Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17203 IMPLEMENTATION COMPLETION REPORT CHINA TIANJIN LIGHT INDUSTRY PROJECT (LOAN 3022-CHA) November25, 1997 Finance and Private Sector Development Sector Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency = Renminbi (RMB) Currency Unit = Yuan (Y) 1988 $1 = Y 3.71 1989 $1 = Y 3.71 1990 $1=Y4.72 1991 $1 = Y 5.22 1992 $1 = Y 5.38 1993 $1 = Y 5.45 1994 $1 = Y 8.70 1995 $1=Y-8.31 1996 $1 = Y 8.30 1997 $1 = Y 8.30 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric Systemn ABBREVIATIONS AND ACRONYMS CIB - China Investment Bank ERR - Economic Rate of Return FRR - Financial Rate of Return FTC - Foreign Trade Corporation GOC - Government of China ICB - International Competitive Bidding ICR - Implementation Completion Report LOC Line of Credit SOEs - State-Owned Enterprises TA - Technical Assistance TLIP - Tianjin Light Industry Project TPIC - Tianlong Paper Industry Corporation TVEs - Town & Village Enterprises Vice President Jean Michel Severino, EAP Country Director Yukon Huang, EACCF Sector Manager Hoon Mok Chung, EASFP Staff Member Zafar Shah Khan, Principal Financial Specialist, EASFP FOR OFFICIAL USE ONLY CONTENTS PREFACE ..........................................................iii EVALUATION SUMMARY ..........................................................v PART I: PROJECT IMPLEMENTATION ASSESSMENT .................................1 a. Project Background .........................................................1l B. Project Objectives and Description ..........................................................2 C. Achievement of Project Objectives ........................................................3 D. Implementation Record and Major Factors Affecting the Project ...............7 E. Project Sustainability .........................................................1 1 F. Bank Performance ......................................................... 11 G. Borrower Performance .......................................................... 12 H. Assessment of Outcome ......................................................... 13 I. Future Operation ......................................................... 13 J. Key Lessons Learned ......................................................... 14 PART II: STATISTICAL TABLES ........................................... 17 Table 1: Summary of Assessments .17 Table 2: Related Bank Loans/Credits .18 Table 3: Project Timetable .19 Table 4: Loan/Credit Disbursement: Cumulative Estimate and Actual .20 Table 5: Key Indicators for Project Implementation .20 Table 6: Key Indicators For Project Operations .21 Table 7: Studies included in Project .21 Table 8a: Project Costs ................................................... 22 Table 8b: Project Costs ................................................... 23 Table 8c: Project Financing ................................................... 24 Table 9: Economic Costs and Benefits ................................................... 24 Table 10: Status of Legal Covenants ................................................... 25 Table 11: Compliance with Operational Manual Statements ........................ 25 Table 12: Bank Resources: Staff Inputs ................................................... 25 Table 13: Bank Resources: Missions ................................................... 26 APPENDIX A: ICR MISSION'S AIDE MEMOIRE ............................................. 27 APPENDIX B: BORROWER'S CONTRIBUTION TO THE ICR ...................... 36 APPENDIX C: CIB-COMPARATIVE (ACTUAL AND PROJECTED) FINANCIAL STATEMENTS FOR THE YEARS ENDING DECEMBER 31, 1990-96 ........................................................ 45 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 11 - APPENDIX D: COMPARISON OF PROJECTED AND ACTUAL RESULTS OF SUBPROJECTS .................................................. 46 APPENDIX E: MONITORING OF TARGETS .................................................. 49 - 111 - IMPLEMENTATION COMPLETION REPORT CHINA TIANJIN LIGHT INDUSTRY PROJECT (LOAN 3022-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Tianjin Light Industry Project (TLIP) in China, for which Loan 3022-CHA in the amount of $154 million equivalent was approved on February 21, 1989 and made effective on December 7, 1989. The loan was closed on June 30, 1997, compared with the original closing date of June 30, 1995. Final disbursement is expected to take place on October 31, 1997 at which time a balance of $0.19 million would be canceled. The project also used $1 million out of the Second Technical Cooperation Credit (TCCII) (Credit No. 1664-CHA) for the preparation of Tianjin's overall industrial strategy. The ICR was prepared by a team comprising Zafar Shah Khan (Task Manager) and Amanda Hagy (Task Assistant) in the Finance and Private Sector Development Sector Unit (EASFP) of the East Asia and Pacific Region. Naiqin Lu, Operations Officer in the Resident Mission of China, and Raymond Chalk, Consultant/Paper Specialist, participated in the ICR mission and contributed to the mission's work. The ICR was reviewed by Hoon Mok Chung, Manager, EASFP and Yukon Huang, Director, China Country Unit. The borrower provided comments that are included as appendixes to the ICR. Preparation of this ICR began during the Bank's final supervision/completion mission in June/July 1997. It is based on the material in the project file. The borrower contributed to preparation of the ICR by preparing relevant data and information, contributing views expressed in the mission's aide-memoire, preparing own evaluation of the project's execution and initial preparation, and commenting on the draft ICR. I CHINA TIANJIN LIGHT INDUSTRY PROJECT (LOAN 3022-CHA) EVALUATION SUMMARY Introduction 1. The Bank's first operation in the industrial sector was a loan for the Fertilizer Rehabilitation and Energy Saving Project in 1985. It was followed by loans for the Shanghai Machine Tools (1987), Gansu Provincial Development Project (with an industry component) (1987), Fertilizer Rationalization (1987), Pharmaceuticals (1988), and Rural Industrial Technology (1990) projects. In addition, the Bank has provided five credit lines to the China Investment Bank (CIB) for onlending to small- and medium-size projects in the industrial sector. The Tianjin Light Industry Project was the first of a series of three pilot projects undertaken at the regional level to implement the overall development program and strategy for specific industrial subsectors. It focused on the restructuring of textile dyeing and finishing, pulp and paper, and packaging subsectors, which were studied jointly by the Bank staff and the Tianjin Municipal Government (TMG) as a part of project preparation. Project Objectives 2. The main objective of the project was to assist TMG in the implementation of the development program and strategy that it had prepared for the three light industry subsectors of the project. It aimed to: (a) expedite system reforms at the regional level leading to greater autonomy for and accountability of enterprise management while enhancing the regulatory role of municipal authorities; (b) modernize and restructure viable enterprises; (c) improve internal enterprise management and systems; (d) strengthen institutional infrastructure (including research and design institutes and vocational training schools); and (e) support the preparation of a long-term overall industrial development strategy for Tianjin. 3. The development program and strategy for the project's subsectors, which outlined, inter alia, the enterprise reforms to be undertaken and subsector investment criteria to be followed, was formally adopted by TMG and was the centerpiece of the project. During negotiations, an assurance had been obtained from TMG that it would exchange views with the Bank on its implementation. TMG reported the progress on the implementation of development program and strategy to the Bank on a regular basis and supervision missions followed up on this subject during field visits. - vi - 4. Project objectives were defined at a time when enterprise reforms in China were at a rudimentary stage and the focus of industrial policies was on hardware investment. It was the first time that, in the context of a Bank project, concerned Chinese officials formally recognized that such investment had to be accompanied by greater autonomy to enterprise managers; separation of the government's ownership, regulatory and management roles; price liberalization; removal of subsidies and production controls; labor mobility; financial reforms; etc. Furthermore, the investment had to take into account economies of scale, product specialization, and comparative advantage. At the same time, research and design institutes and training centers were to be strengthened to provide efficient and prompt service to industries. Also, enterprises needed to improve their internal organization and management systems to achieve greater efficiency and cost-savings. All these elements were part of the development program and strategy and included in project objectives. Although the reform process in China has substantially advanced in subsequent years and there is a greater awareness of product specialization and rationalization, improved organization and management systems, and closure of nonviable plants, the project was a major step forward at the time of its preparation. It also provided a beginning of dialogue on enterprise reforms in the context of Bank operations. Implementation Experience and Results 5. All project objectives have been met but the desired results have not yet been achieved in the project's subsectors. Enterprise reforms have been carried out beyond the original expectation; internal enterprise organization and management systems have been improved in pilot enterprises with the help of international experts; institutional infrastructure has been strengthened; and long-term overall industrial strategy has been prepared by international consultants and has contributed to the preparation of the ninth five-year plan for Tianjin. Modernization and restructuring of enterprises; including increased product rationalization, greater efficiency, quality improvements, and closure of nonviable and polluting plants; has also been carried out. However, many of these enterprises are facing working capital shortages and problems in the areas of marketing, cost and price structure, and social overheads. These problems have led to financial difficulties that may not be resolved in the near future. Consequently, the sustainability of the project, from the perspective of subsectoral restructuring, is uncertain. 