following fuAction which have so far been handled manually: (a) Registration of job-seekers, 0) Job openings and information on demand, (c) Matming of job-seekers and enteprises, (d) Traiing consultaion including skill tests, (e) Unemployment isuance management, and (f) Analysis and prediction of employment. TanWg Pogm 16. SLB and SLSC will conduct an exensve taining program for their staff starting from early 1994, udlizing the courses provided by the Dalian Cene. The program will focus on 60 staff from the bureau and SLSC and is expected to be completed by the end of 1995. The training program will then be extended to community level agencies and large and medium smze enterpnses covering about 400 staff. 17. Trainng will focus on (a) computerized mana t system and network pplication, (b) functions of labor market and modem labor ngement and (c) English capability. For computer skills training and English training, SLB and SLSC will start courses in early 1994. Countepart funding is secured for the acttvies. M agement of the Pogram 18. A project implementation unit has been established in the Labo Bureau. The unit will be reponble for overall mement of the program including the taning of saff in the county/district level agencies. Two computer speialsts have been hired to augment the work of the unit. A detailed work program for the componet has already been prepare. The unit will closely monitor the progres and report to the bureau and the Leading Group as well as to the World BanL - 116- Bud~st 19. The total cost of fte program will be $400,000 and Y 12.8 million. - Te S400,000 wil be used for (a) equipment for the labor market information system $200,000, (b) appcation softwae $20,000 and (c) training and consuting fees $180,000. C. ROMVNG TM CAwACIr OF INDUSThAL SANM NSIECrOUS 20. The main objetve of the program is to upgade the capacity of SIB to undertake adate safety inspections and to enforce national safety standards. This would be done by raining of nsptors m improved inspection and work place survey methods, actoy inspon courses, and by demonsion as well as by training of some enterpris managemenlt and workers on safety in the enterpris. Work Progm 21. The program will focus on taining a) 100 inspects m fctoy inpecdon taiang course and b) 20 inspecws in improved inspeon methods and workplace sunrey methods. It will furthber undtake comprehensive safety inspeons, worplace sves and two demnsttion-cum-taining courses. All in all 10 enterprises will be covered. R is expected to improve the safety awaress of enteries. 22. The work program will conast of mainly three actvi2es:/ (a) taining of 100 insictors, (b) enterpe inspections and surveys and (c) overseas tani. (a) Taining of 100 inectors-a project office of SLB will ornize four ssons of factoy inpec taining course during 1995 with the assstanc of te Nationd Training Center for Occupati Safety and Health and faoeign expe. The course will be designed based on the courses provided by the Nationa Training Center such as (i) one-week training of factory inspectors, (ii) one-week taining of tuainers, (ii) upgading taining of senir factory inspectors and (iv) enterpise maement and workers training. 100 insptos to be tained will be selected by the project office based on their engiering educational background. (b) Enteprise inpecons, accident prevention and investiton and awaen taing-on-the-job trning for 20 inptos: (i) Enterpise inpeo: Four enterprises will be selected fo thorough sfety insecon. It will be undertaen with te guidance of a foreg consltant. Four inspecto from the government and four staff from the enterpie afety unit Shenyang will work cosely with the consuant to leam the inpection procedure for each enterpise. For each enteqrise, the team will prepare an inspeto report 2,l sLS has ardy ad sed is inapeca for co00 pvided at the Ntinal Tning Caer fOr SaMySd andHealh. Bedieproebemeefectde,wibe atlea erial hnpectorsied an th baic cooe at th Ceter. - 117 - 3,1 and discuss imprvements to be made including the use of fund for occupatonal safety. An action plan for improving occupational safety and health will be prepared by the enterprise and reviewed by the inspection team. (ii) Accident prevention and investigation: The project office will examine accident and occupation disease statisttcs and selects 4 prioity accident/disease types and 4 enterprises for workplace survey for accident preventionfinvestigudon. The survey will be conducted with a foreign consultant's guidance sa1d a teamn of 4 inspetors from the govemment and 4 inspectors from enteprise will work closely with the consultant. (lii) Enterprise-based awareness training The project office wi1l select 2 enterprises for awareness training. Training material in Chinese should be collected from the National center with posters. Training teams selected will work closely with a foreign consultant. (c) Overseas training: There will be two overseas training, one in Hong Kong and other to be decided. Twelve inspectors will receive overseas training of two weeks. Each inspector sent for overseas will write a deailed report of his findings and technical observations, and how these can be used in Shenyang. Management Of the Component 23. A project office will be established in SLB. It will be responsible for all the preparatory work for the progm and implementation of activities. It will also prepare an amual work program, monitor and evaluate the progress and report the progress to a Dep" Director of SLB who will report to the Leading Group and the World Bank. Budget 24. The program will require $250,000 for foreign cost and Y 3.2 million for local cost. The $250,000 will be used for a) a foreign consultant-$56,000, (b) overseas training-$44,000, (c) inspection equipment-$135,000 and (d) teaching materials15,000. SLB will use its countepart funding for (a) the training room, (b) equipment instllation and adjustment, (c) woridng expn for the project office and (d) equipment maintenance and opeation. D. Dcv=zoPr!rT oF PRopEm RIGHT J/ TRAWACTION CENl 25. This subomponent will help SMG enhance the opeation of the Property Rights Transaton Center established for mergers and acquisitions and develop an information system for this purpose. I1 Popety igu deotoesownrs of sets inludig ugles nd itage, nd lad uso t - 118 - ANNEXS 3.1 26. The program will focus on: (a) orderly opeation of the market by refining existing legislative framework towards uniform, nonnegoftable and transparent reguations, voluntay rather than adminivey guided transactio, and simplification of admiistrative procedures; (b) development of marketing strategy and preparation of prospectus, offers and other promotional steps for the Trnaction Center; and (c) stening of the center's capability by training its staff and by instlling a computerized information system which will be lined to other infomaton systems established in other cities of China which already have such property markets. The trang will also be provided to those who work on prope transacon in the Shenyang Municipal Government Bureaus as well as in distdcts and counties. 27. The work program will be composed of tee activities. First, an exten cOnsultant will be hired by the Center to work with the staff of the Center for about a month on the allowing: (a) e n of the exiing legisLation and regulatons govening the property rights market in Shenyang with a view to proposing measures for moving towards: (a) uniform, nonnegotiable and transparent reguations, (b) voluntary rather an minisaiveguided ransac, and (c) implification of adnive procedures; (b) development of a market staegy and praration of prospectus offers documents, valuations and other related material; (c) examinton of infaomation needs, estlishment of a computeized information system; and (d) as ent of staff sldllslknowledge and formulation a feasble training program including inspecdon tours to overseas. 28. Secondly, the Center will set up an apprprat information wsstem for propety rights tansactons. The informaton system will store such data on the entepse enter the property market, monitor changes in this information over time, record taacto and carry out analyses of trends so that the Ceter will be able to provide efficiet and timely intmediay services for prosective selers and buyers of property right. The basic information items to be covered by the system are: (a) a set of deailed information of the eterp enteig the property market to sel or tansfer a part of their property; this may include infaom on -1 19 - ANNEX 3. 1 status of company, assets, liabilities, capital, turnover, operating cost, employment, details of propety to be sold/transferred; (b) data on interested buyers; and (c) data on tsdcons 29. Thirdly, the taining will be provided to the 15 staff in the Center as well as 80 staff who work on property tansaction in the municipal government bureaus, districts, and counties. The training program will focus on corporate fiance and management, information management, computer skills, property transaction regulations, and marketing. The staff are also expected to take basic courses on the market economy theory provided to the key municipal government officials. Managemen Arrngae_ 30. The Planning and Economy Commission will set up a project office to be headed by the chief of the Shenyang Property Transaction Center. The office will be responsible for the daily management of the subproject activities as well as monitoring the pogess. The project office will prepare semi-annual progress reports and annual work programs to be reviewed by the Planning and Economy Commission, the Leading Group for the Training, and the World Bank. This subproject is expected to be completed in two years. Budget 31. The total foreign cost of the program will be $150,000, with training and consultants amounting to $60,000 and equipment $90,000. The counterpart funding of about $100,000 will be provided by the T'- ction Center and SMG for the office space, in-country training, and local consultants. E DEVELOPMENT OF STATz Assrr MAAGEMNT BUREAu 32. The main objectives of assistance for the State Asset Maagement Bureau (SAMB) and the State Asset M&iagement Company (SAMC) are to (a) assist the bureau and the company clearly define their scope and reponsibilhties and (b) equip the bureau with adequate capabilities so that the bureau will be able to effectively exercise ownership rights of the state assets. 33. The program for SAMB and SAMC will be twofold: (a) constltancy services for SAMB and SAMC and (b) training of staff to be engaged in state asset management activities. 34. SAMB and SAMC will hire a consultant who will work closely with them to clearly define their fncti and advise them on the necesury trang that staff should take. The consultant will also assist the bureau ognize worlshops and seminars which - 120 - ANNEX 3.1 wil further the understanding of corporte management and the experience of other coutries in anaging public enterprises. The scope of work for the consultant are to: (a) review and analyze the official documents setting up the bureau and any related state laws and regulations which govern the functions and operation of the bureau; (b) review and analyze the cufrent fimctions of line industry bureaus with a view to devise a feasible process of transferring their responsibility for the exercise of ownership rights to SAMB (the transfer is to be fully implemented by the end of 1995); (c) work with SAMB to define clearly the scope and responsibilities of the bureau and assist SAMB work out local regulations for state asset management; (d) work with SAMB to formulate a recommended structure of SAMB and to specify job description of key positions in the bureau; (e) assess the training needs of staff in the bureau and in the experimental SAMC and devise an effective training progam which may include workshops, seminars and overseas investigation; and (f) review the information equipment needs and advise an information system which will be used for an inventory of the state asset. In addition, for the e ental SAMC, the consultant will, inter alia, (a) review and analyze the official documents setting up the company and any related state laws and regulations which may govern the function and operations of the company; (b) review and analyze the company's current set up with SAMB and other municipal govemment bureaus involved with a view to recommend any modificatn to the current company suctre and mandate; (c) work with SAMB to define clearly the scope and responsibilties of the company; and (d) review the company's first year option with SAMB and recommend SAMB whether additional SAMCs are necesary and if so, recommend any adjustment measures necessary for SAMCs to be functional. 35. The staff of SAMB and SAMC will be trained in key subjects of corporate management~ In addition, the bureau will orgnize workshops/seminars to furier the - 121 - ~ANNI 3.1 staffs underStanding of cpo mnagement and len from the exeiece of other counties. Budget 36. The total cost for the constancy sevice and the taining will be $250,000 Nd Y 1 million; $50,000 for the consulq srvice, $40,000 for the information system equipmnt and $160,000 for tan which will include about $35,000 for overseas investgt dn. 37. SAMB wil aniz a project team headed by current chief of State Asset Management Division. The team will be responsle for the daily management of the activies as wel as monitring the progress. The project team will prepare -annual progss repot and annual work progams to be reviewed by Drector of SAMB, the Leading Group, and the World TBan This program i expected to be completed in two yeuL F. Tn s ni TACADIG CAPALumy- SmiNANG CoLUGE OF EcoNoiuCS AND FmNANc 38. The main obective of the technical asistance progam is to strengthen the teaching capablity of the colege so that it will eventually be able to provide good courses on a markt economy, in l tade, accting and finance and respond to a growing de_and for trii gov ent officials and enterprs managers in these areas. _pe TSh& 39. Sen fculty members will be seleced to be sent to ovrseas univaerties for postg4aduat degre taining over the four-year perod sting in 1995. Selecton crteda for the 7 members will be (a) age below 45; (b) podua degees from Chnese Univesities in one of the following-Accounting, Economy, Finance, In l Trade and duEial conomy; (c) fr language capabilities; and d) aon from the Deartmt Head. They will be roired to take degees within two years on one of the folowing ubjects: na tade, nomics, finance, accuntng, and business 40. The college w utilie its fiendship networc with over univsities for the degree training ce the netwrk universities would be able to provide financal ad adma a for those lected. The first two facy members are expced to st studying in 1995, another three in 1996 and two in 1997. The prgam is epcted to be completed in 1998. In arder to ensu ht tse sent for the -122 AN= 3.1 degree training overseas come back to the College, the College will make several financial angements with the selected faculty members.4/ Use of Visiting Scholars 41. During the four-year period of this program, the college Will invite a few s,ho1ars from overseas universites. The scholars are expected to (a) review the curent cunicula for the Economics & Business, Accounting and Finance Departnents and advise any improement that the College should make with regard to course desgs and (b) teach one semester on one of the following subjects; economics, accounting, business admiistration, and finance and international trade; those being the courses considered to be rather weak. 42. The college will investigate the availability and qualification of scholars at the friendship universities overseas and invite two scholars for one semester startng from 1995. Using the relationship with the network, the college will be able to receive scholars with less expenses. The college will also look for scholars who are able to teach in Chinese on courses mentioned above through the assistance of an advisor to be retined by the training office in the Shenyang Municipal Govemment Budget 43. It is expected that the program will require $300,000, of which $200,000 for degree taining and $95,000 for visiting scholars. A small sum of about $5,000 wil be spent for purchasing textbooks and other teaching materials from abroad. The college will provide local counterpart funding of about $100,000 for visiting scholars' lodging and other necessities. lImplementton ArrnDgement 44. The College will organize a project team for the program. The project team will report directly to the President of the College. The project team will be resonsible for the implementation of the program. The team will prepare semi-annual progress reports and annual work programs to be reviewed by the Leading Group for Training to be set up in the Shenyang Municipal Goverment and the World Bank 41 Thos selected wll dther bew a portion of the taining cost fiat and repWid afer they retu to tho Collego or be ased to place a morga for their amai_s to guaant the financial asstane tdat the College is going to provide. - 123 - a S1MTL ENHANCEMENT OF PRODUCT DESGN CAPABIITI TE1MS OF REFERECE FOR CONSUILTING SERVICES introduction 1. SMICL was established in April 1993 through the merger of Shenyang's three metal-cutftng machine tool manuers and its only manuacture of CNC systems. The company is a producer of machine tools, especially of uning machines and drilling, boring and milling machines of different configuratons, as well as manually operated, conventionally automated and numerically controlled machines. In order to improve the efficiency of SMTCL in technial, operaonal, financial and managerial terms, a ng program will be carried out by the company with the financial support of the World Bank. 2. SMTCL has adopted a market-oriented product say that emphasizes (a) reduction in output of conventiona lathes while upgrading thei quality; (b) manufichre of simplified and sophisticated CNC lhs; and (c) production of milling/boring CNC machine tools, including mchining centers. The strategy further specifies that (a) product quality implovement rather than output grwth will be stessed; (b) modular desig, repetitive part technology and value engieeing will be the principal factors in product design; (c) manufacture of parts and components will be organized in a configuration that assures economies of scale and avoids duplication of efforts; and (d) assembly of products will be confined to three spedalid shops. As one of the main objectives of the restructun program is further development of product design capabilities of SMTCL, the company plans to employ a foreip consuling firm, in accordance with the World Bank's Gudelines for the Use of Consultants, to assist it in achieving this objective. Objectives of the Work 3. The objectives of the proposed consultng services are: introduction of modem design techniques; assistance in the implementation of these techniques through training; and support for the development of advanced machine tools through paricipation in the design of a limited number of machine tools. - 124 - AEX 3.2 Scope of Services 4. An outline of the scope of sevices is presented in the following paraphs. The consltants, in their proposal, should suggest other areas which in their judgement should be included for the enhancement of product design cpabilities at SMTCL. S. In intducing and implementing modem desg techniques, the consultants will conider aU design parameters. They will particularly focus on: (a) Teamwork work approach to desig; (b) Value engineenrng; (c) Data bank, literature and patent inquiry; (d) Search for altemnative solutions and evaluation of such alteratives; (e) Pailure mode and effects analysis (FMEA); (f) Modular design and repetitive parts usage; (g) Design for cost savings in production and assembly; and (h) Standardizaon of products and parts. 6. The consultants shall advise and support the design departments of SMTCL in the conceptual development of an integmated product program based on the asting products, effective license agreements, market requrements and technological development forecasts. Ihis program shall incorporate aU possibilities of moduar desin, standardizaion and repetitive parts usage. Further, theses aspect shall be the basis for the assessment of planned new license agreements or coproductions. 7. The onsultants shall advise and SuppOrt the dein dpartments of SMITC in the development of advanced machine tools included in SMTC's production program, especially those listed below: (a) Horizontal turning madhines (b) Verdcal turning machines (c) Tuning centers (d) Special purpose tuming machines (e) Horntal machining centers (f) Vertical machining centers (g) Five axes machining centers A entative list of specfic products to be developed is attached. The fina list will be agreed upon between the consultants and SMICL. 8. The development of each product shall be caried out in the followig five phases Phase 1-Product Specfiation. The technical iScats of each desg and development project will either be supplied as draft by SMTCL or determined on -125 - A E 2 the basis of a project study prior to the start of the project. The project study all compdise: (a) Databank inquiry and evaluation of the current stat of the machine tool techniques; 0) Review of the main competitors' products and its comparison with the planned product; (c) Analysis and assessment of the existing market situation; and (d) Prepartion of a duty sheet for the planned product. Pbm 2-Product Concept. Based on the duty sheet, ideas and concepts for the product and its parts shall be developed, evaluated and worked out. During this phase the team work method should be appLied. In a review meeting, the optmum conepts shall be selected. Phase 3-Product Development. In accordance with the selected concepts, prelimiary drawing shall be worked out for all units and subunits based on the calcuation of loads, stresses and lifetime for aU critical elements. During this phase the methods of value engineering and FMEA should be applied to the enire development process. The production costs of all parts as well as the cost of assembly shall be estimated with the aim to develop a cost optimized product. The results of this phase sball be presented in a review meeting and the decision of this meeting, if positive, shall be released for the next phase. Phase 4-Product Design The prliminary drawings of all units and subunits shall be reworked into final design drawings consideing the decision of the review meeting and the results of the calculatons and cost evaluations. The final drawings shall correspond to LSO standards and must show all details which are required to make the detailed drawings for all parts. A prelminary partial list shall be preped contaning aU parts, produced at SMTCL and purchased, with name, mateial and specfications. Furthermore, all functional charts and diagrams as gearing layout, hydraulic and pneumatic layout, lubrication diagram and functional flow charts should be provided. The complete project shall be presented in a review meeting and released to completion. Phase 5-Product Details. Prparation of detailed manW u ng drawings and the final part List shall be carried out by SMTCL without the support of the consultants. Implementation Locations 9. The tasks listed in paragraphs 5 and 6 shall be carried out at SMIC by ienced engines of the consutants in close cooperation with the design departments of SMTCL. 10. The product development ta, deribed in pagraph 7, shall be caried out either at SMTCL or at the offices of the consultants. The work will be equally divided - 126- ANNEX 3.2 between the two locations. In the first case, an exrienced design engineer shall guide product development (phase 1 to 4 in paa. 8) in Sbenyang. In the second case, one or more Chinese design engineers shall work during phase 1 to 4 under the supervi of a member of the consultants' staff. The review meeftngs shal take place alternatively at SMTCL or at the offices of the consultants. To reduce travelling costs, the review meetins of different deve projects shall be combhined. Tnhng 11. The consultants shall develop an approprate taining program, including courses and seminas on *Introduction and Implementation of Modern Design Techniques,' for implementation- at SMTCL. The training program, which shall be conducted in English, should include, inter alia, the following areas: (a) Basic desig engineeing principles and methods, including teamwork approach, value engineering, search for alteive solutions and their evaluation, moduar design and repettive parts usage, and desg for comt savings in production and assembly. Pardcipants shaU comprise al desig enginers who work creatively. (b) Databank, literte and patent inquiry. Pardcipants shaU comprise one or two persons from each design departnent. (c) Failure mode and effects analysis. Participants shaU compnise one or two persos from each product line group. (d) Standardi of products and parts. Participants shall compie the leading design engneers. ?ouuutt' Team 12. The consultants will propose a team to undertake the assigment at its own headquarters and in the field. The selecdon of the consultants will be heavily influenced by the expnce and capabilities of the proposed team. The team leader will be a senior consulant with severa years experience in similar assignments. FA_mated Tlming and Cost 13. It is expected that the task will be completed within 24 months of the commencement of the worl. The assgment will probably require about 25 staff-months of the consultants' professional staff. Oher cots to the consutans would include travel, support staff assigned to the task, office expenses, and overhead. -127 - 3.2 AITACHMENT: TENTATIVE LIST OF PRODUCTS TO BE DEVELOPED One type of urnin center (swmig 250 - 610) Two types of honzontal single-spindle tuming machine (swing 250 - 610) One type of four axes turing machine (swing 310 - 610) Three tpes of vertical single spindle tring machine (swing 300 - 1,000) One type of vertical double spidle turning machine (swing 300 - 500) One type of special prpose turning machine (swing 300 - 1,000) Two types of single column vertical machining center (XxY= 400 x 1,000 - 800 x 2,000) Two types of horztal milling and boring machining center (XxZ = 630 x 630 I1,25Q x 1,250) Three types of horizmtal five axes machining center (XxZ = 630 x 630 - 1,000 x 1,000) - 128- ANNEX 3.3 Table 1: Shenyang Machine Tool Company Lmited Changes in Products Mix - Basecase (Million Yuan) 1993 2002 Product Output Value Output Value Set Set New Products * Flexible Machine System 1 4.5 * Flexible Machine Call 2 6.0 * Tuming Machine Center 102 102.0 * Fmwork Robot 20 12.0 * Five-face Machine Center 11 49.5 * FMC S 24.0 * Boring and Milling Machine Center 2 7.0 * Vetical NC Lathe 60 127.7 Improved Prducts * Vertical Machine Center 26 8.7 173 199.S * Horizontal Machine Center 5 10.1 90 2SO.S * CNC Boring and Miling Machine 13 7.4 185 317.8 * Ful Functieon NC Lathe 188 97.7 14S0 1,318.1 Special Lfth 75 34.7 90 41.1 Precision Lathe 4 0.S 110 32.7 Multi-spindle Auto Lathe 35 9.9 100 39.3 Existig Prducts ** Geneal NC Lathe 14 4.0 S00 200.0 ** Low-cost NC Lathe 806 62.4 1000 120.0 Lato 5469 341.1 2180 164.9 Horizontal Boring Machine 258 94.3 200 77.8 Radial Drillig Machine 224S 1S1.2 1332 95.9 Othes 148 93.3 0 0.0 loaw 9.28C 915.37.6I3 20.l2 % of CNCMachine 11.3% 20.8% 47.3% 85.8% Note: ** are simplified CNC machine tools * ae the other CNC machine tools CNC Macine Tools 232 123.9 2101 2,418.5 Simplified CNC Machine Tools 820 66.4 1S00 320.0 Conventional Machine Tools 8234 725 4012 451.7 roaw 223 1. 61 ^9. CNC Machin Tools 2.5% 13.5% 27.6% 75.8% Simplified CNC Machine Tools 8.8% 7.3% 19.7% 10.0% Conventional Machine Tools 88.7% 79.2% S2.7% 14.2% Total 100.0f 100.0% 100.0%M0i - 129 - .3 Table 2: Shenyang Machine Tool Company Limied Changes In Products Mix - Lowcase (Mllion Yuan) 1993 2002 Product Output Value Output Vaue I ~~~~~~~Set Set Nwv Products * Flexible Macbine System. 1 4.S * Flexible Machine Coln 2 6.0 * Turning Machine Centre 52 S2.0 * Franwwoak Robot 10 6.0 * Five-face Machine Centre 6 27.0 * I;IdC 5 24.0 * Boring and Milling Machine Centre 2 7.0 *i Vertical NC Iathe 40 85.1 Ittroved Products * 1FuI Function NC Lathe 188 97.7 1030 933.1 * CNC borig and milling ma e 13 7.4 185 317.8 * Vertical macbine centre 26 8.7 113 130.5 * HorimZOal Machine Centre 5 10.1 S5 l12.5 Special Lathe 75 34.7 90 41.1 Ptecion Lathe 4 O.S 110 32.7 Muti-spindle Auto Lathe 35 9.9 100 39.3 Existing Products "t General NC Lathe 14 4.0 S00 200.0 " Low-cos NC Lathe 806 62.4 1400 161.0 Lathe 5469 341.1 2780 203.3 Horizontsa Boring Machine 258 94.3 300 117.8 Radial Ddllig Machine 2245 151.2 1332 9S.9 Others 148 93.3 % of CNC Mchine 11.3% 20.8% 41.9% 79.9% Note., are simplified CNC machine tools * are the other CNC macbine tools CNC Macbine Tools 232 123.9 1S01 1,745.5 Simplified CNC Machine Tools 820 66.4 1900 361.0 Conventidnal Machine Tools 8234 725.0 4712 S30.1 | ~~~~~Toa} SE 215. Am 2.ff.S | CNC Machine Tools 2.5% 13.5% 18.5% 66.2% D Simplifie CNC Machine Tools 8.8% 7.3% 23.4% 13.7% Conventioal Ma?-;neTools 88.7% 79.2% 58.1% 20.1% L~~~~~~A IW%100 t 00 8 - 130 - ANNEX 3.4 SflMTL'S TRAINING PROGRAM Backgrounld 1. An important pa of the development of SMCI's corporate res& tc ting plan and management o ion is to design a trn program for manager at all levels, from shop floor to cororate managemet. 2. The trng devised is based on a combination of formal training, suported by follow-up coaching, dunng which a consultant works with individual or small groups of managers. Practical assisance and support dming the implementaton of new ideas, gained from redical taining sessions, can greatly improve the dcance of success. 