6. About 85 percent of the loan amount was disbursed within the original closing date of June 30, 1995. An extension of two years was approved in the closing date mainly to complete disbursements for the two paper subprojects. 7. The technical assistance (TA) component of the project (which received $9.9 million out of the loan amount) was implemented satisfactorily, though the completion of tasks was behind the original schedule. Cost overruns in this component were small. The line-of-credit component of $143.9 million was onlent to paper (58 percent), textile dyeing and finishing (17 percent) and packaging (24 percent) subsectors. Fifteen subprojects, including 11 above-free-limit subprojects (requiring the Bank's prior - vii - approval), were financed under the line of credit. Five subprojects were completed on schedule or earlier; three with a delay of one year; and seven with a delay ranging from two to four years. The total cost of restructuring of enterprises was $305.27 million equivalent compared to the original estimate of $211.6 million equivalent. The cost overruns in individual subprojects ranged from 27 percent to almost 300 percent (in renminbi) and were the result of the devaluation of the yuan (from Y 3.72=$1.00 at the time of appraisal to Y 8.3=$1.00 in 1996), delays in the implementation of some subprojects, and lower cost estimates particularly for paper subprojects. All but two subprojects had high-capacity utilization ranging from 60 to 100 percent during the second year of operation. However, only 4 out of 13 completed subprojects were making marginal profits and these were generally much lower than estimates. The financial position of most of the subborrowers was poor. The high cost of inputs (including raw materials and utilities), without a corresponding increase in the price of outputs due to increased competition, is a major factor responsible for enterprise losses or low profits. In addition, delays in subproject completion and overruns in capital cost have also contributed to poor financial position and results. 8. At the time of subproject approval, CIB had estimated the economic rate of return (ERR) and financial rate of return (FRR) to range from 15.37 to 49.7 percent and 15.3 to 75.3 percent, respectively. CIB's revised estimates, based on actual cost and current revenue projections, estimate the ERR and FRR to range from 0.4 to 20.6 percent and from 2 to 16.5 percent, respectively. Most of the subprojects would now have ERRs and FRRs of less than 12 percent (required in the subproject financing criteria). 9. All subprojects have acquired pollution control equipment and visits to the plants have not shown any environmental problems as a result of these subprojects. As regards the paper mills, until such time that they are in continuous operation, it is not possible to measure their impact on environment but it is expected that considerable improvement will be achieved over the preproject situation. Improvements will be realized through closure of old production facilities, provision of new high-efficiency boilers with tall stacks, and installation of wastewater treatment facilities. 10. The key factors that have affected the achievement of desired results of the project are rooted in the overall policy environment for industrial and financial sectors. Industry- related policies and incentives do not encourage enterprises to quickly adjust their costs and prices and respond to competition. The enterprise management is still production- oriented and often lacks the initiative and know-how to cut costs and enhance its competitiveness. Factories continue to employ a large number of redundant workers. The marketing function is not getting adequate attention in enterprises and they are also bound by a low ceiling on sales promotion expenses. The social burden of state-owned enterprises (SOEs) has not yet been fully eliminated. Financial sector policy constraints create working capital shortages and a "triangular debt" issue that affects the debt- servicing by enterprises. Financial intermediaries have a long way to go to base investment decisions on carefully prepared feasibility reports and project appraisal, particularly realistic estimates of market viability and cost. Independently of the above - viii - factors, the competition both within China and in export markets has intensified and the textile sector, in particular, is facing global market problems. 11. The Bank played an active role in the preparation, appraisal and supervision of the project. Textile, paper and packaging experts, industrial economists, enterprise reform specialists and financial analysts participated in the preparation of the project. Supervision missions visited the project frequently and maintained an effective dialogue with counterparts and provided them necessary advice. Two areas have been identified where Bank staff should have given greater attention-subproject cost estimates and procurement through international competitive bidding (ICB). This would have helped to avoid overruns and delays in the completion of some subprojects. The Bank's overall performance has been rated as satisfactory. 12. TMG had full commitment to the project. A team of senior officials of all the concerned departments and agencies was made responsible for project preparation and worked closely with Bank staff A project management office was also established with senior and competent staff who worked with full devotion. TMG successfully introduced all the enterprise reforms agreed to under the project and has continued to advance this process. Also, all the institutional development activities were completed satisfactorily. In addition, all studies agreed under the project were completed with the help of international consultants. 13. All loan commitments were met, albeit, with delays incurred for the commitments of the central government and the municipal government regarding the provision of funds to meet project objectives. 14. CIB's performance as a financial intermediary for the line-of-credit component was somewhat mixed. It prepared detailed appraisal reports on subprojects and kept itself fully informed of subprojects' status and performance. However, its market evaluation, cost estimates and capacity utilization targets turned out to be optimistic for some subprojects. Overall, the performance of the borrower (the government and CIB combined) has been rated as marginally satisfactory, mainly because of poor operational and financial performance of restructured enterprises. 15. The implementation of the project is considered satisfactory because of the introduction of agreed enterprise reforms; restructuring of three subsectors with specialization in production, closure of noneconomic plants and polluting small pulp and paper mills, and import of modern equipment; improvement of technological infrastructure (support institutions); and completion of three important studies with the assistance of international consultants and partial implementation of their recommendations. Development objectives of the project have not been met as most of the restructured enterprises are not yet financially viable and cannot service their debt. Consequently, the outcome of the project is considered unsatisfactory, at present. - ix - Summary of Findings, Future Operations, and Key Lessons Learned 16. The project has provided a useful opportunity to officials of TMG, CIB and enterprises to learn new skills and methods of project planning, development and implementation. However, this knowledge would have to be applied in future, keeping in view the lessons learned under this project. Research and design institutes and training centers are now providing an important and unique service to the subsectors because of their well-trained staff and modem equipment. Future industrial development planning in Tianjin will be guided by various studies carried out by international experts. As regards the subprojects with operational and financial problems, actions need to be taken by the government, CIB and subborrowers to provide additional working capital, enhance marketing skills, introduce greater cost efficiency, reduce surplus labor, and bring greater product rationalization. These actions will help to minimize the current problems of enterprises and to turn them around over time. 17. There are four main lessons to be learned from this operation: (a) The profitability of industrial projects is influenced by the country's overall macroeconomic and sectoral policies, institutional framework, and competition. Projects undertaken in the context of limited reforms in a particular region may face problems because of constraints caused by overall national policies and changing global market situation. These constraints should be fully recognized in planning all profit-making activities and mitigating measures should be introduced before investment decisions. (b) The assessment of market viability is of critical importance for industrial projects. Reliable sources of information for domestic demand and supply -both present and future-should be developed and modem techniques of market research should be introduced in institutes responsible for the preparation of project feasibility. As markets change with the lapse of time, projects should be implemented soon after their feasibility has been established; otherwise they may find themselves in an adverse market situation. Also, enterprises should shift their focus from production to marketing and this latter function should lead and guide all other activities of enterprises. (c) The culture of enterprises does not change swiftly. It takes time for the management and staff to adjust to new realities and change their attitude and actions. Major changes in organization, management and staff may be needed to expedite the change process. (d) Financial institutions that are responsible for the appraisal and supervision of subprojects are often optimistic about market forecast and cost estimates. They need to be more conservative and should strengthen staff capability in these areas through intensive training. - 1 - CHINA TL4NJIN LIGHT INDUSTRY PROJECT (LOAN 3022-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT BACKGROUND 1. China's industrial development until the early 1980s was guided largely by an inward-oriented and import substitution strategy. This led to a rapid growth in industrial output and employment, the acquisition of industrial skills and a wide range of industries. On the other hand, it had also resulted in numerous problems, including inefficiencies in production, lack of technological development, poor product quality, and inadequate knowledge of markets abroad. 2. The efficiency of resource use in the Chinese industry had also been low. Institutional rigidities due to planned quotas and price controls, an environment of distorted prices, and excessive focus on physical and quantitative planned targets, provided little incentive for efficient management at factory level. In addition, there was an overemphasis on self-sufficiency at the regional level, leading to a fragmented national market and reduced domestic competition. As a result, potential gains from economies of scale, specialization and division of labor were often missed. 3. The government started to encourage higher exports but these efforts were frustrated by distortions in the trade regime. For example, a major constraint to Chinese exports was an almost total separation between enterprises and their external markets. Enterprises generally had to go through foreign trade corporations (FTCs), which had virtual monopolies in their subsectors, for imports and exports. This kept enterprises often unaware of latest developments in foreign markets. Another constraint was that the access of enterprises to foreign exchange was tied to their ability to export. It was thus extremely difficult for enterprises to service their foreign exchange debt and to import raw materials and spare parts if they did not earn foreign exchange through exports. 4. The economic reforms in China placed high priority on the decentralization of investment responsibilities from the Center to provinces. In industry, it required the provinces to play a more active role in the preparation and execution of development programs and strategies for individual subsectors. The government of China (GOC) requested the Bank in 1987 to assist some selected provinces in carrying out the above task. The first such operation to assist the development of specific subsectors was the Tianjin Light Industry Project (TLIP). Tianjin is an important coastal city in northern China and has the status of a province. It has a large industrial base with light industry - 2 - accounting for the major share. The subsectors to be assisted were textile dyeing and finishing, pulp and paper, and packaging. 5. During project preparation, an in-depth study of the three subsectors in Tianjin was carried out by Bank staff together with the Tianjin Municipal Government (TMG). The study and subsequent discussions between TMG and Bank staff assisted the government in the preparation of a development program and the strategy for the three subsectors. It outlined: (a) the economic and system reforms that would be implemented in Tianjin on a priority basis to provide a reasonable degree of autonomy and accountability to enterprise management, as well as to improve the economic performance of the subsectors; (b) subsector investment strategy and enterprise investment criteria; (c) plans for improvements in internal enterprise organization, management, systems, and procedures; (d) plans for the strengthening of institutional infrastructure; and (f) future studies to be undertaken for the long-term development of subsectors. B. PROJECT OBJECTIVES AND DESCRIPTION 6. The main objective of the project was to assist TMG in the implementation of the above-mentioned development program and strategy formulated for the three light industry subsectors. It aimed to: (a) expedite system reforms at the regional level leading to greater autonomy for and accountability of enterprise management while encouraging the municipal authorities to focus their activities on supporting and guiding enterprises rather than the direct control; (b) modernize and restructure enterprises including increased product rationalization between plants and the support of high-priority investments; (c) improve internal enterprise management and systems; (d) strengthen institutional infrastructure (including research and design institutes and vocational training schools); and (e) support the preparation of a long-term overall industrial development strategy for Tianjin. Objective (a) was achieved beyond the original expectations as overall enterprise reforms accelerated in China, including Tianjin. All other objectives, except objective (b) were also fully achieved. Objective (b) was achieved in a limited manner as the enterprises were modernized and restructured with increased product rationalization, higher efficiency, and quality improvements but most of them continue to have financial problems and poor debt-servicing and their sustainability is uncertain. As a result, the project's development objective has not been achieved. -3 - 7. The project included financial assistance in the form of an industrial credit of $141.2 million to be onlent through the China Investment Bank (CIB) to the enterprises for their restructuring and modernization and technical assistance (TA) of $12.8 million for the overall industrial restructuring program including strengthening of the institutional infrastructure in Tianjin. It was originally estimated that CIB would onlend $36.6 million to the textile dyeing and finishing subsector, $71 million to the pulp and paper subsector, and $33.6 million to the packaging subsector for the financing of a total of 15 subprojects. These subprojects, which were to be consistent with and part of TMG's strategy for the restructuring of the three subsectors, were to result in significant improvements in product quality and production efficiency. 8. The TA component of the Bank loan was to be used for (a) strengthening of institutional infrastructure ($11.65 million) through import of testing equipment, pilot plants, computer hardware and software, teaching aids, etc. and staff training; (b) development of internal enterprise management systems ($0.5 million); (c) short-term consultant services for the light industry ($0.3 million); (d) a study to prepare a long-term development strategy for the paper subsector ($0.3 million); and (e) staff training of CIB Tianjin branch ($0.05 million). The total cost of the project was tentatively estimated at $227.6 million equivalent, with a foreign exchange component of $155.0 million. C. ACHIEVEMENT OF PROJECT OBJECTIVES 9. Enterprise Reforms. All the enterprise reforms agreed with TMG have been carried out. Price and production controls on the three subsectors have been removed and these are determined by market forces. Enterprises pay taxes on their income at a fixed rate instead of the remittance of entire net income to the government or profit contracts as practiced in the early period of reforms. Enterprises have been given direct export rights. All new workers are hired on the basis of fixed contracts. Enterprises are free to choose their bank and vice versa. TMG uses economic and financial criteria (including economic rate of return, ERR, and financial rate of return, FRR) in its investment decision-making process. In fact, the enterprise reforms in China, including Tianjin, have advanced over the last 10-year period much further than contemplated at the time of preparation of this project. Nevertheless, as noted from the performance of subprojects financed under the Bank loan, the culture of most of the state-owned enterprises (SOEs) still needs significant change. In particular, enterprise management has to be less dependent on the government, more market-oriented and profit-conscious, and show greater financial discipline. At the same time, SOEs need to be fully absolved of the social burden and surplus workers. 10. Subsector Restructuring. The three subsectors of the project have been restructured in accordance with the strategies and programs agreed at the time of project preparation. However, most of the 15 subprojects financed under the Bank loan are not operating satisfactorily and have financial difficulties. - 4 - 11. The restructuring of the pulp and paper subsector involved the closure of inefficient and polluting plants, discontinuation of many varieties of paper that were uneconomic, and production of high-quality paper using domestic cotton pulp and imported wood pulp. All this has been largely done, including the closure of 11 out of 26 plants. The subsector has also received the largest portion of the Bank loan ($84 million or 59 percent of the credit line for two subprojects) for its Mills No. 4 and 5. These mills have been merged into a newly created joint stock company, Tianlong Paper Industry Corporation (TPIC), which was established under the new Company Law. Overall civil works and the physical installation of plant facilities is impressive. TPIC has now some of the most modem paper manufacturing facilities in China with the potential to produce high-quality papers of international standard. At the time of the implementation completion report (ICR) mission, the two mills were not in operation and had not been run continuously since the first attempts at test runs some six months earlier. Therefore, it is not possible to make any meaningful comments on plant operation. Discussions with plant staff and TPIC management revealed that there are a number of technical problems that will need to be resolved with the cooperation of the suppliers. 