3. There wil be a continuing need to review and adjust taining progams according to changing circumstances. For example, as manpower reducton plans begins to bite into the Business Units, some taining will be needed to help remaining staff handle the changes. Precise needs will be identified and met at the time. 4. A detailed trang modules and plan has been discussed and agrOed and rcorded in secdon 7, Volume 6 of the Final Report of the Management System Design Study. Key training activities are summarized as follows. S. For the purpose of training, SMTCL, in onsutation th its exteral management consultants, has divided its managers into five levels. It plans to train approximately 930 people at the various levels of nagement as sumazedbelow: Level Description No. l&2 Headquarter's Funcdonal Directors and Business Units' General 50 I anagers 3 Business Units' Functional Department Heads and Headquarter's 130 Second Line Managers 4 Senior Managers in Business Unit' Subdeparnts or in Workshops 250 5 Junor Mangers (Section Heads) and SSmss i Workshops 500 -131- ANNEX3A 6. Management tralim t will be primarily carried out in Shenyang by competent intenional maagement consultants over a four-year period. A selected number of levels 1 and 2 managers who have successfully completed the taining program in Shenyang will be sent abroad for advanced training. 7. At the outset, a short-term raining progmam would expose levels 1 and 2 managers to the principal issues in management through courses in strategy and business planning, financial management, markeedng and project management. These will be supplemented by specific courses in business planning, financial mnagement for financial mnagers, prctical sale and marketing, and project management for project managers. 8. Following the short-term trining program, levels I and 2 managers will receive training in management effecdveness, quality control issues, operations management and customer awareness. All managers in levels 3, 4 and S would take core courses in management effectiveness, finance and accounting, customer awareness, staff utining, quality control, and project management. Then, specific training programs will be conducted for managers n finance, sales and marketing, product development, production, quality assmurance, personnel aministation, and management information system. Product Dedin 9. Approximately 120 design engineers will be trained over a three year period. All trainees will participate in courses to be conducted by a competent etrnal consulting firm on 'Introduction and mplemention of Modem Desin Techniques" (Annex 3.2). About 70 din engineers would receive on-the-job training in Shenyang and the other 50 would receive such taining at either the external consultants' headquarts or at the premises of the providers of technologies. Production Techiqes 10. The pilot manufarig shop establihed at SMTCL (SAR, para. 3.19), once aprpiately equipped, is exected to train approimately 100 oprators annually in modern metal-cutting techniques. Accordingly, some 500 qualified opeators should become aailable by the end of 1999. 11. Training of specized operators will be included in all SMTCL's contrc for import of machinery and equipment. About 300 such opeators are expected to be tained by the suppliers either at the suppliers' premises or in Shenyang during 1994-99. Lagag 12. The Shenyang Training Center will be the primary insttution for providing SMTCa's employees with training in the English language. All levels 1 and 2 managers and about 50 percent of managers in levels 3, 4 and 5 are to receive language tining. - 132 - A 3.4 Further, design engineers to be trined in product desin (pa 5) and tose opators who will be sent abroad (pan. 7) will lso be subject to lngue t n. IlO of the nge tining program bas already stad and is exped to be completed by the end of 1998. - 133 -Ax 3.s INDUSTRL AND COMMRCAL BANK OF CHINA (ICBC) 1. The Institution. The Industi and commercial Bank of Cha (ICBC) was founded in Septembe, 1983, by State Council Decree 146 as a spinoff of the former Industrial and Commercial Administration Departmt of the PBC. ICBC's pincipal functions include: mobilation of enterprise and individual deposits, mainly in urban ares; provision of working capital to ste-owned enterprises (SOEs), colecive and individual enterprises; medium-term technical innotion loans; payroll managementand supervision, and cash management of SOEs and large collective enterprises. It also engages in trust business, and offers consulting serices and, through a joint venture, finaci leaing services. 2. There is no Board of Directors in ICBCs management structure. It is headed by its President appointed by the PBC with the approval of the State Council, and four Executive Presidents. The Head Office has 20 departments, with a staff of 800, and is mainly involved in policy formuation and overall supevion of branch oprtions. ICBC operates through a very large network of over 30,000 branches and subbranches all over China, of which 29 are provincial branches, and employs a staff of over 500,000. The financial instion is governed by its Artcles of Association approved on November 15, 1989 and a Statement of Policy approved in July, 1990. 3. With total assets amounting to Y 1,436.3 billion ($165.5 billion) and net worth of Y 96.1 billion ($11.1 billion) at the end of 1993, ICBC is the largest bank in China, accountng for a third of total bank assets and more than half of the domestic opeations of commercial banks in China. Its end-1993 outstanding loans and deoi amounted to Y 1,152.7 billion and Y 951.5 billion, respectively. Sixteen percent of its loans are long term but its long-term resources int he form of deposits are used to finance its working capital opeats. ICBC's loansideposits ratio at the end of 1993 has exceeded 120 percent. It had to borrow large amounts (Y 352 billion as of December 31, 1993) from the PBC to make up the resource shortage for lending. 4. ICBC's fncial policies focus on promoting a diversfied portfolio, matching of its sources and uses of funds in trms of inteest rtes, matrites and cunrencies, and maintaining liquidity in its opeations. ICBC has set its exposure lmits for sectors, borrowers and size of loans. Lending to indutrial sctors will not xcweed 30 percent of its portfolio, to single bonrower at 10 percent of its net worth and the mmum project size will be Y 2 bilion ($230 million). The projects it finances should bave a minimum financial ate of return of 15 percent, positive current ratio and adeque debt servce coverage. -134- ANEX 5. ICBC's net profit for 1993 amounted to Y 3.3 billion, compared with Y 16.1 billion for 1992. Return on average equity in 1993 was 3.9 percent compared with 1,27 percent in 1992. The sharp decline of its profitability in 1993 was attributable to the narrowing of its interest spread and rapid increase of its expenses including its administative expenses as well as the conversion to the new accounting system. The total assets show almost no change in the past year, remaining at Y 1,436 billion at the end of 1993, compared with Y 1,434 billion at the end of 1992. ICBC's loan portfolio increased from Y 934 billion in 1992 to Y,153 billion in 1993, up 23 percent. Its equity increased from Y 70 bilion at the end of 1992 to Y 96 billion at the end of 1993, due to substantial increase in paid-in capital. ICBC's equity as percentage of its total assets went up from 4.9 percent in 1992 to 6.7 percent in 1993. Shenyang Branch 6. ICBC's Shenyang Municipal Branch was opened in January 1985, when its head office started opeations. During the decade since its establishment, ICBC-Shenyang has rapidly expanded its subbranch network within the limits of Shenyang Municipality. As of the end of 1993, ICBC-Shenyang has opened 9 city subbranches, 6 suburban subbranches, 189 savings offices, and 40 business offices, with a total staff of 7,049, including 5,388 professionals (with high school and above educational nd experience in baning). 7. ng t and Staff. ICBC-Shenyang's eight-member management team consists of the President, four Vice-Presidents, chief economist, auditor, and chairman of the branch's labor union. The branch has six departments: opeations de t, technical innovation credit departnent, real estate credit department, interational business department, credit card department and computer center. Apart from the subbranches and savings offices, it has a training center and five subsidiaries: the Trust Company, Venture Capital Company, Northern Securities Company, Fimance Company and Consuldting Company. It is projected that the number of staff will reach 8,000 by 1997. 8. Technal bmovation Credit D arM (IC). The Technical Innovation Credit Department of ICBC-Shenyang is the term lending arm of the munici branch. The Department is headed by a general manager and two deputy generl managers. There are three Divisions within the Department. The general manager is directly involved in planning, statistics, research, computers and audit. One deputy general manager is supersing the Division dealing with prelminary screening of project proposals, supervison of sector loans and monitoring the performance of subbranches. The other deputy general manager is stpervising project appraisal and supervision. The Departme has undergone a major r on in mid-July 1993. Its staff was reduced from 72 to 34, by assigning more than half to the subbranches. The putpose of the gnization was to strengthen loan identfiction and project supevision work of the suboranches which are geographically more close to the borrowers. As a result of the rganiztion, the funcdion of appraisng projects has been moved to ICBC-Shenyang subsidiary consultdng firm. The Department's staff only plays the role of appraisal mission leaders or advisors, superising - 135 - 3 .5 the appraisl work carried out by ICBC-Shenyang subsidiary consulting finn, the Shenyang Financial Intelligence Conultant Company. This consuting firm, in '. nration with the Shenyang Science Association New Technology Consultant Comp^g. which is an independent consulting firm, has been doing all the project appaisal, including financial and economic analyses, for ICBC-Shenyang. The project appraisal by these consulting firms is carried out on the basis of feasibility studies submitted by applicant enterprises. The appraisal fee, at a standard rate of 0.1 percent for projects below Y 10 million and 0.08 percent above Y 10 million, is fully borne by the applicant enterprise. This charge is on top of the cost for preparing feasibility study. In appaising industial projects, the consultng firms follow ICBC's Industrial Project Appraisal Manual which i identical to the manual orginally prepared by the China Investment Bank with the help of the Bank The tematonalBusiness Department of ICBC-Shenyang is responsible for proceng all foreign currency loans. However, because of inadequate appraisal staff in that Departient, the apprais of all projects financed under the Project will be done by the Technical Inovation Credit Department which will assign the work to the consulting firms. The Intrnational Business Departnent will takle on the necessary tslation work only. 9. ICBC-Shenyang received authorization from the State Foign Exchange Contro Bureau on May 27, 1993 to handle forn excange tnsactions including foreign exchange savings deposits, remittanices, loans, trade and nontrade setdements, borrowing, foreign exchange buying and selling, guarantees, marketable securities (excluding common stocks), reach, consultancy, and verification. It has in fact started makdng loans in foxeign currncies in 1991. In that year, it only extended warldng capital loans in foreip currencies. During 1992/93, it has committed one foreign currency loan for $1 million fnancing an engineeing project and another for $19 million financing a telecommunications project with eight telephone exchanges components in different parts of the city. During the same period, the Technical Innovation Credit Department has approved 226 local currency term loans tolling Y 2.2 billion. The average size of the local cufrency loans was around Y 10 million ($1.15 million). 10. ICBC-Shenyang has prepared a comprehensive two-year training progam and it intends to finance the costs out of its own budget. 11. ICBC-Shenyang's operations are guided by the polices and rWations stipulated by the Head Office. The policies and strategies to be followed by the branch are summarized as follows: (a) A loan:deposit ratio of 67:100; @b) Exposur to a single enterpwse not to exceed 10 perct of ICBC- Sbenyang's total equity; (c) Long-term debt/equity rto of the borrowing enterprise not to exceed 70:30; (d) Minimum annual loan collection ratio of 90 percent; (e) Annual provision for bad debt equal to 0.6 percent of its outstanding loan portfolio; - 136 - ANNESXLU (f) Worldng capital loans will not be renewed if the bromwing enterp's term loans are in arreas; (g) Long-term loans will be made on a fixed amortization schedule; and (h) The borrowers' financial statements must be audited by qualified independent auditors. 12. Einadal Performance and Condition. ICBC-Shenyang's income statements and balance sheets for 1989-93 and the projected income statements and balance sheets for 1994-98 are included in Attachments 1 and 2. ICBC-Shenyang's net profit for 1989-93 did not show a growth pattern. It amounted to Y 98 million in 1989, declined to Y 81 million in 1990, went up to Y 136 million in 1992 and dropped to Y 129 million in 1992. The net profit declined firthe to Y 93 million in 1993, down 28 percent. Intert income on loans and deposits increased from Y 4.6 billion in 1989 to Y 6.4 billion in 1991 and to Y 8.9 billion in 1992. In 1993, such income drpped to Y 3.9 billion, down 54 percent. Also, a much larger amount of provision for bad loans was made in 1993. The pwovision was Y 2 million in 1989, and it was inareased to Y 40 million in 1993, a 20-time increase in five years. ICBC-Shenyang's administrative expenses also increased sharply in 1993-from Y 77 million in 1992 to Y 127 million in 1993, up 65 percent, and the average of the previous four years (1989-92) is used as a base, the rate of increase was more than 130 percent. 13. ICBC-Shenyang's total assets increased from Y 15.6 billion at the end of 1989 to Y 27.6 billion at the end of 1992, showing an average rate of growth of about 21 percent per year. In 1993, total assets increased further to Y 31 billion, up 12 percent from 1992. Its fixed assets, which maintained an average level of Y 262 milLon in 1991/92, went up to Y 373 million, gaining 42 percent. Its equity amounted to Y 1.6 billion at the end of 1993, accounting for around 5.1 percent of total assets. The capital adequacy criteria would not be fully applicable to a branch like ICBC-Shenyang, whose accounts are annually consolidated with the Head Office. 