12. On the basis of available information, it appears that the equipment installed at both mills is generally acceptable and capable of producing the paper grades and qualities originally planned. The types of problems reported to the mission do not appear to be particularly unusual for the startup of a modem paper mill and, no doubt, can be solved through a cooperative approach of supplier and mill technical and operating staff. The initial startup and commissioning process to bring mills of this type to a level of continuous operation at consistently high levels of quality can be expected to take at least six months. 13. No. 4 mill plans to produce high-quality coated "Art Printing Paper" as originally planned. The very large domestic demand for this grade is currently being filled by imports and TPIC is confident that the 40,000 tons/year output of No. 4 mill will be easily consumed in the domestic market. Prices assumed in TPIC's forecast are comparable to prevailing prices though it may have to sell initially at 10-15 percent discount. No exports are planned. 14. No. 5 mill has considerably changed the originally planned grade mix. The original plan for No. 5 mill developed with the Tianjin authorities during the appraisal of TLIP involved a more rational use of cotton pulp, which at that time was used for producing toilet paper. It was agreed that production of high-quality writing papers with about 25 percent cotton content on a new paper machine and paper finishing line presented a good opportunity. This program seems to have been abandoned and the mill now plans to sell the cotton pulp in the domestic market and produce lower-grade paper from imported pulp. TPIC is of the view that both domestic and foreign demand for high- quality paper is not strong and therefore, as a temporary measure, it will produce lower- grade paper. As soon as the demand and prices have improved, it would shift to the production of high-quality paper based on a mix of cotton and wood pulp. Another major problem of TPIC is its financial structure. The two mills had large overruns that have been financed with loans. As a result, the company has a very heavy debt burden. According to financial projections prepared by CIB, it would not be able to service its debt fully even if it starts normal operations. This situation needs to be corrected by increasing the equity and retiring some of the long-term debt. 15. The following actions need to be taken urgently to solve the problems of TPIC and paper subprojects: (a) The most pressing operational problem for TPIC is the provision of working capital to allow completion of trial runs and commissioning the mills for full-scale commercial production. TMG should help in the arrangement of necessary funds. (b) TPIC, with the help of TMG, should restructure its capital so that it can have a reasonable equity base and a sound capital structure. Financial projections show that TPIC needs a debt:equity ratio of about 50:50 compared to the actual present ratio of 80:20. An improved capital structure would help to improve net income and debt servicing of TPIC once the two mills have started operations. (c) Additional assistance from the equipment suppliers is needed to help solve the various technical problems identified so far, as well as new problems that will show up as the machines move up to full speed and continuous operation. An understanding should therefore be reached with both the main suppliers as soon as possible. (d) At the same time that full-scale production is being developed, a vigorous marketing effort must be maintained to ensure an outlet for the production when it is achieved. (e) TPIC should explore the possibilities to find a joint-venture partner that can put equity investment and can also help in mill operation, quality improvement, and export of paper. 16. The strategy for the restructuring of the textile dyeing and finishing subsector included the processing of wider-width fabrics and greater design flexibility. This was to lead to enhancement in export capability and performance. While the above strategy has been implemented with five subprojects receiving $24.97 million in subloans, all the five subborrowers have continued to suffer losses and their financial position is unsatisfactory. So far, the enterprises have operated at high capacity, but some will close down in 1997 because they cannot absorb more losses and their working capital will be wiped out. Although the major reasons for the sector's problem are the global surplus of supply over demand and higher cotton prices; the situation in China has worsened because of the shortage of working capital, significant increase in prices of inputs, and competition with township and village enterprises (TVEs). In addition, the government has also reduced the rebate on textile exports from 17 percent to 9 percent in 1995. It is expected that a number of old textile plants will close and that the number of spindles in Tianjin will decrease from 600,000 at the end of 1994 to 400,000 at the end of the ninth five-year plan. In the medium to long term, this may be a good development and consistent with the general pattern of semi-industrialized and industrialized countries. Lower spinning will mean less demand for cotton, thus its lower prices. In addition, with limited high- quality textile production, there would be a need for high-quality and high-value-added dyeing and finishing that TLIP subprojects will be able to provide. 17. As regards the immediate future, the subsector should address the issues of lack of optimal utilization of new production facilities, surplus labor, and low concern for - 6- conservation of dyes and chemicals, energy and other inputs that are contributing factors for poor financial performance. The financial results can be improved through labor rationalization, savings in inputs, and higher sales revenues by product upgrading and efficient marketing. Direct export rights have not yet helped enterprises to maximize their export earnings because the managers are traditionally production-oriented and have not been exposed to marketing management and cost controls. They need to shift focus from the quantity of production to the profitability of enterprise. This would, in turn, require a different set of incentives for enterprise managers. 18. The following measures are planned for improving the cost efficiency of this subsector: (a) To reduce direct costs and overheads, industry standards will be set that all enterprises will have to follow. Standards should, however, be applied with flexibility so that the more enterprising managers may have the option to exceed them when they can earn higher profits. (b) The number of workers in No. 1 Dyeing and Finishing Mills has been reduced from 1,561 to 614 (with the monthly wage bill decreasing from Y 620,000 to Y 350,000). Other mills will also decrease the number of workers. (c) Some organizational changes have been made to help improve the operations and financial results of textile mills. For example, No. 4 Dying & Finishing Factory was amalgamated with a weaving factory in June 1995. At present, they are still separate legal entities with one headquarters but they will soon become a single legal entity. No. 4 mill will benefit from better access to gray cloth and improved working capital situation. No. 1 Printing and Dyeing Factory has formed collaboration with an industrial cloth factory and other textile mills with similar benefits as above. 19. The strategy for the restructuring of the packaging subsector included the balancing, modernization and expansion of production capacity to meet the growing demand for good-quality packaging material, particularly for export products. This subsector received $34.93 million in subloans for eight subprojects and has performed better than the other two subsectors. One subproject (Tianjin People's Printing House) has high sales and profits. It will pay off the outstanding subloan in the next 1-2 years. The Tianjin No. 1 Board Containers Mills is also doing well, formed a joint venture with a Japanese company and fully paid off the subloan. Plastic Factory No. 1 has marketing and working capital problems. The Tianjin Bureau of Finance has provided a working capital loan of Y 3 million and this will help to alleviate the problem to some extent. Plastic Factory No. 3 is operating at more than its capacity of 3,000 tons of BOP film and plans to reach a target of 5,000 tons at which level it will break even. It is suffering losses at present because its cost of production (Y 16,000/ton) is higher than the price (Y 15,000/ton). The price of BOP film has decreased by Y 5,000/ton over the last two years. Another subproject (Decal Printing Factory) cannot operate because its sole potential buyer-a bicycle manufacturer-has changed its product design and does not need decals. This factory has to explore other market potentials for it products and equipment and also seek the advice of its machinery suppliers for product diversification. The remaining two printing mills and one plate-making factory are also facing marketing and working capital problems. Two of them have joined themselves into a loosely formed - 7 - body called the Printing World to support each other financially and provide a better and more coordinated service to clients. 