14. ICBC-Shenyang's loans/deposits ratios for 1992 and 1993 were 127 percent and 142 percent rspectively. It has been relying on borrowing from the PBC and other banks to make its shortall of resources for lending. This policy needs to be reviewed closely. 15. Quality of Leon Portfolio. At the end of 1993, ICBC-Shenyang's arrears on technical innoation loans amounted to Y 813 million, of which 56 percent have remained in aers for more than one year. If the rescheduled loans are taken into acount, the arras taio would exceed 30 percent of loan portfolio. The city of Shenyang, being one of the old heavy industrial bases in China, has been modrniing the fixed assets of enterprises at a slow pace. Since most of the equipment is obsolete, the technical innovation thereof has proven to be very compLicated. The unsati performance of many enterprises is not expected to be reversed within a short time. Alhug the investmnts in tecamical innovation projects by the government have incsed during recent years, large amounts of loans made during the earLier period sill rem in - 137 - a The large of loans in ICBC-S y 's portfolo reft the curentsas of many of its borowers. ndwsra and C _mewda Bak o Cblna - Sbemyang Brwc Income R0*=teie 199 10 199 1 1 19 1990 199 199 7 199 (for yew ended Decmbwer31) ActUl _- - J bInare oanns 1,276.0 1,40A.0 1,426.0 1,574.0 2,003.0 2,621.0 2,711.0 2,820.0 3358.0 3,625.0 Inxtare on deposs 3,307.0 3,618.0 4,987.0 7,338. 1,914.0 2,2S4.0 3,22.0 3,8S1.0 4,258.0 4,359.0 Commisnndd 22.0 23.0 14.0 14.0 24.0 28.0 32.0 35.0 36.0 38.0 TouS bmoNno 4~~.605.0 5.049.0 6.4t. 8.926.0 3 941,02 43L 6103Q 6 S36.0 7ME20 9,0.22.0 Latcvoa an deposs S90.0 653.0 572.0 686.0 990.0 1,009.0 1P29.0 1,148. 1,673.0 1,685.0 Interet on bonwings 3,628.0 4,008.0 5,310.0 7,669.0 2,409.0 3,402.0 4,392.0 465S8.0 5,136.0 5,402.0 Operaing &aedmninlstrv.oexpenses 39.0 48.0 S5.0 77.0 127.0 177.0 225.0 276.0 328.0 359.0 Deprckilon 5.0 7.0 8.0 12.0 21.0 28.0 34.0 42.0 45.0 48.0 Ptrovion for bad debt 2.0 3.0 4.0 36.0 40.0 42.0 44.0 46.0 48.0 50.0 Businestax 72.0 80.0 78.0 86.0 109.0 155.0 211.0 256.0 302.0 348.0 Tota EFjwncs 423360 4.799.0 6.027.0 8,S66.0 3.696.0 4.813.0 S.935.0 6A26 .0 7 S2.0l amwKT" moe 269.0 2SO 400.0 4O 3 2S 90-0 100.0 110.0 120Q 130 Lees: Saff bonus & wef fund 8.0 11.0 11.0 14.0 0.0 0.0 0.0 0.0 0.0 O0 Lems: Dvelopment fund 3.0 24.0 32.0 6.0 0.0 0.0 0.0 0.0 0.0 0.0 Inome Befom Income Tax 2S8.0 21S.0 357.0 340.0 245.0 90.0 100.0 110.0 120.0 130.0 lnomta 160.0 134.0 221.0 211.0 IS2.0 56.0 62.0 68.0 74.0 81.0 ~~Lumu IL!~~~2 OA! DUA AM h A au M1~ OA NotInooameAvw TotalAsaeu(%) 0.63% 0.46% 0.63% OS.1% 0.32% 0.10% 0.11% 0.11% 0.11% 0.12% Net Incomn/Avg. Equity (%) 8.54% 6.67% 9.30% 7.85% S.7S% 2.20% 2.54% 2.79% 3.03% 3.21% OperA&- AExpJAvg. TotalsAs(% 0.2S% 0.27% 0.26% 0.30% 0.43% 0.54% 063% 0.73% 0.82% 0.8S% lncom.fromLoA AvgomLamfolobs( 11.10% 9.89% 8.31% 7.98% 8.98% 9.85% 9.48% 9.31% 10.46% IO7% Fiacia E_up/Avg. Bwis N ADeosils (5) 8.05% 7.18% 5.12% 5.01% 5.64% 5.54% 5.17% S30% 7.21% 5.47% bIeretSpesd(%) 3.05% 2.71% 3.19% 2.97% 3.34% 4.31% 4.31% 4.01% 3.25% 5.10% Indu al and Commerdal Bnk of China - Sbenyang Bancb P I ot2 Baan Sbeet (Y Mmion 1909 1990 19l 1992 1993 1994 199S 1996 1997 1998 (for yea eoded Decmbe 31) -Act- d Cub 93.1 76.7 70.5 84.7 92.4 150.0 170.0 180.0 2000 220.0 _udqpols - PBC 1,843.9 2,267.8 2,824.0 3,119.6 3,477.8 3.900.0 4,300. 4,700.0 4,700.0 5,000.0 Deosits - otw baeks 466.4 852.6 1,036.9 2,708.0 1,568.6 1,750.0 1,860.0 2,030.0 2,100.0 2,320.0 Wodlgs capita loas RUIB 10,741.8 13,490.6 15,179.2 16,406.6 18,869.6 20,120.3 21,215.4 22,310.4 23,50.5 24,800.S Frig aueq 37.8 37.0 48.3 95.4 178.1 180.0 185.0 190.0 195.0 200.0 SubtoS 10.779.6 13S27.6 1S22.S 16.502.0 19.0477 20.300.3 21.400A 22 .4 23.7e.s 2S.00035 Less: provson for bed ddt 0.0 0.0 0.0 0.0 (0.7) (0.8) (0.9) (0t9) (1.0) (1.0) Oth cumncy assets 180.3 199.7 285.2 19S.6 562.6 597.5 675.5 710.5 725.5 750.5 Curmt matri of lon =r loas 0.0 0.0 0.0 0.0 0.0 200.0 240.0 260.0 280.0 300.0 w L1munder ruat 83S 85.1 108.0 159.8 116.9 120.0 12S.0 130.0 135.0 140.0 Tota Currt Asse4 13446.8 17.5 19S2.1 22.769.7 24.86.3 27.017.0 270Q 30.jIQ4 31.840.0 33:730.0 Loag-4en LOW$ Load currency 1,872.6 2,065.4 3,256.7 4,210.3 5,329.2 6,300.0 7,200.0 7,800.0 8,400.0 9,30.o Foreig cun0 0 .0 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 L1s: Proions (12.0) (tSS) (18.9) (48.1) (62.8) (73.0) (25.0) (90.0) (92.0) (9S.0) j 86.6 2.049.9 3.3.8 4.62 5.266.4 6.227. 7.11S. Z1 7Il7.0 80 L 9 20 Longterm nvemens 253.7 307.7 367.3 426.0 574.8 600.0 620.0 640.0 660.0 680.0 FLed Assets (cost) 108.0 1S4.0 241.8 282.3 372.6 390.0 410.0 430.0 4S0.0 470.0 Le: Acc. deproec_tioa e _ 9 _1. e! (131.0) _ 73 266-0) fet fixed Ss 4 VA, 126. 206.0 2304.S 29 3 . 279.0 2W, ; 20'4.0 BDling under _ostuo 0.0 0.0 0.0 0.0 7.5 8.0 835 9.0 9.3 10.0 Dderrd ms 03 1.4 0.9 1.3 2.3 3.0 3S 4.0 4.S S0 Told a t9 AI 2 37 n1 3L' 34,14l X7 9 3MA 41U. O Indu trial and Commral Bnk of Chin - Sbenyang Bnch P 2f2 Bab Sheet (Y minion) 1989 1990 1991 1992 193 1"4 199S 1396 1997 1998 (for year ended December 31) - Atl- - o - LIADBUTS & EQUITY Shoderm Mob L4 cural my a4,968.5 5,633.6 6,686.2 7,861.6 7,811.2 8,730.0 9,480.0 10,210.0 11,040.0 12,6.0 Foraegn curncy 5.9 5.7 5.9 38.9 60.8 70.0 80.0 90.0 95.0 100.0 LOs from PBC 3,204.3 4,654.3 4,819.1 5,311.7 5,302.6 5,300.0 5,300.0 5,30O 5,300. 5,30.0 Loans from otber bank 1,746.2 1,742.8 2,516.0 2,727.8 6,060.7 6,574.4 7,266.8 7,665.3 8,268.7 8,645.2 Depost under u 28.9 46.1 56.9 109.9 64.2 70.0 75.0 80.0 85.0 90.0 Accoutpayable 479.3 736.9 773.9 t,393.6 752.9 792.3 817.5 842.7 867.9 893.1 Taxpable 0.0 0.0 0.0 0.0 3.2 3.5 3.8 4.1 4.4 4.7 Currant mturty of long-term loans 0.0 0.0 0.0 0.0 0.0 200.0 240.0 260.0 280.0 300.0 Total Curent LiabUi 10.433.1 12.819.4 14.858.0 17.443.S 20.055.6 21.740.2 ,.1 24.452.1 25,941.0 _7693. g Long-term deposi 4,018.4 S,345.0 6,797.0 8,451.4 9,348.6 10,800.0 11,820.0 12,860.0 13,590.0 14,610.0 Long-atm bonds 49.8 48.9 65.7 56.7 22.6 17.0 12.0 7.0 2.0 0.0 Long-term loans - IBRD 0.0 0.0 0.0 0.0 0.0 100.0 200.0 300.0 0.0 0.0 Total Lo-term Liabilities 4068.2 5393.9 6.8.7 8 S08.1 9 371.2 10.917.0 12.032.0 13.167.0 13S92.0 14,610.0 Paid-in capial 87.9 1,031.6 1,242.5 1,282.5 1,399.3 1,400.0 140.0 1,400.0 1,400.0 1,400.0 Rearves 0.0 0.0 0.0 0.0 0.8 0.8 0.9 0.9 1.0 1.0 Undistributed profit 269.5 250.2 400.9 359.6 193.4 90.0 100.0 110.0 120.0 130.0 Total Eaui LlJ4 1281.8 1.643.4 1.642.1 1 193.5 L490.8 150D.9 13510.9 1 S21.0 S,31.0 lllfabhwu e AnX IS.C48.7 19.49S.1 23364.1 27.S. 310=0 .t48.0 36.7S6.4 39,,I30. 41,40 Q3S RAM'S C rentlRatdos(tlims) 1.3 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1I.2 Capktl Adequay Rati () 7.4% 6.6% 7.1% 6.0% 5.2% 4.4% 4.1% 3.9% 3.7% 3.S% Totd labilllEquity (thn) 12.6 14.2 13.2 15.8 18.5 21.9 23.5 24.9 26.0 27.6 Long-tem Ddbqy (tlmes) 3.5 4.2 4.2 5.2 5.9 7.3 8.0 8.7 8.9 9.5 TaPmFlnaneTermlo (dm) 2.2 2.6 2.1 2.0 1.8 1.7 1.7 1.7 1.6 1.6 - 141- ANNEX 3.6 THE BANK OF COMMUNICATIONS (BOCOM) 1. The lnstituon. The Bank of Communications (BOCOM) was first established in 1908 in Beijing to provide long-tenn fiance to the transportaton and telecommunications sectors. Its operations were suspended on the mainland from 1958 to 1986, although it continued its operations in Hong Kong. In 1986, a decision was taken by the State Council to retablish BOCOM as a universal bank permitted to undertake all kdnds of banking and nonbaning financial services. It may accept deposits, provide a ful range of commercial banlkng services in both local and foreign currencies, make equity investments, issue guarantees, syndicate loans, issue and trade securities domestically and ntnatonally, form joint ventures with overseas banks, finance companies or enterprises, subject to the approval of the People's Bank of China (PBC), handle trusts, insurance, leasing, consultancy work, custody and act as agent. It may also handle real estate business. After having operated on a tral basis for six months, BOCOM was formally opened for business on April 1, 1987 in Shanghai. BOCOM is hailed as the first commercial bank under China's financial sector reform and thus did not have to participate in directed credit. 2. In order to enhance its managerial autonomy and responsibility, BOCOM's legal form is that of a joint-stock company, one of the first Chinese state-owned enterprises to use this legal form. This form was extended to all its branches before July 1994. Each branch was a disnct legal entity with operational autonomy and financial accountability. However, the Head Office played a role of "Unified Leadership* over the branches in the appointment and removal of senior officers (general manager, deputy general manager, and auditor), establishing opeational policies and plans, operating rules and regulations and foreign business(such as signing cooperative agreements with foreign partners, investing abroad, issuing bonds or participating in loan syndications). Each branch is to operate in economically, rather than advministatively defined regions in order to reduce undue local political interference. The Hong Kong branch and any additional overseas branches to be established have always operated as dependent branches of the Head Office. BOCOM's shareholder's assembly adopted a resolution to formally consolidate branches and the Head Office into one integrated bank on July 12, 1994 as Bank of Communications Limited. As a result, branches are no longer separate legal entities. The overall structure of the institution has therefore been changed from one similar to a holding company with shares in subsidiaries to a conventional banking institution with fully integrated branch network 3. BOCOM's total regied capital is Y 8 billion. Its paid-in capital as of December 31, 1992 was Y 6.0 billion, of which 23 percent was controlled by the Mistry of Finmance, 42 percent contrbuted by 263 povincial, municipality and county finance bureaux and the remaining 35 percent contributed by about 1,800 industial and - 142 - AX,&36 commercial establishments. The ownership structure has been changed from what was originally stipulated in its Afticles of Association dated March 10, 1987, i.e. 50 percent of the shares shall be controlled by PBC on behalf of the Government and the remaining 50 percent to be subscribed by local governments, businesses and individuals. BOCOM plans to expand its capital by Y 2 billion and attract 10 percent individual private shares. 4. BOCOM is headed by a President and three Executive Vice Presidents nominated by the Board of Directors and appointed by the State Council. The President implements the policy decisions of the Board of Directors and manages the daily operations of the entire bank. S. The Board has 20 directors including 1 chairman, 3 vice chairmen -and 4 managing directors; the latter 8 made up the Board of Mnaging Directors. The Board of Managing Directors meeing every two months wil act on behalf of the Board of Directors, which meets once a year. BOCOM also has a Supevisy Board with two members appointed by PBC and its shareholder representatives. It also meets once a year. 6. At the branch level, there is a Management Committee consisting of the general manager, deputy general managers of the branch, representatives of the local finance bureau, economic and planning committees, PBC branch and shareholding rprises. It meets semi-annually to examine branch policies, persol changes, profit disribution, etc. The branch general manager is responsible for the daily operms of the branch. There is also an AssetLiability Management Committee to monitor asset quality in line with the financial indicators set by the Head Office. 7. BOCOM's business development strategy is described as a 'three combinations' sttategy, combining domestic and international banking business, wholesale and retail banking, and taditional and nontraditional operations. In its guiding pinciples, BOCOM stresses autonomy m operons, independent accounting, bearing ow.1i rks, sole responsibility for profit and loss, balancing own flow of funds, and develop independently. Based on the generl manager responsibility system, each branch has relative autonomy in it's own opertions. Under the guidance of the AsseULiability Maagement Committee of the Head Office and regional branches, the entire bank should stricdy adhere to the set/liability and risk management systems based on capital adequacy ratios, asset quality audit and financial indicators to a.hieve steady growth in different types of ations. 8. As of December 31, 1992, there were a total of 75 domestic branches/subbranches, 625 banking offices and two overseas branches in Hong Kong and New York respectively. Total number of staff of the entire bank was 230,000. Apart from the wholly owned subsidiary, the China Pacific Isurance Company which has offices in 39 cities, BOCOM has equity investments in 32 real estate development companies. BOCOM plans to further expand its network and make new investments in securities companies. - 143 - ABX 3.6 9. Total assets of BOCOM amounted to Y 157 billion, equity Y 11.2 bilion and net profit Y 2.7 bfllion. The return on equity was 31.5 percent, arer on RMB loans accounted for 4.7 percent of RMB loan portfolio and afrears on foreign currency loans accounted for 3.5 percent of foreign curency loan portfolio. Bad debt writeoffs were 0.07 percent of total loan portfolio. Shenyang Branch 10. OrganiftIon. BOCOM's Shenyang Branch was established in October, 1986 and started to operate on a trial basis in May, 1987. It formally opened for business in June 1988. As a regional branch, BOCOM-Shenyang does not confine its business in one municipality. As of December 31, 1993, it has set up 11 subbranches in the 3 Northeastn Provinces fiaoning, Jilin and Heiongjiang) and established corespondence bank relationships with 372 banks in different countries. 11. Management and Staff. At the top of BOCOM-Shenyang's management structure is the Manement Committee which consists of a Chairman, four Vice Chairmen and four members. The Chair=m, Mr. Quan Jushan, is concurrently the President of the branch. He is also a Director of BOCOM-Shenyang Head Office's Board of Diectors. Mr. Quan has worked in the Shenyang Branch of PBC and subsequntly in the Shenyang Branch of ICBC for a number of years before he was appointed to the present position in BOCOM-Shenyang in 1990. The four Vice Chairmen represent the Shenyang Branch of PBC, Shenyang Municipal GCovernment, including the Deputy Secretary General, Deputy Chairman of the Planning and Economic Commission and Deputy Chief of the Finance Bureau. The four members are Vice Presidents of the branch. Total number of staff working in Shenyang City is 759, including 685 professionals. The branch has fourteen departments, five banking offices and two subsidiaries, Shenyang Securities Company and China Pacific Insurance Company (Shenyang). In addition, it supervises eleven subbranches in the three Nt teastn Provinces. It is expectd that the number of staff will increase to nine hundred within three years. 12. Technical inovation loans in local currency are processed by the Banking Business Departmet, with a staff of 168, and technical innovation loans in foreign exchange are processed by the Intnational Business Department, with a staff of forty. The Credit Division within the International Business Depatmet will be responsible for the appraisal and supervision of the subprojects under the line of credit of the Bank- financed Project. Given the constraint of this Division in terms of both the number of project appraisal staff and the experience in handling the term loans in forein currencies, BOCOM-Shenyang will assign the project aaisal work to Shenyang Science and Technology Economic Appraisal Center, a consulting firm established in 1988 by the Science and Technology Commission of Shenyang Municipal Government. Tis consuling firm has been employed by BOCOM-Shenyang to appraise a number of technical innovation projects in the pasL It is able to mobilize eper of different discipline on short term basis, including professors stll teaching at different universities in Shenyang area An officer of the Credit Division of the International Business Departmet - 144 - ANNE 3.6 participates in the appraisal work but does not play a leading role. The appraisal fee based on the investment cost of each project appraised (0.1 percent for projects below Y 10 million and 0.08 percent above Y 10 milion) is borne by the borrowing enterprise. BOCOM-Shenyang's appraisal capability appeas to be limited. It has idendfied training needs of its staff and is prepared to finance the training programs out of its own budget. 13. BOCOM-Shenyang received approval from the State Foreign Exchange Control Bureau in 1988 to handle foreign exchange transacdons including foreign exchange savings deposits, remittances, loans, trade and nontrade settlements, foreig exchange buying and selling, discounting no notes, guarantees, research and consltancy. It has in fact stared making loans in foreign exchange in 1989. During 1989-92, four foreign curency loans aling $2.2 million have been committed and disbursed. In 1993, tGree foreign cunrency loans for a total amount of $7.3 million were committed but only one loan for $1.5 million was disbursed. During the same period, 104 technical innovation loans in RMB totalling Y 241 milHon were committed and disbursed. 14. Policies and Strategies. While the Head Office provides general guidance on opeatng principles, the branch is responsible for its own policies and strategies. BOCOM-Shenyang policies and strateies can te summarzed below: (a) A loan:deposit ratio of 85:100; b) Exposure to a single enterprise not to exceed 25 percent of BOCOM- Shenyang's total equity; (c) Long-term debttequity ratio of the bonowing enteprise not to exceed 70:30; (d) Minimum annual loan collection ratio of 90 percent; (e) Annual provision for bad debt equal to 0.6 percent of its outstanding loan portfolio; (1) Working capital loans will not be renewed if the borrowing enteise's tenn loans are in arrears; (g) The borrowers' financial statements must be audited by qualified independent auditors; (h) Long-term loans will be made on a fixed amation schedule; and (i) BOCOM-Shenyang wil maintain a capital adequacy ratio of 8 percent in line with BIS criteria. 15. Fnandal Performance and Condition. BOCOM-Shenyang's income statements and balance sheets for 1989-93 and the projected income statements and balance sheets for 1994-98 are included in Attachments 1 and 2. BOCOM-Shenyang's net profit has almost doubled in three years, increasing from Y 50.8 million in 1991 to Y 53.8 million in 1992 and to Y 92.2 million in 1993. Return on equity in the last year reached 54 percent. This was mainly attributable to the sharp increase in interest income (72 percent) and decline in other expenses (59 percent) in 1993. Administrative expenses icreased by 340 percent, fom Y 6.2 million in 1992 to Y 27.5 million in 1993, and provisions of bad loans went up by 354 percent, from Y 2.1 million in 1992 to Y 9.5 - 145 - A 3.6 million in 1993. The increases of such items did not materially affect the net income growth. 16. BOCOM-Shenyang's total assets inceased from Y 1.25 billion in 1990 to Y 2.44 billion in 1992 and to Y 5.49 billion in 1993, showing a growth of 339 percent in three years. During the same period, fixed assets increased by 53 percent and shareholders' equity 50 percent. However, at the end of 1993, its equity accounted for only 3 percent of total assets, having declined from 9 percent in 1990, and 6 percent in 1992. BOCOM-Shenyang is formulatng plans to increase its equity base so that it wil be able to meet the BIS standard. Its loans/deposits ratio has been fluctuating from 86 pecent to 94 percent during 1990-92. In 1993, it went up to 13 perent Inorder to finance its epanded lending operations, BOCOM-Shenyang had to increase its borrwing from other finnial institutions. Such borrowing have increased more ta three times since 1990. BOCOM-Shenyang should review its policy closely and it is advisable to put a lmit on such intrbank borrowing and to find ways to issue its own debt instruments for resource mobilzation in the market. Its accounts are audited by the Municipal Audit Bureau but the oughness of the Bureau's audit needs to be reviewed by the Bank to make sue that its audit win the future will meet the Bank's requirement. 17. Quality of Portfolio. At the end of 1993, BOCOM-Shenyang's arrar on local currency technical innovation loans amounted to Y 39.4 million, repesenting 18.4 percent of local currency technical innovation loan portfolio, and its aers on foreign currency loans amounted to $1.02 million representing 30.5 percent of foreig cuurreny loan portfolio. Its loans to the engineerng industry accounted for more than 25 percent of its loan porlio. BOCOM-Shenyang's loan collection ratio for 1993 was about 90 percent. Bank of Communicaons - Sheang Banh Income Statement (Y million) 196 M1990 1991 L992 1993 1994 19 1996 IM 1998 -_Actua- - Projcted - Itnteres Inome from Landin 2. 280 25. 8. Localcucy 73.1 100.1 100.0 119.2 190.1 201.0 -220.0 238.0 2S5.0 282.0 oreip curney 2.1 2.2 2.5 3.0 7.0 9.0 10.0 12.0 15.0 18.0 Subtal :2 = L O 5 1 97.2 210.0 200 2.0 270.0 am04.0 Intest Income from DeMosits Local crorey 12.8 21.6 21.9 38.9 81.4 83.0 87.0 91.5 96.0 105.0 Foreign uency 0.3 0.4 0.6 0.9 1.1 2.0 3.0 3.5 4.0 5.0 Sub L31 ZL21.9~ ~22 S 825.0 0 9.0 100.0 110. Otder lIcome 2.6 6.7 6.6 4.7 7.8 8.0 9.0 10.0 11.0 11.0 W Inemse A ILQ flL LZ MA MA M muI 421.0 cal carrency 39.7 70.0 65.7 87.0 147.6 1S3.6 171.4 187.0 197.0 218.0 Fore7g curncy 0.7 0.8 1.0 1.1 3.0 6.4 8.6 10.0 11.0 12.0 D 1 AQ, M, f6.? 1I 160.0 180.0 10 230.0 Mauagsmat and adber fe 4.1 5.6 4.1 6.2 27.S 30.0 33.0 36.0 40.0 43.0 Otdet 2.3 2.1 4.2 11.6 6.1 11.0 8.0 8.0 8.0 11.0 Totd gblM *A eS a IM LMm 1 U mu MAU am Profitbeomtax 44.1 523 56.6 60.7 103.3 102.0 108.0 114.0 125.0 137.0 Tx 45 6.2 5.8 6.9 11.1 12.0 13.0 14.0 15.0 17.0 Net3 AU m Il H, MA MQ LR fLU flU Bank of Commications Sheyng Brach Iof2 (Y millioi) 1989 1990 1991 1992 1993 1994 199S 1996 1997 1998 (for yen aaded Dweab 31) -Actudal- --Pected- ASSB Cash 54.0 133.8 204.5 342.3 1,177.4 1,3S4.0 1,557.2 1 790.7 2,059.3 2,3.2 Shorlt-tie bon Local currency 664.5 8193 1,012.6 1,324.1 2,1S9.7 2,128.3 2,100.8 2,041.9 2,126.9 2,115.6 Foreiga cucaoy 6.9 9.0 9.4 23.2 90A 111.4 122.6 1613 185.1 204.9 Account reoeiabi 401.5 23.1 65.7 92.0 1,4213 1,879.0 2,200.0 2,800.0 3,500.0 3,560.0 Other current ass 41.8 142.0 152.8 379.4 293.1 354.4 596.5 893.9 843.5 1,746.0 T9 cwrw m 1.167.5.444 27.27.2 1,449 2JA61. 5141i S.lZ 6577.687.8 8.7148 9.,94.? Long-em Loans Localcurrency 75.2 79.6 101.1 170.3 214.3 300.0 465.0 491.8 550.0 624.S Poreg cuteny 6.9 8.7 12.4 12.0 19.0 40.0 45.0 52.0 135.5 219.0 Less: prmvisi (0.6) (0.9) (1.3) (8.1) (17.3) (21.0) (25.8) (26.0) (26.5) (27.0) Equhy nvestmet 0.0 0.0 34.1 40.8 44.8 57.0 60.0 70.0 75.0 80.0 Fbced Asub 26.0 30.0 34.2 41.2 46.0 50.0 77.7 101.0 131.3 170.6 Less: accuawlatd deprociadon (0.8) (2.7) (3.4) (4.9) (6.4) (8.4) (10.0) (12.0) (15.0) (18.0) OtberLngerm Aaset 1.8 3.2 4.3 9.7 S.1 6.6 7.8 8.5 9.6 10.2 ,Ad llAb sL =A au MA &Z1 mu mu 61 Mui MMAusW L1a. 2AL a1u SA4M ta luZLL MU 2 r 2~~~ S~~~ Umu 3 mh - 3d~~~~~~ ~bWA (Y uIflIu v 1W vn9 us21 193 £994 199s £94 97 £996 ( yer yided D_cemb 31) -Jl- - IAISCW Im 436.1 809.0 1X027.1 1.4283 2,019A. 1,90.0 197.0 2,060.0 2,20.0 23.0 Pouv mnqw 16.0 31. 48.9 111.6 158.4 320.0 430.0 5.0 550.0 600.0 Aocowfs pyble 0.0 0.0 0.0 0.0 1,624.1 1,700.0 100.0 90.0 2,000.0 2,100.0 TadCr ibkaI S 154.1 3.8214000 4.4*z4-.0 A Loag4uUaLitiU Laeg4. depoes 79.8 134.0 190.0 230.0 331.0 350.0 400.0 4S0.0 50.0 60.0 Domneo bomig 582.2 97.1 120.4 153.1 320.0 230.0 250.0 280.0 310.0 330.0 Woe DUan be 0.0 0.0 0.0 0.0 0.0 0.0 0.0 43.0 86.0 86.0 OdwsrHlhbie 60.1 63.3 113.7 370.9 664.0 1,551.9 2,148.4 2,904.1 357. 4,700.1 161_~~~& ~L 722n WLB424.2 zQ LlThI U.22 LULl Totd Lnge U*Aki I.IS O . 2.7f.A 3.6".1 C .7|1.9699. ..1 . LUZM LIMA LSLL LUU LU17L 6LULl LUUA LUU- L2= 2JIAJ PaId-ia ospkal 14.0 88.0 1031 110.0 120.0 140.0 10,0 190.0 220.0 260.0 Raahed.aainp 20.8 26.5 28J 37.1 512 0.0 100.0 120.0 140.0 160.0 Elm l 260.0 1= liu t u NU SU L33i LOA _ LMU 2MU L - 149 - AiE - DETAILED PROJECT DESCRIPTMON FOR THE ENVIRONMENTAL COMPONENT A. HZAZDOUS WA= TtATME:N FACIUTY (HWTIM Backgrud 1. In June 1986, the Environment Committee of the China State Council approved the establishment of the Shenyang Hazardous Waste Disposal Model Project Office under the Shenyang Environmental Protection Bureau (SEPB) to carry out preiminaty studies for hazardous waste management and disposal. In 1988, under US grant funding, intonal consultants assisted the Project Office in carrying out feasibility sudies (FSs) for a hazardous waste management program. The FS report from this work Was apved by the National Environment Protection Agency (NEPA) in 1989. 2. The work for the FS defined the hazardous waste inventory in Shenyang hrough survey work of about 320 major enterpises in Shenyang and audits of about 50 of the larger waste generators. Based on the information obtained, waste was claified for treatment methods (chemical, landfill, and/or incinaton) and projections for future hazardous waste geneaon were made. Conceptual desin and initial site surveys were caried out for a Hazardous Waste Tratment Facility HWTF) to dispose of those categories of hazardous waste that the study identified as difficult to treat at the point of geneaton, and small volumes of hazardous waste that could more cost effectively be disposed of in a central facility. Insdtutional and financial implicatons of the introduction of hazardous waste regulabons were also examined. 3. Since the 1988/89 FS work, SEPB had continued to update the data base for hazrdous waste generation with follow-up surveys in 1989/90. In 1991, NEPA initated a pzogam to improve the management of industrial wastes and proposed an industrial waste registration system. As one of the nine cities in China selected to implement this system, Shenyang conducted a firther large scale industrial and hazardous waste inventory in 1992. Project Prepao ton 4. Preparation of the HWTF, the major investment component in introducing hazardous waste management regulats, was condnued for possible inclusion in the proposed World Bank Liaoning Environment Project, but in the event, Shenyang did not prtipate in this project. Additional preaatory work was caried out using Japnese - 150 - ANNEX 3.7 Grant Facility (JGF) fuAding after the HWTF had been included for consideratton in the Shenyang Industry Refom Project. Under this preparaon, exeienced intonal consultants were utilized to; review the draft Shenyang Hazardous Waste Management Regulatons; review the results of the 1992 survey and determine the size of the HWTF; review the suitability of the site chosen; carry out preliminary design work so that accurate capital and opeting cost estmates could be made; estimate the required tariffs for the HWTF to be fincially self supporting; and, review the EIA for the facility. The consultants report P,re nary Engineering for Shenyang Hazardous Waste nreatM Faciity (anuiy 1994) is available in the Project File. Hzardous Waste Situation in Shenyang 5. As one of China's major industial bases, Shenyang generates considerable quanfiies (about 3.3 million O N"Mw tpy) of industdal waste from about 5,000 enterprises of which about 350,000 tpy is hazardous and requires special treatment/ disposal (see Figure 1). Existing pracce I is that tetmentfdisposal is regulated but soid waste is largely umegulated and much of the waste ends up in the wastewater system, in normal refuse, or stored on the { i factory sites-the 1992 survey estimated such accumulated hazardous waste at 360,000 tons, and disposed of to other users (e.g., firmers) who are aware of potential | LOIN hazards. 6. Because there are no regulaons and standards for solid waste n t mnagement, most solid wastes are not OATh) analyzed for composition and their dischare is not monitored as closely as air and water emissions. Monitoing is limited to Meal discharge of sold wastes to natur wat bodies, and uncontrolled waste sorage. There are numerous documented cases of the damage caused by improper dips of hazardous waste (loss of crops and livestock, contamination of wells and reservoirs, and human health effects). The economic loss of four such incidents (not including health effects) was estimated at Y 510,000. However, hese statistics captre only the cases where there is an immediat severe economic impact and the larger less visible effect on the envirment with its seious long-term implications tends to be less easily quantfied. - 151 - &IENiK3.7 Hazardous Waste Manag 7. Tbe national Solid Waste Polution Control and Prevention Law would regulate Eanagement of solid waft (generaton, discharge, treatment, recycling, disposal) of all solid waste, including hazardous waste. The law was proposed some four years ago by the State Council and was distribute to concerned agencies for discussion, completed in 1992. The law now awaits final approval by the State Council. NEPA is developing the Eazardous Waste Catalogue referenced in the law and so far some 45 hazardous mateia listed in the Basle Convention are widely accepted in China as part of this catalogue. The law will require enrpises generating industial solid waste to report to and regist with the local EPB and obtain a license from the municipal, or provincial, EPB. Based on the National law, Shenyang has formulated 'Provisional Regulaons for Hazardous Waste Management in Shenyang (Regulations).' These regulations require approval by the Peoples Congress of Shenyang and that of Liaoning Prwvince, before submission to NEPA for its final approval, and implementtion. 