20. The following measures are planned to be taken to improve the performance of this subsector: (a) Enterprises will identify new products and new buyers for their products. In this connection, they will seek the help of foreign experts (including advice from machinery suppliers), market research institutes in China, and trading companies. (b) TMG will help the enterprises in obtaining necessary working capital. (c) Dongfonghong Printing Mill, No. 2 Printing House, Plate Making Mill and Decal Printing Mill are likely to merge into the newly formed Printing World as one legal entity and, thus, have the economies of scale, savings in overheads, and better service to clients. 21. Technical Assistance. The original plan was to strengthen 11 design and research institutes and vocational training schools in the three subsectors of the project at an estimated cost of Y 50.6 million, including the Bank loan of $11.7 million. The work on nine institutes and schools has been completed except for the training of the Textile Training Center's staff and the testing of equipment of the Packaging Research Institute. This was to be completed by October 1997. As regards the remaining two institutes, the Textile Research Institute has become a business enterprise and the Packaging School has been closed down. The actual cost of this component is Y 89.09 million including a Bank loan of $8.88 million. It has contributed to the import of new equipment and training of 345 staff. After the completion of this component, the number of clients increased from 240 to 324 and the number of contracts from 512 to 672. Also, the value of contracts has increased. The design institutes' financial performance is satisfactory. The research institutes and training schools cannot yet cover their costs but this was not contemplated in the project design. 22. Three studies have also been completed under the project: (a) a study of pulp and paper subsector to prepare its development strategy, (b) a study of management systems to improve organization, systems and procedures in the paper and textile dyeing and finishing subsectors, and (c) a study to help prepare a long-term industrial development strategy for Tianjin. The studies have been beneficial to the concerned industries and TMG in the preparation of the ninth five-year plan. The management system study's recommendations had been implemented with the help of consultants in two factories as a pilot project. These need to be fully replicated in other paper and textile factories to improve efficiency and cost savings. 23. The implementation of the TA component was generally satisfactory, although there were delays, particularly in staff training and selection of consultants for studies. D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 24. Loan Effectiveness and Implementation Schedule. The loan was approved by the Board on February 21, 1989. It was expected to become effective on May 21, 1989 and to close on June 30, 1995. The effectiveness was delayed by seven months to December 7, 1989 and the closing by two years to June 30, 1997. The main reason for the - 8 - delay in loan closing was that four subprojects under the loan required ICB procedures and this took a considerably long time because of the inexperience of the financial intermediary, the foreign trade corporation, and the subborrowers. The delay was particularly significant in the case of two paper subprojects that took much longer to complete due to ICB procedures, cost overruns and problems in arranging counterpart funds to finance overruns. Although about 85 percent of the loan amount had been disbursed by the original closing date of June 30, 1995, the extension in this date was necessary to allow payments to be made to suppliers upon the completion of performance guarantees, which could only take place upon the completion of buildings and erection and installation of all the equipment. 25. Loan Categories. The Bank approved, in July 1995, certain changes in loan categories and allocation between the paper and other subsectors to help finance overruns in the foreign currency cost of the two paper mills by utilizing savings in other categories and subsectors. The actual loan utilization by individual subsectors and TA components as mentioned in paras. 11 to 21 is consistent with these changes. 26. Subproject Implementation and Performance. Five out of 15 subprojects were completed on schedule or earlier; three with a delay of one year; two with a delay of two years; and five with a delay of three/four years. The total cost of restructuring of enterprises was $305.27 million equivalent (or Y 2,539.1 million) compared to the original estimate of $211.6 million equivalent (or Y 1,787.3 million). The cost overruns in individual subprojects ranged from 27 percent to almost 300 percent (in renminbi) and were the result of the devaluation of the yuan (from Y 3.72=$1.00 at the time of appraisal to Y8.3=$1.00 in 1996), delays in the implementation of some subprojects, and lower cost estimates, particularly for paper subprojects. Eleven out of 13 subprojects had high capacity utilization ranging from 60 to 100 percent during the second year of operation but only 4 out of 13 completed subprojects were making profits, although these were generally very small and much lower than estimates. The financial position of most of the subborrowers was poor as indicated by low current ratio (7 subprojects with a ratio of less than 1:00) and high debt:equity ratio (13 subprojects with a ratio of more than 2:1 and in many cases even more than 10:1). The high cost of inputs, (including raw materials and utilities), without a corresponding increase in the price of outputs, is a major factor responsible for enterprise losses or low profits. In addition, delays in subproject completion and overruns in capital cost have also contributed to poor financial position and results. The debt servicing of all but two subborrowers is poor; they are not making even full interest payments. 27. At the time of subproject approval, CIB had estimated the ERR and FRR to range from 15.37 to 49.7 percent and 15.3 to 75.3 percent, respectively. CIB's revised estimates, based on actual cost and current revenue projections, of the ERR and FRR range from 0.4 to 20.6 percent and from 2 to 16.5 percent, respectively. Most of the subprojects would now have an ERR and FRR of less than 12 percent (required in the subproject financing criteria). The main reasons for the lower ERR and FRR are the same as given in the above paragraph for the poor financial position of enterprises. - 9 - 28. All subprojects have been equipped with pollution control equipment and visits to the plants have not shown any environmental problems as a result of these subprojects. As regards the paper mills, until such time that they are in continuous operation, it is not possible to measure their impact on environment but it is expected that considerable improvement will be achieved over the preproject situation. Improvements will be realized through closure of old production facilities, provision of new high-efficiency boilers with tall stacks, and installation of wastewater treatment facilities. 29. Major Factors affection Subsectoral Performance. The three subsectors of the project, like the rest of China, are facing four generic problems that are affecting the operations of enterprises despite reforms and technical modernization and restructuring. These are management, marketing, surplus labor and working capital. (a) Management. Traditionally, the main focus of enterprises in China has been on production. The top management of enterprises normally has a technical background and its focus is on the quantity and quality of production. In the past, competition was nonexistent, the price was determined on a "cost-plus" basis, and the trading companies were generally responsible for selling products. The enterprise management is slow to adjust to the new competitive environment and still looks to the government to solve its problems. Similarly, enterprises have not taken full advantage of the direct export rights given to them. (b) Workers. The excessive number of redundant workers is a serious problem. Many factories, which are economically nonviable due to obsolete equipment, outdated technology and high cost of production, are being kept afloat through direct and indirect subsidies to provide employment to workers. Such factories need to be closed and their workers should be retrained and redeployed. However, sector corporations/bureaus should refrain from transferring such workers to existing factories with full employment. It was noted that the five dyeing and finishing factories have 7,621 workers, of whom 2,650 are redundant. Some of the redundant workers are still paid by the factories. (c) Marketing. The marketing function in enterprises is not getting adequate attention. The staff is relatively small and the sales budget is very limited -normally 1-1.5 percent of sales. The government has placed a cap on sales expenses of all SOEs but it is inconsistent with the principle of autonomy to enterprises. Marketing functions (including organization, staffing, distribution channels, market research, pricing policy, marketing strategy, sales promotion and advertisement campaigns, etc.) need to be given due importance in enterprises and sales expenses should be significantly increased. Services of professional experts should be engaged for market research (to guide production) and sales promotion. - 10- (d) Working Capital. There is a general shortage of working capital, which is affecting production and sales of enterprises. Many enterprises are using their internal funds for financing working capital rather than servicing their long-term debt. Banks need to relax their policy on lending for working capital. 30. The above problems are, to some extent, a reflection of the policy environment for industrial and financial sectors, which still face government's selective controls either directly or indirectly. Industry-related policies and incentives do not encourage enterprises to quickly adjust their cost and prices and respond to competition. Financial policies have created constraints on borrowing for working capital needs and, therefore, enterprises often use their internal cash generation for working capital financing rather than debt servicing or discharging their liabilities to other enterprises. This so-called triangular debt is a systemic problem in China and beyond the control of financial institutions. 31. Role and Financial Situation of CIB. The financial intermediary for the industrial restructuring component was CIB, which had delegated all appraisal and supervision functions to its Tianjin branch. As provided in the original project, it onlent to textile and packaging subsectors at its own risk while it served as a financial agent for TMG for the paper subsector. It performed appraisal and supervision of all subprojects. Looking back at the performance of subprojects, it becomes obvious that there was a need to be more conservative with regard to cost estimates and market prospects. Also, CIB's subloan repayment schedules have been too optimistic. Subborrowers cannot repay according to the short repayment period assigned to them. At the request of the Bank, the Tianjin branch prepared in June 1996 a plan for improvement in its loan recovery. The plan covered all 58 long-term borrowers of the branch, most of whom are in default, classified the nature of their problems in eight categories and specified appropriate actions for loan recovery. The branch has also created a special division to focus on arrears and loan recovery. It would be difficult for CIB to carry out many of the planned actions, particularly those that envisage the foreclosure of assets, legal action to enforce guarantees, closure of factories and removal of redundant labor. These issues have social consequences and the government is sensitive to any drastic actions on a large scale. As mentioned in the last paragraph, the loan recovery problems of banks will need to be resolved in the context of overall policy reforms. 32. A comparison of financial projections of CIB for 1988-92 (as prepared by CIB at the time of the project appraisal) and the actuals for that period shows that its gross income and net income were lower than estimates. This was mainly the result of inadequate mobilization of financial resources by CIB. In subsequent years, its financial position further declined because of poor loan recovery, which, in turn, is the result of exchange rate and tax policy changes and increased competition that have adversely affected its clients' ability to repay loans. At the end of 1996, its arrears were at 4.1 percent of the portfolio, the current ratio was 0.6: 1, and total liabilities were 22.4 times of equity-all less-than-satisfactory indicators. It long-term debt:equity ratio has been - 11 - within the revised maximum limit of 7:1 as agreed under the project. CIB has gone through structural changes beginning in 1995 and it is now functioning more like a commercial bank with greater focus on short-term lending. Consequently, its net income (after taxes) after reaching the low level of Y 45.6 million in 1994 has started to pick up and was Y 67.4 million in 1995 and Y 208.7 million in 1996. E. PROJECT SUSTAINABILITY 33. Enterprise reforms introduced as a part of the project have further intensified. The Chinese commitment to and the practice of gradual reforms based on experimentation indicate that the reform process will keep moving forward. The strengthening of institutional infrastructure is also beneficial and the design and research institutes and training centers are playing an increasingly important role and are becoming market- oriented because of the phaseout of government grants for their operations. They will continue to provide a useful service to the industry. The major issue relates to the enterprises restructured under the line-of-credit component of the project. Many of these enterprises have working capital shortages and face severe problems in the areas of marketing, cost and price structure, and social overheads. As a result, subprojects in paper and textile dyeing and finishing subprojects would not be able to make profits until 2000. Besides, two subprojects under dyeing and finishing have been closed because of shortage of working capital and continuous losses and there are no firm plans for their rehabilitation and startup. As regards the packaging subsector, three out of eight subprojects will continue to have losses up to 2000. Under the circumstances, the financial viability of most of the subprojects is not assured in the near future. Consequently, the overall sustainability of the project, from the perspective of subsectoral restructuring, is uncertain. F. BANK PERFORMANCE 34. - The Bank was actively involved in the preparation, appraisal and supervision of the project. The preparatory work included the study of the three subsectors of the project with the assistance of industrial economists, financial analysts and experts in paper, textile and packaging. Bank staff also assisted the Tianjin government in the preparation of the development program and the strategy for the project's subsectors. It was the first project of its kind in China in the sense that it took an all-inclusive approach in the restructuring of individual subsectors based on enterprise and institutional reforms at the municipal level, technical modernization, and improvements in organization and management systems. During implementation, Bank staff closely followed up the progress on various components of the project and provided advice on subproject appraisal and how to minimize delays and overruns. Staff promptly took up various project issues, particularly the arrangement of additional funds to finance the cost overruns, with the central and provincial governments and CIB and sought their assistance. Furthermore, in case of overruns and delays in subproject implementation, CIB was asked to reassess their viability and financial prospects and to advise the subborrowers to take early remedial measures. CIB was also advised to focus on its loan - 12- recovery and prepare special plans to lower its arrears. In addition, changes in project components and categories were discussed and agreed to when found justified in the interest of the project. All this was achieved through open, frank and continuous dialogue with project counterparts. The main project risks, i.e., implementation of policy and system reforms and implementation delays were identified at the time of appraisal but the delays could not be prevented in certain components. 35. With hindsight, the Bank staff should have paid greater attention to two areas. First, the cost estimates of the subprojects, particularly the two paper mills, were readily accepted by the staff based on the evidence presented by the Chinese side at the time of appraisal. There should have been a greater scrutiny of these estimates. Second, it was not realized at the time of appraisal that the counterparts would use the local office of the foreign trading corporation and that it did not fully understand the principles and procedures of international competitive bidding as required by the Bank. This led to confusion in the preparation of bidding documents and in the comparison of tenders, which resulted in implementation delays in three subprojects. Also, as CIB did not have the appropriate expertise, Bank supervision would have been perhaps more effective if technical experts would have also made frequent field trips. This was, however, not possible because of budget constraints. The Bank's overall performance, considering it role in identification, appraisal, and supervision, has been rated satisfactory. G. BORROWER PERFORMANCE 36. TMG had full commitment to the project. It started with the establishment of a team represented by the senior officials of all the concerned departments and agencies to coordinate the project preparatory work. The team worked very closely with Bank staff. A project management office was also established with senior and competent staff who worked with full devotion. TMG successfully introduced all the enterprise reforms agreed to under the project and has continued to advance this process. Also, all the institutional development activities were completed satisfactorily. In addition, all studies agreed under the project were completed with the help of international consultants. 37. All legal commitments were met by the borrower albeit with delays in the commitments of the central government [Section 3.01 (a) (i) of the Loan Agreement] and the municipal government [Section 2.01 (a) of the Project Agreement] regarding the provision of funds to meet project objectives. 38. CIB used the Bank's TA for the training of staff as provided in the project. However, its performance as a financial intennediary for the line-of-credit component was somewhat mixed. It was responsible for the appraisal and supervision of the subprojects and it carried out this activity with diligence, although it was passing through a learning curve. As a result, its market evaluation, cost estimates and capacity utilization targets turned out to be optimistic for some subprojects. Overall, the performance of the borrower (the government and CIB combined) has been rated as marginally satisfactory. - 13 - H. ASSESSMENT OF OUTCOME 39. The three components of the project have been implemented despite delays and cost overruns, which are more predominant in the two paper subprojects. The implementation of the project is considered satisfactory because of the introduction of enterprise reforms; restructuring of three subsectors with specialization in production, closure of noneconomic plants and polluting small pulp and paper mills, and import of modem equipment; improvement of technological infrastructure (support institutions); and completion of three important studies with the assistance of international consultants and partial implementation of their recommendations. Development objectives of the project have not been met as most of the restructured enterprises have financial difficulties and cannot service their debt. Furthermore, its sustainability is uncertain at this stage because if the market