8. In order to implement on a comprehensive basis the Regulations, the SEPB will need to provide the following capabilities so that the registration and license system is effective: (a) Waste analysis for all enterprises so that ication into hazardous and nIonlhazardous is objective; (b) Deterination of those wastes that cannot be adequately dealt with at the enterpise and thus need to be sent to the HWTF; (c) Provide informtion on treatment and disposal, and for waste exchange among Shenyang entprises; (d) Examine and evaluate reutilization and exchange programs; (e) Set standards and monitor compliance for waste storage and t n; and (i) Extnd enviomental impact assessments to include hazardous waste genaton, treatment and disposa. Haardous Waste Treatment Facilty 9. The HWTF, occupying 120,000 m2 in area, is located on scrub and marginal famland 30-km north of Shenyang City (see map IRD 25697). The site boundaries are 1.2-km north of the village of Zhian (population 223) and 1.8-km west of Xlnhua Village (population 176) in the Xlnchengzi District of the Shenyang Municipality. A co ve geotechnical and hydrogeological survey has been carzied out on the proposed site and the results show that the site is stable and that in the undikely event of any mishap, no seious or etenive ground water contamination would result. 10. A preliminary layout of the HWTF is shown in Map IBRD 25698. Design capacity of thpe HIWTF is for a secure landfill of 20,000 tpy of solid waste, and an aqueous waste treatment plant of 6,500 tpy (including leachate from fte landfill and vehicle washing was_tewatr). Capacity is based an stabilizaton of hazardous waste geneation in Shenyang - 152 - ANENB 32 at current levels, and the disposal over 5 yeas of about 13,000 tos of waft stred at 11. Design capacity of the HWTF is for a scure landfill of 20,000 tpy of solid waste, and an aqueous waste treatment plant of 6,500 tpy (mcluding leachate from the landfil and vehcle washing wastwater). Capacty is based on stabiihtion of hazrdous waste generation in Shenyang at current levels, and the disposal over 5 years of about 13,000 tons of waste stored at etrprises. Initally it was intended that the HWTF wold have incineration capaity, but this is now to be provided by a hazardous waste incinerator to be constucted by the Provini Govenment. Hazardous waste tawnsport from the enterprises to the HWTF will be provided by the HWTF. Generators will be able to provide their own transport, providing this meets the regulations to be established for the sa toansporaion of hazardous waste. 12. The most critical part of the HWTF is the design of the secue landfill so (a) Wastes are sepatated by types in cells so that no ations occur, 0b) processes are applied to the wastes so that leaching is m (c) The ris of migration of con nts out of the landfill are minimized by a double liner system using liner material from an exrienced supplier; (d) Cap deign prevents rainwatr mgress to the landfill; (e) A drainage and lachate system collects any liquid in the landflU for teatment and discharge; and (t) landfill closure is phased as cells are filled. 13. All formaliies have been completed for the purchase of the site and for the apwvals for costucto of roads, and provison of ufilities. The envinmental impact assessment has also been approved at both the municipal and provincial level.J/ It is projected that implemention will require three years from the date of signature of the consrction contact which is epect to be signed in early 1995. OrgInizo 14. Ihe HWTF has been established under its own charter as a financially autonomous entity under the leadership of the SEPB. Since this is a pilot project, it will be the first such facility in China, SEPB will ontinue it ledehp role for the HWTF untl normal operadn has been adhieved. Once this step had been reached, the HWTF will be trnferd to one of the other relevant agencies of SMG dealing in waste diposal, and 1I Two of te I of the MA weo to lat the HWFP f&rte fim th two ntes villgs nd to mub dt acces red so twt adverse impacts onto vge we reduced. The - ---- _dave been mooponted in the prqecc - 153 - AN 37 SEPB will be only rposle for ensuring that the HWTF complies with the Regulation. Personel are estimated at 60. 14. A coe of senior staff involved in operatons of the HWTF will be taind overes with two to three staff assigned to similar ovs faities for exended perods The core staff will then be responsible for local training of others, using for experts as necesury to conduct courses and develop taining material. B. WASTWAISR MoMrroRw NMwOEK Backgound 15. Water pollution has been a major concern at both national and local levels for many years, and the very first eronmental guaions introduced in China were in response to this concern. Industial waswater is the major source of water pollution but effective contml is hamipeed by a number of factors, of which cne of the more important is the lack of accurate infman on the extent of industrial pollution lads at the enteprise, local, and national levels. In oder to begin to coect this situaion, NEPA inifiated in 1991 a pilot scheme for the introducdon of automatic wastwater moniorng networks for 15 of the major industrial cities in China, which includes Shenyang. The purpose of the network is to provide infmation both for monitoing individual enterprs and for aggate data on pollution loads (both quantity of wastewater and c and amounts of polluants) to prove planing prese and design of contrl reguio. MM Pftqject 2/ 16. The first phase of the network would be i nted under the project and vould consist of 25 monitoring stations that woud cove 19 of the major industrial was_water generators (several of the facries have more than one wastewater outet) in Shenyang (based on volume and/or the importance of poLutants d rged) estmted to repesent 49 percent of the total pollution load in Shenyang, and 60 percent of the industi polluton load. 17. Each of the monitoring stations woud autmatiy monitor waswter volume, and pH (acidity or alkalinity of the water) and report these resut auy to a cent monitoing sain. The indvidual monitoig stons would also automatically compile 24 hour samples by sampling the waste stream evvy hour. These samples would then be manually analyzed every day and the resuts reported to the centr monitoing sti. Initially, it had been planned to aumat the analys of dl and 2f hWll deais of tho sopo of the Pject are conained in tb fesibt rpot Feauibily Ruv Rin for Sk g Waerf Qa n*gy ewo Mu 1o wmbw.199), prpd by SEPI, whis in he Proje Pie - 154 - ANNE 3.7 suspended solids, at al of the statons and sme paricular pollutants (phenols, heavy metals, etc.) at selected stions. However, the availability of sufficiently robust, low m tenance, and accur instruments for such purposes has yet to be established, and only as such instruments become available will they be added to the system. The project will also contin mobile monitoring and test equipment to check on the opeatons of the monitoring staions and to conduct analyses at other enpriss. Orpniation 18. The monitring stations will be owned and opated by the enterprise that they serve. However, the design and equipment wil be according to SEPB specfications. Opation and maintenance will also be according to the requirements of SEPB. Analysis of the 24 hour composite samples and the reporting to the cental monitoring station will also be the responsibility of the entepris. The existing Monitoring Center of SEPB will opeate the central monitoring station, and will conduct routine and random checks on the operation of the stations and to independenty analyze the composite samples. The Monitoing Center will also report relevant information to the North Waste Water Treatment Plant when this comes into opration in 1996. C. INUoNL SL G Hazardous Waste Management Central Liboratory 19. The Laboatory will provide services both to the EPBs and to enterpises. These saevices will include: (a) Hazardous waste sample analysis for all enterss to clasify the wastes and determine the methods of treatment/disposal; (b) Analyze routine and random samples collected by the EPB's; (c) Provide analytical sices for accidents that may involve hazardous wastes; (d) M ntai and update the Shenyang hazardous waste data base and provide data to the EPB's for planning and control purposes; (e) Promote, vaLidate, and manage hazardous waste exchange progams that may be concluded between enterprises; and (f) Research new technologies for hazardous waste treatment and disposal. 20. Odginally, when the HWTF was planned as a division of SEPB, the laboratory was izationlly to have been part of the HWTF. However, following the decion to transfae opeaions of the HWTF away from EPB once the unit is in normal operation, it was decided that the Laboratory should become organizionally part of the Monitoing Center of SEPB. The ponn requ ts of the Laboraty are estimated at 27. 2/ Ddailo of tie Centu Laboutr a contined in theXbiluy stsudy r the MWTF, a copy of which is in th poect film. - 155 - IANNEX 3.7 Environmental Ilformation Management System (ENS) 4! 21. The EPBs handle considerable quantities of information tat require access and diss n at various levels within SEPB and the nine district and four county EPB's within the Municipality, to other departments of SMO, and to national bodies such as NEPA. The informtion is required for monitoring, planing and policy purposes. At present, there is essentially no computerization of data handling and as a result timely, systematic and adequate data generation and flow between interested partes is lacing. The EINS design would be based on similar work already being planned in Shanghai, Zhejiang, and Beijing and would link all EPB's to a central data nagment sysiem. Prepaatory work for this component is proeding, under JGF fnancing, to better define the system requirements and layout. Enviomnental Trainn Center MM 22. Atpresent the training needs of the EPB's are mamnaged mainly on an ad hoc basis, by the pticular units concerned. Although there is a functional resposibility for training within each EPB, the resources available are very limited. The ETC would redress this situation through a purpose built training center with full-time staff that would serve the needs of the EPB's whilst also providing environmental training to rdevant government and entepise personnel. Initial plans are for an annual intake of about 500 middle management level staff and a similar intake level for bcnicans. The coures would cover all aspects of envrnmental management using the centers full-time trainers and, experts brought in for specific courses. Purther preparation of the component is beg cried out under JGF financing to better define the long-term trang needs of the EPB's and to specify the initial design of the courses to be offered. 1 Detfals of dis compont ar contied in Fewlby Remr& Repa lfor S&mywag IVfomU Managenat Sfyn, (D_ecb 1993) praed by SUB and locaed m d Proect Fil - 156 - ANNEX 38 TABLE 1: IMPLEMENTATION SCHEDULE REFORM PROGRAM SUPPORT COMPONENT Activities 194 199S 1996 1997 01 02 QQI03 iQ4 Q1 QQ 0 3 I04 2-0 Q 2103 0 4 Q1 LQ210 3 rmi Officia Tranh,g Seect adviwso Traning courms - _ - _ . - _ Oveseas aing X X X AnralPan X Progre rpot X X X X X X X Staffg ___n m _ Oversesining XX linmaon Sytem setup & trial run Saft l eotor_ Select constutas Traning . _- Ovem traning hisec Tain Centr stup Sel"c consulans Imnfomato Systm Setup Siemyan COWe Cours by forig lectrer SAMD Seim naruu Training Oversea vist Note: AUl sub-componen entites are required to prepar (a) an annua work progrm; (b) seWmi-nna progres rport. - 157 - AN= 3.8 TABLE 1: IMPLEMNATION SCHEDULE REFORM PROGRAM SUPPORT COMPONENT Actlitk 1994 1VS V996 197 -l - - Q3 _ - _ __2 - i; y OfficialTain_ing lHro -m - - Infpectors _ - aiyalg Colleg - _ _-- _.4A1S- - _ - _ _ _ I- -_ -- __ _ - 158 - 3.8 TABLE 2: PROJECT IMPLEMENTATION SCHEDULE SHENYANG MACHINE TOOL COMPANY LIMITED SubjecIAcites 19 1 99 19 Q3 Q4 QI QZjQ3jQ4 QI Q2jQ3 Q4 QI Q2 Q3IQ4 QI Q21QI Q41Q Q2 Q3 Q4 Prelikmfnt&Eniecring DetWldngineering Preparto of Bid D Documen_t Tendring & Contact Awirda _ _ _ _ _ _ _ _ _ _ _ Equipment lRceive - * m - . _ Cmv Wor & Installa_t__ Foundrie & Forgo--*.m-m. Accessry Plets --... - Machine Tool PRa * _ _ _ _ _ _ _ _ _ _ _ Purebase of Foreign Manufcturing Licenses , _ _ _ _ _ _ _ _ - _ _ _ _ Cooperai w/ Poreign Fm in New Prduct Design - _ _ _ _ _ _ Consuant Cont C oncluded Peoparaory WOro Note: h inicate completion of conuissuioning. - 159 - 3.8 TABLE 3: IMPLEMENTATION SCHEDULE ENVIRONMENTAL COMPONENT S&Cd.cd I Activit 19 1995 199 1997 98 QS Q4 QI Q2I-Q Q11 Q WI QS Q4 QI Q2 QI Q4 QtI Q QS Q4 HAZARDOUS WASTE TREATMENT FACIUTY Prlmina Enginering Deaed En_ing _ Technical Speciications Tendeig & Cont Awards _ _ _ _ _ _ Equipmnt Receved _ _ _ _ _ _ _ Site Prepuarion . _ _ _ _ Seu Landfil _ _ _ _ - Chial Teament Facility _ _ _ _ - Comm F%iM____ Preparory Wor_ WASTE WATER MONITORING NEWORK Monitonng Stations Monioring Cnter Monitg Center _ _ _ _ _ _ Cil Works and bsblitie Monitong Sations _ _ _ _ _ _ _ Monitorng Center _ _- _ _ Iuswtlttoal twgtusing Hawdo Wasfborator . _bo _ _ _ _ _ Tnig Centr - _ _ _ _ _ nonrnaton System _ _ _ _ _ _ _ _ Resarah _ _ Upgading Monitoring _ _ - _ _ _ _ _ -160- &MM 4.1 TASLE 1: SHENYANG MACINE TOOL COMPANY LIMF £ManA OF PROJECT COTL Local Forep Total Lal FOdgN Total -RMB Y Mlin-n 1. Civil Woks & Buildings 147.4 147.4 16.9 169 2. Bquipret I Materials 123.4 750.4 873.8 14.2 86.3 100.4 3. Eme n &Iutalatioa 23.8 16.9 40.7 2.7 1.9 4.7 4. Envirmental Prowttin (Foundries) 61.7 61.7 7.1 7.1 S. TohdoloV Transfer Pe 11.2 109.2 120.4 1.3 12.6 13.8 6. T.A. & Costing Sevices 2.9 35.6 38.5 0.3 4.1 4.4 ToW Boo leCat 3704A 912.1 12M. _42A 1Q4 l4i Pscal 11.1 45.6 56.7 1.3 5.2 6.5 Prices 124.4 376.0 500.4 3.4 115 14.9 TO PAroed Cst S2 1.333.7 1, 7.3Au 1= i nterstDrinContructio 120.8 143.3 264.1 13.9 16.5 30.4 Not Working Capa Ineas 656.6 57.1 713.7 75.4 6.6 82.0 Totd &Mlf_ Reotdred 1 LAM1 2 A 1A A 1HU FI;NANCING PLAN Loca Forig Tota Local Foregn Totl -RMB Y Mllllon- -l Wold Bank LAn 1,288.0 1,288.0 121.0 121.0 Loa Pojedt Ln 440.0 440.0 50.6 50.6 TotS IA_ Tem O1 440.0 1.288.0 1.728,0S. 2. SEe Capital Ie 10.0 1S0.0 17.2 17.2 I1tea Cah 200.0 246.1 446.1 23.0 23.6 46.6 Sbort Term Lo 493.3 493.3 45.8 45.8 M_ t283 3JL~M LflL4 AMA M6 2A - 161 - AIiIig 1 4. TABLE 2: SHENYANG MACHINE TOOL COMIANY LBTIED DEIAIL PROJECT COST Local Fore TOa Lol Fore&p Tol Dscripdion -RD V Million- -YUS$ ili.