situation does not improve in the near future and additional working capital is not arranged urgently, paper mills will not be able to start operations and other loss-making enterprises and those with low profits may also close down. Consequently, the outcome of the project is considered unsatisfactory at present. I. FUTURE OPERATION 40. The project has provided a useful opportunity to officials of TMG, CIB and enterprises to learn new skills and methods of project planning, development and implementation and these will continue to be applied in their future activities. Research and design institutes and training centers will also continue to provide an important and unique service to the subsectors because of their well-trained staff and modem equipment. Future industrial development planning in Tianjin will be guided by various studies carried out by international experts. As regards the subprojects with operational and financial problems, certain actions need to be taken by the government, CIB and subborrowers that will help to minimize the current problems of enterprises and to turn them around over time. These actions were discussed and agreed to between the Tianjin side and the ICR mission and are presented below: (a) TMG will cause to arrange necessary working capital for paper mills No. 4 and 5. In addition, TMG will take measures to improve the debt:equity ratio of TPIC so that it becomes financially viable. (b) CIB will assess the additional working capital needs of all other subborrowers and work with TMG to arrange these funds. (c) TPIC will reach agreement as soon as possible with the two main machinery suppliers on the timing of their visit to Tianjin to help in the start of trial runs and solve the teething problems of paper mills. (d) Enterprises will shift their focus from production to marketing. They will try to identify new products and new buyers for their products. In this - 14- connection, they will seek the help of foreign experts (including advice from machinery suppliers), market research institutes in China, and trading companies, strengthen their sales and sales promotion departments, and send managers and staff for training in marketing. (e) Following the example of No. I Dyeing and Printing Mill, targets for labor reduction will be set for all other enterprises in textile and packaging subsectors and the surplus staff will be transferred by June 30, 1998. (f) Wherever appropriate and feasible, similar enterprises in a subsector will be merged into one legal entity to obtain economies of scale and savings in overheads. It has been already done for the paper subsector and is also planned for some of the enterprises in textile and packaging subsectors. (g) Enterprises will optimize the use of new equipment by diversifying the product mix (based on market research) and producing high value-added products. (h) Recommendations in the study of management systems prepared by international consultants will be implemented in all textile and paper mills and cost-cutting measures, including savings in various inputs-raw materials, energy, etc.-will be introduced by the end of 1997. (i) CIB will play a more active role in assisting subborrowers in solving their operational and financial problems. It will also be free to reschedule the loan repayment in justifiable cases and proceed with foreclosure proceedings where, in its opinion, there are little prospects for the rehabilitation of a subproject. (j) TMG, as the owner of enterprises, and the enterprises themselves, will actively seek joint-venture partners that can bring technical, marketing and management skills and help to turn around the loss-making enterprises and/or improve the profitability of other subborrowers. 41. Based on the successful implementation of above measures, new performance targets of subprojects were prepared by the Tianjin side and are attached to the ICR. These are rather conservative and show that the subborrowers will be able to reduce their losses or increase profits, although many of them will not be out of woods until the year 2000. J. KEY LESSONS LEARNED 42. Key lessons learned from this project are as follows: (a) The profitability of industrial projects is influenced by the country's overall macroeconomic and sectoral policies, institutional framework, and - 15 - competition. Projects undertaken in the context of limited reforms in a particular region may face problems because of constraints caused by overall national policies and changing global market situation. These constraints should be fully recognized in planning all profit-making activities and mitigating measures should be introduced before investment decisions. (b) Even when appropriate policy changes have been introduced, the culture of enterprises does not change swiftly. It takes time for the management and staff to adopt to the new policy environment and change their outlook, approach, strategies and actions. It would therefore be unreasonable to expect quick improvements in enterprise performance and results. However, major changes in organization, management, and staff will help to hasten the change process. (c) The assessment of market viability is of critical importance for industrial projects. Reliable sources of information for domestic demand and supply -both present and future-should be developed and modem techniques of market research should be introduced in institutes responsible for the preparation of project feasibility. As markets change with the lapse of time, projects should be implemented soon after their feasibility has been established; otherwise they may find themselves in an adverse market situation. Also, enterprises should shift their focus from production to marketing and this latter function should lead and guide all other activities of enterprises. (d) Financial institutions should strengthen their expertise in market assessment and cost estimates. In general, there is a need for being more conservative in estimates. This is an area of common weakness in most of the financial intermediaries and can only be removed by hiring well- qualified staff and intensive training. (e) A procurement plan should be prepared and agreed during project preparation for all components requiring international competitive bidding. Also, bidding documents should be completed before negotiations. This will avoid confusion about the procedures during implementation and expedite project completion. (f) Technical staff/consultants should participate in Bank's project supervision missions more frequently and the necessary budget should be provided for this purpose. (g) In China, counterpart funds needed as per the original financial plan prepared at the time of project approval are normally made available on a timely basis. However, it becomes difficult and time-consuming to mobilize additional funds to finance cost overruns despite government's - 16- blanket commitment to arrange funds as needed to complete the project. The paper mills in this project are a relevant example. This issue should be discussed between the Bank and the government and an amicable agreement should be reached to solve this perennial problem. - 17- PART Il: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues X Other social objectives X Environmental objectives X Public sector management X Private sector development X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X D. Borrower Performance Highly Satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance X Operation (if applicable) x E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory x - 18 - TABLE 2: RELATED BANK LOANS/CREDITS Year of Loan/Credit Title Purpose Approval Status Ln. 2226-CHA/ To assist CIB in meeting the need for foreign exchange for industrial 1983 Completed Cr. 1313-CHA financing, improving investment efficiency, and organizing and First Industrial Credit improving CIB's capacity for project design, selection, appraisal and Project ($71.5 million) technology transfer. Ln 2434-CHA/ To continue the institutional building efforts of the first project, 1984 Completed Cr. 1491-CHA including expanding branches, assist in appraisal of larger projects Second Industrial Credit and meet CIB's resource requirement. Project ($183.2 million) Ln 2658-CHA/ To assist CIB in financing productive facilities and resources in China 1986 Completed Cr. 1663-CHA to contribute to the country's economic and social development; to Third Industrial Credit provide CIB with funds needed to develop its operations and carry out Project ($103.6 million) its Charter and Statement of Policy Strategy. Ln 2783-CHA/ To assist the government in promoting and implementing technology 1987 Completed Cr 1763-CHA upgrading and modernization in industry, to build up sound Fourth Industrial Credit institutions and procedures for project appraisal and investment Project ($300 million) financing and to improve intermediation practices; specifically, to continue institutional assistance to CIB and provide a general line of credit for industry. Ln. 2784-CHA To assist the Shanghai Municipality to achieve product rationalization 1987 Completed Shanghai Machine Tool and product upgrading; modernization and rehabilitation of Project ($100 million) manufacturing facilities; expansion of the design and engineering capabilities; and improvements in management systems for the machine tool sector within Shanghai. Ln. 2838-CHA Fertilizer To improve the production efficiency of existing medium-size plants 1987 Completed Rationalization Project through plant renovations and upgrading technologies; expand ($97.4 million) phosphate production to help achieve a more balanced nutrient input; and improve institutional capacity through the introduction of more modem systems and techniques in financial and operational management Ln. 2943-CHA To assist the govermment expand pharmaceutical production by using 1988 Completed Pharmaceutical Project modem technology; improve the quality of the products and introduce ($127 million) Good Manufacturing Practices (GMP) in selected enterprise and training programs; and improve the quality, maintenance, marketing and management in the pharmaceutical industry. Ln. 3075-CHA Continuation of activities under the Fourth Industrial Credit Project. 