- 1. Cill Wor & Eunill 147A 147.4 12 I" 2. EtMOnd_t 11S5U Z8SA .0 }A a Su (a)Met Cutang Machin. Tools 45.4 385.4 45.4 5.2 443 49.5 (b)Mctal Formng&OtherMachineTools 0.7 9.5 0.7 0.1 1.1 1.2 () Heat Treatn Equipmnt (9) 0.4 36.9 0.4 0.0 4.2 4.3 (d) trumenS & Omthr Small Machines 2.2 45.7 2.2 03 53 5.5 (e) Fouadr Equipment 15.S 168.1 15.5 1.8 193 21.1 (f) Ft 7.9 2.0 7.9 0.9 0.2 1.1 (g) Contl systmaufacturing euipmnt 29.7 3.4 3.4 (b) Computer SyM 0.0 73.1 0.0 0.0 8.4 8.4 Materls 33.5 33.5 3.9 3.9 3. Ereebo &A IfinlItdni n d 2 L2 U 4. Enyhynnmb PfWedioi l 7A LI iT.A&m.ItIaerls U 3S.6 38J jL, 41 44 Consultaes 8.3 8.3 1.0 1.0 Tainin - for*ig 27.4 27.4 3.1 3.1 d dome 2.S9 2.9 0.3 0.3 herOds L8 U8 u pas Cost nu0.4 1 L! GA 42.6 Pbysical 11.1 45.6 56.7 13 5.2 6.5 Pries 124.4 376.0 S00.4 3A 11.5 14.9 Piec Cost!SU 1,333.7 1A 6 w1 au lA btersDuring Consrct 120.8 143.3 264.1 13.9 16.5 30.4 Not Woking Capeal as 656.6 57.1 713.7 75.4 6.6 82.0 Trotal lWhunchReauhed 1 L 1 I1 2W!4 AZU A4 mu - 162 - A1 Table 3: ENVIRONMENAL COMPONENT - PROJECT COST ESTMATES 1. Hardous Waste Treatment Fadrlity TIWmT Description Local Foreig Total ILoca Foreign Total - RMD Y Thousand - - US$ Thousand- Imd Acquisitin 5,551 5,551 638 638 Matend and Civil Work 10,779 4,550 15,329 1,239 523 1,762 Equipment 1,923 31,651 33,573 221 3,638 3,859 Consultants 418 1,044 1,462 48 120 168 Engineering and Prject Managenment 1,331 609 1,940 153 70 223 Trining 731 731 84 84 TOW Ebse C= 20. 38585 am 2.299 4I .73 Physica Contungencies 3,002 3,863 6,864 345 444 789 Price Contingcies 6,664 1,358 8,022 204 156 360 Total Insbted Cost: 29.667 43.= 73.472 2.8 SD3S LIU Interst Duing Construction 2,706 6,308 9,014 311 725 1,036 A. Waste Water Monitoring Network Description Local Foreign Total Loa Freign TotlD - RMB Y Thou d - - USS Thound - Fafitd Cot Land Acquition Materil and Civil Work 1,S31 1,531 176 176 Equipment 183 11,815 11,997 21 1,358 1,379 Instaleln 235 905 1,140 27 104 131 Engineering ad Projet Managemen 26 1,227 1,253 3 141 144 Training SOS 505 58 58 Tiotal Bss Cost: L2Zi 14.451 16.426 2271 L .8 L8 Physical Contingeies 200 1,444 1,644 23 166 189 Price Coningencies 139 588 727 16 68 84 Total Instaled Codst IJA 16-483 182797 266 L.8 Zd.16 Itres During Comnruction 452 1,797 2,249 52 207 2S9 Total nGnSin RwftLdr. 2.76 IL.28 Zl.O4 31 20 2Lo - 163 - ANNEX 4.1 TABLE 3: ENVIRONMETAL COMPONENT - PROJECT COST ESTIMATES- 3. Institutional Strengihening Description Local Foreign Total Local Fordgn Total 1M Y Thousand US$ Thousand Hardous Waste Central Laboratory Fdma Cot Land Acquisition Mateial and Civil Work 5,403 5,403 621 621 Equipment 661 3,306 3,967 76 380 456 Enginee and Projed Management 305 139 444 35 16 51 Traning 165 165 19 19 Tot-R Ebse g=s 6.464 3.854 10,318 743 -443 1.18 Physical ContingeIcies 970 383 1,352 111 44 155 Price Contingencies 1,488 161 1,649 55 19 74 Total Instlied Cost: 8[ 4&M 13.319 909 Qf 115 hiWrest During Constunction 1,540 479 2,019 177 55 232 Totd FSnancing2Refured: 10.461 49877 ISL339 1fD l07 4. Other MUMk Description Local Foreign Total Local Foreign Total MOB Y Thousand USS Thousand FAtmated Costs Information Manauement Svstem Equipment and Softwe 4,176 4,176 480 480 Technical Assistance and Traning 609 1,305 1,914 70 150 220 Sub Total 609 5.48 km9 70 26 TraWn Cef Equipment and Software 1,740 1,740 200 200 Technical Assistance and Tnining 174 870 1,044 20 100 120 Sub TotI 174 ZM1 2.784 ; Z £2 3gg MQonIoinf Canabilit Equipment and Software 1,740 1,740 200 200 Technical Assistance and Training 174 1,305 1,479 20 150 170 Sub Ttal 174 3.045 3219 2Q M Sbowtenrft and Researk Technical Assistance and Tnining 174 1,305 1,479 20 150 170 atl PnRea L11 1Z.A41 I3.m iai 141Q LI -164 - ANX 4. 1 TABLE 4: PROJECT COST SUMMY SMG'S REFORM PROGRAM SUPPORT CONIPONENT Local Foreign Total Lol Foreign Totll Desrptiom -RMB Y Thouand- -US$ Thoiud- 1.8MG Officais Tning 3,000 17,460 20,460 344 2,000 2,344 2. Labor Msk Tfirmaton 1,000 3,492 4,492 115 400 515 3. Sdaety bctr Traning 3,200 2,183 5,383 367 250 617 4. Propety Mskt Dayv. &Trainng 12,800 1,310 14,110 1,466 150 1,616 S. Stde AseI Dev. & Training 600 2,008 2,608 69 230 299 6. Finane Colege 300 2,444 2,744 34 280 314 7. Ohiers 2,784 2,784 320 320 Toa d Bl p Cost 20g900 31,180 3219 370 370k Pbysical 8& Ptice CoYntingencbs 3,219 3,219 370 370 Tota l]BMt cms 24200 34899 mm72 239 Qu30 _23 - 165 - ANNEX 4.2 DISBURSEMENT SCHEiDULE Bank Bank fiscal year Semester Cumulative Project Profie la and semester ($ milimon) (%) 1995 First 0.2 0.2 0.1 0.0 Second 9.8 10.0 5.7 3.0 1996 First 12.6 22.6 12.9 10.0 Second 13.4 36.0 20.6 18.0 1997 First 38.0 74.0 42.3 30.0 Seocond 20.0 94.0 53.7 46.0 1998 First 24.5 118.5 67.7 58.0 Second 17.5 136.0 77.7 74.0 1999 Firt 13.9 149.9 85.7 82.0 Second 13.1 163.0 93.1 90.0 2rXX Firs 7.0 170.0 97.1 94.0 Second 3.0 173.0 98.9 98.0 2001 First 0.2 175.0 100.0 100.0 la Bank-wide standard disbursement profile for industr development and finance oerations projects in China issuwed in August 1993. -166- ANNEX 4.3 BANK SUPERVISION INPUT INTO KEY ACTIVITIES APPROXIMATh ACIVrTY EXECrE SKIL WrAff DNUS DATES REQUIRM lS (STAFFWEEK 1019 START-UP MISSION ENGINEERING 10 PROCUPPMENT ENVIRONMENT FINANCIAL ANALYSIS ECONOMICS 0519S SUPfRVISION MISSION ENINiEERN 6 Review Rdeom Program FINANCIAL ANALYSIS ECONOMICS 11/9S SUPERVISION MISSION ENGINEERNO 6 Status of the Pject ENVIRONMENT FINANCIIAL ANALYSIS 05/96 SUPERVISION MISSION ENGINEERING 6 Review Reform Progmm FINANCIAL ANALYSIS ECONOMICS 1V96 SUPERVISIONMISSION ENGINEERING 6 ota of e Proec ENVIRON lEN FINANCIAL ANALYSIS 05/97 SUPERVISION MISSION ENGINERING 10 5d - Term Review PROCURM=ENT ENVItONMENT FIMNACIAL ANALYSIS ECONOMICS 11/97 SUPERVISION MISSION ENGINEERING 6 Stat of the Prject FINANClAL ANALYSIS ECONOMICS 05/98 SUPERVISION MISSION ENGINBERING 6 Review Refotm Prgm FINANCIAL ANALYSIS ECONOMICS 11/98 SUPERVISION MISSION ENGINEERING 6 Status of the Project FINANCLL ANALYSIS ECONOMICS 05/99 SUPERVISION MISSION ENGIEERING 6 Review Reform Prom FINANCIAL ANALYSIS ECONOMICS 11/99 SUPERVISION MISSION ENGINEERING 6 Sts of the Prect FINANCLU ANALYSIS BOONOMICS C5/00 SUPERVISION MISSION ENGINEERING 6 Sat of Project Compeio nd FiNANCIAL ANALYSIS Complance with Cvs ECONOMICS 11/00 SUPERVISIONMISSION ENGINEERJNG 6 Status of the Project FIANClAL AALYSIS COONOMICS 05101 SUPERVISION MISSION ENGINEERING 6 PNoU of PCR FIN4NCIAL ANALYSIS ECOPNOCS Not: Suprvision mii will be coordiatd with od Dak-fnaed indusra projet in Chim - 167- ANNEX4.4 Key Mon*flrig Indktr lndicators Target Data A. SMTCL 99mom ~~~~~~~~~~~May-% Rwidon of the Chater as per the Bank's Reommedations Cahgo in the Composition of the Board of Diets Shareholders Meding's Agreemet to: (i) Acquistion of Shenyang Foundry Plant; (0) Acceptce of the Management Proposal for Increasing SMTCL's Capital through Public Offering Adoption of New Corote Structure in Accordce with Se4 the Recommendations of the Management Study mlementtion Plan of the New Stcre and Manament System 1994-98 Dvlopment and Imple of MIS 1994-98 Imlementaton of Labor Reduction Plan 1994-99 Implementation of Detachment of Non-Productive Assets Plan 1994 -99 ..ysical& R Xesbchuine ..................1994 -99 Implementation of the Civil Works in Accodce wit the Agred Schul b nt of Specialized Assembly Shops Establishment of a New Centrl Foundry and Closur of the Existing HpNInt P _ment and sbtllation in Accordance with the Agreed Schedule Tecnology Trnusfer in Acora ce with the Agreed Stchdue Progresive Change in Product Mix during Project Imp tion 1994-99 Commncement of Training Program Compleion of Training Program B. PFJs :ast Date for Subproject Submission 31-Deo-97 Last Date for Loan Withdxawal 31-Deo-99 -168 - ANE 4.4 Key Monitorng Indicators Indicators Target Date C. SMG Imulementtion of Reform nort Technical Assistance Selection of Consultants Oct-94 Procurement of Equipment De-94 Comm2eement of Staff Training Oct094 Completion of Staff Training Deo-97 0oct4 - Dec-97 Sbrgteing of Project Management Seldction of Project Management Selection of Foreign Consultants Selection of Local Design Instituto Main Construction Contract Award Teader Documents Issued for Land Fill Membranes Finalization of Training Prgam All Major Procurmet Contracts Awarded Completion of Common Facilities Completion of Landfill and Aqueous Treatment Facilities Transfer Operations of HWTF from SEPB W:WY Mtermgnitoring Jan-9S - Nov-97 Selection of Local Design Consultant Final Design Approval for All Monitonng Stations Fna Design Approval for Monitoring Center Completion of Monitoring Center Cc:pletion of All Monitoring Stations InstitXion Strengthenipg oct094 - Decm FinAl Approval of Hazardous Waste Management Reglaions Promulgation of Hazardous Waste Mangement Reguations Site Acquisition for Central Hazardous Waste Laboatory Completion of Central Hazardous Waste Labory Selection of Consultant for MIS Design Finalization of MIS Design and Implementation Finalization of Monitoring Upgrade Program Completion of All Components trs~~~~~~~~~~~~~t 3 W t X g ' [ ffiI f 33i3D p or)~~~~~~~~~ - 170 - ANNEX 5.2 ASSUMPrIONS FOR FINANCIAL AND ECONOMIC ANALYSES 1. Basic Model Stnwttie. The Lotus based financial model calculates project capital cost, finang plan, IRR, ERR and project STMCL's fimancial statements, foreign exchange balances. Two major scenarios are projected: (a) Base Case. SMTCL plans to introduce and to expend its CNC machine tool manufacturing from current 232 units in 1993 to 2100 units in Year 2002. If SMTCL achieves this objecdve, CNC machine tools would be 27.6 percent of company's product mix in twms of units and 75.8 percent in temos of value. The investment plan of the project is to achieve this objective, and fimancid model projects the financial stus of the company under this scenario. (b) low Case. If the CNC machine tool nrket develops less rapidly as expected or the competion from domestic and foreign producers are stronger dhan extd, SMTCL may not be able to sell as much as CNC machine tools as in Base Case Scenario. The project desin is flexible enough to allow SMTCL to produce more Ezonomic CNC machine toob which have lage market in China. The profit margin for Economic CNC is not as high as CNC machine toob but is sufficient to develop a defesadve stategy aginst CNC machine tool market risk The financial model also projects the financial status of SMTL under this less optmistic scenario. 2. Inlation and Exchange Rates. The future domestic and inteonal inflation rates used in the projection are shown in the following table. hadtion (%) iatio (%) 1994 12.0 23 1995 9.0 23 1996 8.0 2.5 199? 7.2 2I 1998 63 23 1999 63 23 2000 ad boeyo 6.0 2I - 171 - A.2 These iflatm rates are applied to the capital cost price contngency calculation and operation eeues and costs over the period of 1994 to 2002. 3. ITe exchange e used in the calculation of project IRR and company's financial projections is $1 = Y 8.7. The foreign exchange rate used in economic analysis is$1 = Y9. 4. Interest Rates and Bank Fees. Effective to SMTCL: World BankLoan 7.5% ($) World Bank Commitment Charge .75% ($) Local ans 10.9% (Y) Income Statements 5. Seing Pies. In financial analysis, the selling prces of the machine tools are those acualy achieved in 1993. After project completion in 2000, a 5 percent average pnce increase per year has been applied for three years (2000 to 2002) on new and upgaded machine tools while t existing machine tool prices remain the same in constant prces. The price increases for new and upgraded machine tools reflect functonal as well quality improvemets as the result of the project. Since the current selling prices of SMTCL's CNC machine tools are on average only 30 percent to 50 percent of the prices of similar machines produced by induizd countres, these pnces increases are modest and indeed consevative. 6. In economic analysis, the economic pnces of machine tools are the same as the financial prices since there is a competitive market in China. There is no price control nor government subsidies in machine tools and major inuts. 7. Major Inputs. In 1993, almost all domestic inputs are market determined, as shown in the following table. These prices reflect their quality in the market place and are, therefore, both financial and economical Cast iron Y 3,800 per ton Sted Y 4,500 per ton Forge products Y 5,500 per ton Elctricty 30 fen per kWh 8. Vaiable Cost Stuctu. To project variable cost of SMTCL, the company's products have been dmded in 15 product categories. One typical poduct's cost sucture, includin castng, forging, control systems, bearing, hydrulics and so on, was analyzed as percentage of the product's selling price. The co structure as pec of lling pices of this product represents the cost strucu for the product category m the financial prqoection. Because of complex of SMTL's product mim and - 172 - A X 52 cost ure, this appoach, which could result in small estimated e=r, is conuidered acceptable. 9. De Calcatd at 7 percent of the odginal worth of fixed assets 10. Wages and Salaries. SMTCL plans to reduce 7000 workers durin pret period. This would reduce the wage bill. In the meantime, the company also plans to separate all social service units. This will create pressure for wage increase since workers are expected to bear more costs in medical expenses, housig rental and other seice previous provided by SMTCL. Overall, we assume that the total wages and salaries increase 5 percent per year, in addition to the geneal inflation. 11. Shop Overhead. Shop Overhead is forecasted in accordance with the acal cost in 1993 with an increase 3 percent per year in addition to the general inflaion. 12. Ad Administmion is also caculated in accordance with the actual in 1993 and projected with an increase of 2 percent per year in addition to the genera infladon. 13. Magrket Expenses. This item is calculated as 5 percent of the sales revenue, which is higher than their curent actual percentage. 14. Taxes and Duties. The assumptions for taxes and duties are: (a) corporat income tax 33 percent; (b) value-added tax, 17 percent of valued-added. Using 1993 actual cost structure, the VA tax was about 7 percent of the sales, whLfh has been used for projection purpose; and (c) average duties for imported component 10 percent. Fund Row Statements 15. Additional Cost to Separate Socal Services. During project period, SMTCL is expected to spend Y 10 million each year from its own retined reources to create new service companies to absorb the works separted from the company, to pay seaation fees to the separated workers and to help hospitals and other service units to become financially independent over time. The saving to SMTCL is the long term cost reduction in maintenance and saving for future investment in social service areas. 16. Capital Cost. Assumptions relating to capital cost is summaized blow: (a) physical contingency for imported machinery 5 pect; (b) physical contingency for domestic machinery and civil work 3 percent, as preiminary design is already completed; (c) spare parts for imported machinery 10 percent; and - 173 - ANNEX S.2 (d) F&I for imported machinery 5.4 percent. Balance Sheets 17. Working CapitaL With financial and inventory control measures which wiSl be intrduced with the project, there is an expcted improvement of working capital utilization. The major assumptions used in projecdons are summarized in the following table: 1993 2002 Minimum Cash (% of Sales) 3.7% 3% Receivable (days) 77 72 Inventory (days) 179 120 Payable (days) 7r 72 18. Moed Curret Ratio. There is no well developed long term debt ket. The ba lend 90 peret of ther loan as short term loans. These loans often finae long term vestmte and rolled over at the end of perods. At 65 percent of SMTW's short term debt is of the long term nature, either fiacng long term investment or permanent working capital. Modified Cumrt Ratio is cadculated taking only 35 percent of the short trm loan in the calulation. Table 1: Shenyang Nachine Tool Company Limited Projected Income Statemts - Basease (93 - 2002) (Y million) Year Eoded De ee 31 U93 1994 1995 19 V97 1998 1999 2000 2001 2002 GOsw Sles Rweau 915 1,183 1,453 1,728 2,051 2,491 3,206 42 5.274 6,096 LA=: Sa Tax 37 83 102 121 144 174 224 297 369 427 Net Sllets 17!£ I40 L13 l1. La0 2317 L2.8 2 4 9 bk Cos CM tib«crbdJ6 & CoDnponc 448 490 633 797 996 1,285 1,745 2,175 2,624 2,936 uulhify 10 16 19 23 29 36 49 69 88 101 Totfial Vantble cost 4S8 :Xso 652 lQ22 I7 L 17 L24 2.712 3,037 amrQ3s AuSrgk4 WEtl 5§s 699 787 882 921 ISA! L7P 2.192 2.632 Fixed A SetFd CAi 0! Degprecialia 43 48 48 75 98 144 175 193 225 225 WagesandSublusi 86 101 IS 130 147 t64 184 204 228 253 Sop Oveatbcad 41 49 57 65 74 83 94 106 119 133 Adminidsttion 96 108 119 130 141 152 163 17S 187 200 tMbus1ting 39 60 74 89 106 130 167 220 274 317 F;nw-panuing eape="es 21 24 28 32 36 40 44 49 55 61 TCSl Fixed Cadt 32 3!ND dd 2 602 72u; 3; 947. LcOr 1.190 mlom mobre I1uwkb 0m9 20 258 266 280 283 f 122 ,06 1.443 aereul Cost 45 129 130 136 143 153 215 304 278 228 nft Befom Tax 51 76 128 130 137 130 145 4S4 828 1,214 bnoorMTax 25 42 43 45 43 48 ISD 273 401 Net IL AL a S7 Ing87 2a 2 8 1S 2 Cbxs bMar I Sda (%) 48% 54% 52% 49% 46% 43% 40% 43% 45% 46% PrefitDBeroTax/Sdak(%) 6% 7% 9% 8% 7% 6% 5% 11% 17% 21% Not PMo I SWu 6% 5% 6% 5% 5% 4% 3% Ss 11% 14% Table 2: Shueyg Machine Tool Coopmy LI mited Projected Baloce Sheets - Baseem (1993 - 2002) (Ymoa) Yaw lade Dhedw 31 159 194 1999 259 159 195 19 200 2*1 2002 AN . carg._ Cmbm 2 33 35 44 52 62 75 96 127 15S 1 Sm Cmb 8 IS 24 36 S7 SS 116 164 157 126 Re_elab 196 251 3 362 427 516 659 86 1,069 1.219 1waw"y 455 S4o 617 672 769 900 1.113 1,416 1,758 2,032 OdCwuaAa 99 104 11I 117 124 132 140 148 157 WUCtrAw g23E 9 Lm L2 i- La L2.t La La 3 Fked A_ IS 75 203 415 764 1,271 1,851 2,249 Gt Fid A 96 IS79 I,8m 2,381 2,872 3,251 3,485 3.530 3,542 3,S56 1AS DW=k" 152 200 248 323 421 565 741 934 1.18 1,383 Net FbW ASm 834 1,379 1,64S 2,059 2,451 2.685 2.745 2,596 2.384 2.173 wegk.h.F1ecm 391 b wetm_l 42 42 42 42 42 42 42 42 42 42 T bW ,12 67 1.421 1.687 O.10 27 7 Lo La 2-215 TOWfl.P A 2.053 2,366 2,7S3 3.334 3,926 4,429 4,904 S.3S2 5.716 5.932 - AMd No,.Phdud. f _ AsS 565 S65 565 565 S65 56S M65 S65 565 5s5 LOW .67 2.931 3.34S 3.S99 4 490 49 S46 L 21u 6LZu 62496 AccooPA y" b195 251 307 362 427 S16 659 867 1.069 1,219 Sbat Tem Lo 579 662 712 S22 982 1.162 1,382 1,642 1,492 992 SbsI m Pei of Lq Tam Dde 23 20 104 92 92 92 159 67 67 67 O&WCmMI.b*m0l 187 19 210 223 236 250 265 28t 298 316 TWA CZue". lAmbann gf LI WI 1422 LL 2-020 2.466 La In La Weld ^_ 1 114 396 694 902 1.015 92 823 719 IPal FwJeP Le 30 160 300 390 440 38S 330 27S 220 O dg Lotal ou 385 SS 436 351 266 13 101 112 124 13S TOWIMOMM"m LS ii m uLz uM L a im WzM i*z ComBftft* 65 _SCqb1 560 610 610 610 610 610 610 610 6t0 610 R_dI 1ua 58 86 131 178 228 274 327 51 957 16SI TgieZ £1 in gm in 1i a a iaz zM WI La MdU*Mh La Lug La La LSi La tS La LM Is a_$laZl!a S~~ ~~65 565 S65 565 565 565 565 S65 56 565 S Tdot U #I brtLa Ln a S L3 s99 i2 La L5JLa Am Table 3: Shenyang Macbne Tool Company Lbmited Projected Funds Flow Stament - Baecase (1993 - 2002) (Ymif ) Yew Ei Decmber31 1993 1994 19 1996 1997 1990 1999 2000 2001 2002 Sco f F_m Net Profit 51 Si 86 87 92 87 97 304 55 814 Add: depwaltion *43 48 48 75 98 144 17S 193 225 225 bdm211 98 134 162 12 m 497 zz 1.038 100 SO Wodd 8rAk 1 113 282 298 208 125 17 L.TI.oalLoAM 110 116 154 140 90 S0 S-T LtAMlo n 181 80 S0 110 160 180 220 260 Tc1alSowltfsofFumbDl 485 345 @£1 694 738 6r16 775 7l' P1Mbd e opxt (>q^ 3wcL 33 246 433 403 263 152 33 OC& Capital Irnv. 264 100 40 rNret %mm WorintgindtaL 89 87 74 57 t0o 137 228 326 364 290 Cqipk Md Fu.ncblaa Cie. S7 8 21 48 80 106 72 Dividend Payenuts 18 30 30 32 30 34 107 113 120 Cost Of D n"ansI of8ocil Ser*bcs S 10 10 tO 10 10 10 Wcqld 11M& 104 104 104 L-T Loca Lan 33 23 20 104 92 92 92 147 SS 53 Shot Teom Leon IS0 S00 Covqnrotc Etond 33 65 TctdJ Amjicnd of Pbzd 476 339 du1 682 111 638 58 m2 21 llDR SNOiuW( Cb 8 6 10 12 21 30 28 48 (7) (31) AccnumltlMvSurpus 8 is 24 36 S7 88 116 164 137 126 JmtaCov"egoeRno 3 2 2 2 2 2 2 3 4 6 I TobA DIk Uvlio Ca""wpaftsni 2 2 2 2 2 2 2 2 3 4b Table 4: Shenyang Machine Tool Company Limited Projected Foreign Funds Flow Statement - Basecanse (1993 - 2002) ( y mim;n ) Yeau Ended Deamber 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 Forel Cash Flow In Revnue from Pduct Export 21.3 24.5 28.4 31.6 34.4 38.7 43.1 48.8 53.3 Wodd Bank LAn 0.1 13.0 32.5 34.2 23.9 Foreipn Cash Flow Out import of Rxw Matvials and Components 2.7 4.0 6.0 8.0 10.5 14.3 19.6 24.8 28.5 InveszmentofFixed lvabncsm 0.1 13.0 32.5 34.2 23.9 Repayment of Wold Bank Loan 12.0 120 12.0 Interest of Wonid Bank Loan 0.8 1.2 2.6 4.9 7.0 8.3 8.5 7.7 6.8 3a 3A I M N 441 47.1 4L4 NA U 4 9 Net Flow of Fonegn Cash 17.8 19.3 19.7 18.7 16.9 16.1 3.1 4.3 6.0 Ac nlated Flow ofForeignCash 17.8 37.1 S6.8 75.5 92.4 108.5 111.6 115.9 121.9 i! Table 5: Shenyang Machine Tool Company LUmited Projected Income Sttements - Lowcase (1993 - 2002) (Y million) Year Ead Decenba 31 1993 1994 1991S M96 1997 1998 1999 2000 2001 2002 Gross Ss Roveae 915 14177 1,431 1,666 1.944 2,343 2.954 3,746 4,415 5,039 Lef. SalesTax 37 82 101 117 136 164 207 262 309 353 Net Sai 879 121 1338 1.549 1.808 2179 2.747 UK 4.106 4. Vuiable Cost MeasiWa&Comnponeats 448 485 618 750 916 1,166 1,554 1,8S9 2,144 2,378 Utlity 10 16 19 23 28 35 46 61 73 83 Total Variable Cost 458 638 1 944 1.20D 1601 1.92D 2.216 2.461 Gym swIdauwi 421 894 700 m 864 979 1.146 1S64 1J890 2.S Elxed Ak Semi-P I Deqrciation 43 48 48 90 122 167 188 225 225 225 Wagosand Saaries 86 101 I1S 130 147 164 184 204 228 253 Shop Ovehead 41 49 57 65 74 83 94 106 119 133 Adminlatrion 96 108 119 130 141 152 163 175 187 200 Madrkdag 39 60 74 86 101 122 154 195 231 264 Nonu,purfing expewses 21 24 28 32 36 40 44 49 55 61 Tobd PbxeCd (S 32S 390 440 53 620 72 82 SS4 llD4 1.13 MKarBdore 1 ngand . bargu 95 204 22 244 24412 §i10 846 L.qS9 _trest cost 4S 129 129 132 134 140 198 278 250 206 ProfltsBfonrTax 5l 7S 131 112 109 112 121 332 596 883 booms Tax 25 43 37 36 37 40 110 197 291 Net!Q w1 so 21 73 21 a m " s2 GrowsMargi l8Ss(%) 48% 54% 52% 50% 48% 45% 42% 45% 46% 47% Po Ithom Tax / Ses (%) 6% 7% 10% 7% 6% S* 4% 10% 15% 19% Not Pofit /ISa 6% 5% 7% 5% 4% 3% 3% 6% 10% 13% Table 6: Shenyan Macbin. Tool Company Limited P!rojected Balance Sbeet - LAwase (3 - 2002) (YmUi ) Yo eD_ I 1993 1994 399 199 1997 t199 199 20 2001 2002 Co d B* 33 35 43 S0 S8 70 89 112 132 151 8uakI Cub 8 17 22 30 40 60 Se 121 98 60 RC=hd4 196 250 304 349 405 48S 607 l6a 89S 1, 1leq 45S S43 611 648 729 646 I026 1,2I49 1.472 1,.60 QthsrOlMAsMs 93 99 104 111 117 124 132 140 148 157 Gum 'ludA, 986 1,579 1,3 2.31 2,872 3,51 345 3, 3.f42 3,56 Imd q 52 200 248 33S 460 627 S15 139 164 1,8 Net Iq2d AEM 034 1,379 1,655 2,044 2,413 2,624 2.671 2,490 2,278 2,067 Wak4,lPaucus 391 _Neime 42 42 42 42 42 42 42 42 42 42 Tdi}li L3J1 1.421 LI 208 WI WI L.73 Us 2L 2.109 TdelpSS d P" ft I" 2,053 2,365 2,771 3,274 3,804 4,252 4,654 4,919 5,066 5.165 Mt NoO a A 56 565 565 555 5S5 565 565 565 55 565 M M M.929 1 LAM I! 4i 4.S16 IA l4 "3 5-729 P*=wI?q*1 M 250 304 349 405 485 607 765 895 1,008 ShtlnT aOM s 579 662 702 782 902 1,042 1,222 1,402 1,232 842 SatPau=ofdLmgTwmoDebe 23 20 104 92 92 92 19 67 67 67 Od OanIa I JiNd. 187 M98 210 223 236 250 265 281 298 316 Told CW~UbMm LM L_"9 1.101446 135La MM69 2A25 2X3 LmTe WBdawkt m 1 114 399 04 02 I,O 928 t3 719 Loel Pf4matIAN 30 160 300 390 440 3So 330 275 220 Ota LAW LuM 385 S0u 436 351 266 103 101 112 124 138 TddumTermLem M m m i3z Ua JAIl IM JW , M 65 raft s~bc SOD50 610 610 610 610 610 610 610 610 610 Rddii ulap se Is 132 171 208 247 290 425 741 1,5 T* Redly Win WI aI so la la IA La L MdwZT ug IM! L Lo il L2 InE In Lo _ Xww=dCMmmN L s15 56 5se 7se 565 705 se se so TdwtAtwALf __ m2 22 2 2J 'm 4 4= =2 SJ Table 7: S9euyang Mahine Tool Compay Lmited Projeted Fuad Flow Stamentb - LoWCase (IM - 2O (Ymhon) YeWr 3.do. D _em bw 31 1993 1994 i99S 1996 197 1998 199 2000 20 20 Na Profit 51 so 88 75 73 75 81 223 399 592 Add: dpreciation 43 48 48 90 122 167 188 225 225 225 Irtd a W>s 93 98 1t IQ2 12 kan 22 447 624 M£ Ebndtv (i>sadtvdizr100 S0 World Bank 1 113 282 298 208 125 17 L-T LcaLon 110 116 154 140 90 so S-T Lala Loan 181 80 40 80 120 140 t80 180 al Sw s of FSnnds 485 345 443 667 2 640 574 645 64 8 .APOUat of Fa , Projxs Cind"d InvegL 33 246 433 403 263 152 33 Olhet Caphit bvet. 264 100 40 ft.iug.r kJ b4 Caup 89 84 70 37 83 122 190 239 23S 218 CaiFJdPncaWl argea 57 8 21 48 80 106 72 0 DiLid Payments is 31 26 26 26 28 78 83 88 Costof D'nttamentofSocialServices 5 10 10 10 10 10 10 World Bank 104 104 104 L-T LAl LOan 33 23 20 104 92 92 92 147 S5 55 ShOlt TcnM LoAn 170 390 Corpo'e Bond 33 65 Ta Aiodnd m 476 336 438 6S9 59 2 46 612 647 85S Swrplus Cash 8 8 S 9 10 20 28 33 (23) (38) A _cmultati Surplus 8 17 22 30 40 60 88 121 98 60 ldaenrCovemgeRatio 3.1 1.7 1.9 1.9 1.9 2.0 2.0 2.6 3.S 5.0 Totat Ddet Serviv Covrgc Ratio 2.2 1.6 1.8 1.6 1.6 1.7 1.7 1.8 2.5 3.2 Table 8: Shenyang Machine Tool Company Limited Projected Forelg Funds Flow Statement - Lowcase (1993 - 2002) (Y MlIfOn) YearEded December31 1994 1995 1996 1997 1998 1999 2000 2001 2002 Forei Cash Flow In Revenue from Prduct Export 21.3 24.5 28.4 31.6 34.4 38.7 43.1 48.8 53.3 Wold Bank Lan 0.1 13.0 32.5 34.2 23.9 o ___ 2L4 ~~~~~~~~~~~~~~~~~~~~~~~ ~~00 .Ta 31 37 6i 65.8 X 38K 43.1 48. U3 Foreig Cash Flow Out Import of Raw Materials and Components 2.7 3.8 5.5 7.2 9.3 12.5 16.3 19.8 22.7 Investent of Fixed Investment 0.1 13.0 32.5 34.2 23.9 Rpayment of World Bank Loan 12.0 12.0 12.0 Iterest of Wor;d Bank Looan 0.8 1.2 2.6 4.9 7.0 8.3 8.5 7.7 6.8 ,T &I IU X 0 40.2 2 36.7 2 4LSNA Net Flow of Foreign Cash 17.9 19.5 20.2 19.5 18.1 17.9 6.4 9.3 11.8 Acumiated Flow of Forign Cash 17.9 37.3 57.5 77.0 95.1 113.0 119.4 128.7 140.6 - 182 - AN=RB Ll SELECTED DOCUMENtS AN DATA AVAILABLE IN TE PROJECT FILE Refereoce 1. Yellow Cover Feilt Study for the Shenyang Engineering Industry Technological Renovation proect (Septmber 1992), 14 Volumes, No. 6 Institute of Project Planning and Research, Ministry of Machiney and Electonics, PRC. 2. Blue Cover Final Feasibility Study for the Shenyang Engineering Industry Technological Renovation Project (June 1993), 14 Volumes, No. 6 Institute of Pect Planming and Resarch, Ministry of Machinery and Electronics, PRC. 3. SMTCL PRlminary Desig Green Cover Report (November 1993), 7 Volumes, No. 6 Insdtute of Project Planning and Reearch, Ministry of Machinery and Electronics. 4. OStatgy and Policy and Shifting Shenyang's Industry to Markt Economy-Survey of Shenyang's Industry,' Paper prented by Hong ranshen, Diector, Shenyang Ecnomic and Planning Commission, at SMG and the World Bankjoint-sponsored Shenyang Economic Dveopment Strategy Inteainal Wokshop, July 12-13, 1993. S. Optmizing SM 's Operation (July 1993), Hans 0. Rohs, the agieering consultant specazed in machine tools. 6. SMTCL-Management System Development-Terms of Reference for Consulting Sevices (August 1993). 7. Fmal Report for the Deveopment of SMTC's Managmnt System and Tlaining Program (June 1994), Knight Wendling lng LTD. London, U.K. 8. SMTCL's Detailed Pocurement Aangements. 9. SMTCL's Charter (May 21, 1994), English and Chinese, SMTCL. 10. SMG's Municipal Finances (,Hstoical, 1988-93, Projected 1994-2000), SMG and Bank estmates. - 183 - CHART 1 Service Adminitration Presa Publttion Admin. Water Conservation Public Welfare Public Health Ajims Husbandry & Nonsta to Food i . Graina & Food .a State Security Sumrvision PIblic Secunty i Jurisdiction 1 - g e ;} | j E ~~~~Cuturtial Affakira A - ~~~~~~ ~~~~ConmemecJ I - 0 1tig § 3} f Aericulture |1 8 8 8 Urlban Construction Transportation L . . Real Estae Civil Engineing 3 _ ~~~~~~~~~~~~~Urban Planrung & Land ManaFe. _i H Z; f ~~~~~~~~~~~~~~Textileolndustysf _ Agricultural Machinery Building Material z t .g El~~~~~~~~~~~~~ectronic Inusftr Environment Protection Pharmaceuticus _ iS t ~~~~~~~~~~~~~~~Petroleum &d Chemistnr Metalluray Industry Matrial Su%MI Machinery Industry Liht ndustnu Taxation Statistics Ii Price . * Public Fimance Labor Inldusty & Commerce Auiting r I L Urban & Rural Construc. Scie=n & Tehlolovgy | Pysical Culture & Sports |Minotity & Religions Affairs External Economic and Trade I g | Education U | Family Planine Economic System Reform Economic and P _anin Shenyang Machine Tools Company Ltd. Organization Chart Shareholders Assembly BoardofDireChairman|| Board of Supervisors Personnel Development Comprehen- Finance Quality Public Maret Department Programming sive Planning Accounting Control Affairs Relations lnvestigation DeparFet Departet Department De_atnDeareet Department | Depat #2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L itne 3 Prdut Prdtoi Pouction 0~~~~~~~~~~~~~~~~~~0 - C i j W!i i I 1 PROJECT IMPLEMENTATION ORGANIZATION AND MANAGEMENT Shenyang Municipal Government (SMG) Leading Group Project Manage enae Office (PMO) Bureau ~~~~~~~~~~~~~~I 0 MSenyang Machine Planning & Economic Envionment ICBC a Tool Co. Ltd. (SMTCL) Commison (PEC)* Protction Bura (EPB) Shenyang Branch BOCOM, Shenyag Banh LAbor State Assets Popty Rights Shenyang Colle of Bure Management Bureau Transacion Cenr Eonomics & Finae *PEC corda varios actvit uder t Reform Prorm Spot component CHINA rO Hatoebfn . ~ The budoknes- cola' SHENYANG INDUSTRIAL REFORM PROJECT ""Py , otnhr O jUI;rfTh. Wodd Boal Grolp. SMTCL wenyang Mochine Toac Company LUtrted) h World Bank Gro up. Tentotive Sub.projectds! j or any tnd ritmen . Oacceptaneofsc * Porl'eipqfnSf Finconcif InSmUKInS ~~~~~~~~~~\ I \ ! *1 ~~boundanes. P fnicipating financi Instituions reo ~ - Rxods --- Disbid oumkie Bxl eaitd\ g 1X.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~R A~~~~~~~~~~~~~~~~~~~~~~ xi~p NEI MONGOL PROWNCE~~~~~U C ,c~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~IOLOMETRR - h) To Oaken _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~~~~~~~~~~~~~~t H,A[-] VZin* I.The boundaries, colow,'s CHINA H<°uitboe 127 To Harbin .menom;npt,on4 and any SHENYANG INDUSTRIAL REFORM PROJECT . . -f ' h, ,nfa,matian w HAZARDOUS WASTE TREATMENT FACILIMES nk i o the part of AND WASTE WATER MONITORING NETWORK any iudofmet an thelegal HozordausWasle Treatmnt _ree 2 \ / / /oudritneos f s-h 0 Waste Wa Tremon Plant 9,,23 es. o Wase Wow e onttorng Cewter +4- Railrosd Wlng I -DisividsnctBoAfi5 tj i/,l_i_ cit - dBoundafies 33 ' . l / ^ / \/ 4~~~~~~17-~ ~ ~~~~ \ +v§// O71 2 3 4 2g tel0o2 9 x I 1 4 ~ ~ Ifr elo | rOD~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o _ B Hi O.jlSee - 0 * P~~~~~~~~~~~~~~~~~~~~~~~P NE/ MONGOL C H CHINA PROVINCE