1989 Completed Fifth Industrial Credit Project ($300 million) Ln. 3274/ Cr. 2186/ To assist the Chinese government's ongoing Spark Program, which 1990 Completed JGF27230-CHA seeks to upgrade standards of technology and management of China's Rural Industrial rapidly growing rural TVEs. In three representative areas, the project Technology (Spark) supports demonstration enterprise modernization subprojects in rural Project industries, upgrade the "Spark training program" for rural enterprise ($114.3 million) staff and help an existing technology information system reorient its focus to small enterprises. - 19- Year of Loan/Credit Title Purpose Approval Status Ln. 3582-CHA To assist the local authorities in Southern Jiangsu to strengthen their 1993 to be Southern Jiangsu environmental planning and management capabilities, and to caffy out completed Environmental priority initiatives in the regional environmental strategy and action 06/30/2001 Protection Project plans in an efficient and effective manner. ($250 million) Ln. 3788-CHA Support Shenyang Municipal Government's reform program through 1994 to be Shenyang Industrial the joint SMG/Bank monitoring of implementation of a Reform completed Project Action Program and the provision of technical assistance and training 06/3012001 ($175 million) to underpin key aspects of SMG's reorganization. The project also supports two investment components: industrial restructuring and corporatization, and environmental protection. Ln. 4045-CHA To assist Chongqing Municipality to: (a) achieve a significant 1996 to be Chongqing Industrial reduction in pollution and restructure productive facilities from its completed Reform Project most polluting industries, iron and steel; (b) establish a strategy and 12/31/2002 ($170 million) prepare a long-term plan to achieve a major reduction in pollution for the whole sector; and (c) initiate a pilot effort to assist industrial enterprises in other industrial sectors to restructure their productive facilities, control pollution and transform themselves into modem corporations. TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual Identification March 1987 March 1987 Preappraisal November 1987 November 1987 Appraisal March 1988 November 1987 Negotiations June 1988 December 5, 1988 Board presentation February 21, 1989 February 21, 1989 Signing March 15, 1989 September 8, 1989 Effectiveness May 21, 1989 December 7, 1989 Project completion June 30, 1995 September 30, 1997 Loan closing June 30, 1995 June 30, 1997 - 20 - TABLE 4: LoAN/CREDIT DISBURSEMENT: CUMULATIVE ESTIMATE AND ACTUAL ($ million) FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 Appraisal estimate 8.8 27.7 77.0 112.4 138.6 154.0 Actual 4.0 20.59 43.56 52.38 81.58 139.20 147.42 153.27 Actual as % of appraisal estimate 45 74 57 47 59 90 n.a. n.a. Date of final disbursement TBD TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Key implementation indicators in SAR Estimat4d date of Actual date of completion completion A. General Loan Effectiveness May 1989 December 7,1989 B. Utilization of Industrial Credit Component by CIB Last date for subproject submission June 1992 February 1991 Last date for loan withdrawal June 1995 TBD C. Implementation of Technical Assistance Component Development of Institutional Infrastructure Selection of suppliers October 1989 October 1996 Completion of civil works December 1989 December 1995 Start of use of new equipment June 1990 December 1992 Commencement of staff training January 1990 January 1992 Completion of staff training December 1991 June 1994 Enterprise Management Study Commencement October 1989 March 1991 Completion September 1990 May 1992 Paper Subsector Study Commencement October 1989 April 1991 Completion April 1990 March 1992 Studies for Industrial Development Strategy of Tianjin Commencement January 1990 December 1990 Completion December 1991 May 1994 Consultant Services for Light Industry Commencement July 1989 August 1990 Completion December 1994 June 1991 CIB staff training Commencement January 1990 March 1992 Completion December 1991 April 1992 - 21 - TABLE 6: KEY INDICATORS FOR PROJECT OPERATIONS The key indicators for project operations were in terms of (a) enterprise reforms that have all been carried out, and (b) operations and financial performance of subprojects financed under the line of credit. The comparison of projected and actual results of subprojects is indicated in Appendix D. TABLE 7: STUDIES INCLUDED IN PROJECT Study Purpose as defined at Appraisal/Redefined Status Impact of Study Pulp and Paper The purpose of the study was to assist the Completed It assisted in the Subsector Study Tianjin Paper Corporation to prepare a March development of pulp medium- and long-term development plan 1992 and paper sector for the subsector. The study provided including the closure analysis of the following topics: the of many small domestic market, export markets, raw polluting plants. material base, technology and scale of operations, alternative development strategies and centralized pulping and waste paper operations. Internal Enterprise, The study was intended to strengthen the Completed Greater efficiency and Organization and enterprise management systems in May 1992 cost-saving was Management Tianjin's textile dyeing and finishing and achieved in the Systems Study pulp and paper subsectors with the main subsectors. objective of improving their productivity, efficiency and competitiveness. Industrial The main purpose of the study was to Completed It contributed to the Development assist the Tianjin government to prepare a May 1994 preparation of five- Strategy for Tianjin long-term overall industrial development year plan and strategy. restructuring plans for major subsectors in Tianjin. - 22 - TABLE 8A: PROJECT COSTS (Yuan million) Appraisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total Technology Restructuring of Enterprises Capital Costs: Textile Dyeing and Finishing 50.6 128.7 179.3 111.36 204.11 315.47 Pulp and Paper 155.0 234.4 389.4 854.03 646.77 1,500.80 Packaging 26.1 125.0 151.1 117.53 289.53 407.06 Subtotal 231.7 488.1 719.8 1,082.92 1,140.41 2,223.33 Incremental working capital 30.3 37.2 67.5 259.53 56.25 315.78 Subtotal for Enterprise Restructuring 262.0 525.3 787.3 1,342.45 1,196.66 2,539.11 Technical Assistance Development of Technology Infrastructure 7.1 43.5 50.6 15.23 73.86 89.09 Others 0.7 4.1 4.8 7.32 8.81 16.13 Subtotal 7.8 47.6 55.4 22.55 82.67 105.22 Preparation of Overall Industrial Strategy 0.2 3.7 3.9 6.78 6.78 Total 270.0 576.6 846.6 1,365.00 1,286.11 2,651.11 - 23 - TABLE 8B: PROJECT COSTS ($ million) Appraisal estimate Actual/atest estimate Item Local Foreign Total Local Foreign Total Technology Restructuring of Enterprises Capital Costs: Textile Dyeing and Finishing 13.6 34.6 48.2 13.39 24.54 37.93 PulpandPaper 41.7 63.0 104.7 102.68 77.76 180.44 Packaging 7.0 33.6 40.6 14.13 34.81 48.94 Subtotal 62.3 131.2 193.5 130.20 137.11 267.31 Incremental working capital 8.1 10.0 18.1 31.20 6.76 37.96 Subtotal for Enterprise Restrcturing 70.4 141.2 211.6 161.40 143.87 305.27 Technical Assistance Development of Technology nfiastructure 1.9 11.7 13.6 1.83 8.88 10.71 Others 0.2 1.1/a 1.3 0.88 1.06 1.94 Subtotal 2.1 12.8 14.9 2.71 9.94 12.65 Preparation of Overall Industrial Strategy 0.1 1.0 1.1 0.82 0.82 Total 72.6 155.0 227.6 164.11 154.63 318.74 La Includes $0.5 million for enterprise organization and management systems study, $0.3 million for pulp and paper subsector study, $0.3 million for consultancy services for light industry, and $0.05 million for CIB staff training. - 24 - TABLE 8c: PROJECT FINANCING ($ million) Appraisal estimate Actual/late estimate Source Local Foreign Total Local Foreign Total Bank loan/credit - 155.0 155.0 - 154.6 154.6 Other loans } } } 162A - 162.4 } 72.6 } } 72.6 Self-financing } } } 1.7 - 1.7 Total 72.6 155.0 227.6 164.1 154.6 318.7 TABLE 9: ECONOMIC COSTS AND BENEFITS These figures have been included in Appendix E. - 25 - TABLE 10: STATUS OF LEGAL COVENANTS Cove- Original Revised Agree- nant Present fulfillment fulfillment ment Section type Status date date Description of covenant Comments LOAN 3.01 (a) (i) 4 CD The Government shall cause Tianjin Working capital Municipality and CIB to provide necessary funds being arranged funds to meet project objectives. for paper mills. PROJECT 2.01 (a) 4 CD Tianjin Municipality shall provide or cause Working capital to be provided necessary funds. funds being amnged for paper mills. Schedule 2, 10 C Tianjin Municipality shall carry out Complied with para 2 various studies. CIB 3.01 1 C CIB shall maintain accounts and financial Complied with statements and submit to the Bank no later than 6 months after the end of each year. CIB 3.02 1 C CIB shall maintain debt/equity ratio of no Complied with more than 5:1. The Bank revised this limit to 7:1 in June 1994. Covenant Class: Status: I = Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay generation from beneficiaries 10 = Project implementation not CP = complied with partially 3 = Flow and utilization of project covered by categories 1-9 funds 11 = Sectoral or cross-sectoral 4 = Counterpart funding budgetary or other resources 5 = Management aspects of the allocation project or executing agency 12 = Sectoral or cross-sectoral policy/ 6 = Environmental covenants regulatory/institutional action 7 = Involuntary resettlement 13 = Other TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS There was no significant lack of compliance with an applicable Bank Operational Manual Statement (OD or OP/BP) TABLE 12: BANK RESOURCES: STAFF INPUTS FY 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Preappraisal 24.9 61.4 126.7 213.0 Appraisal 9.1 9.1 Negotiations 2.7 9.8 12.5 Supervision 6.6 18.8 10.0 12.9 10.5 5.3 9.5 11.2 10.3 95.1 Completion 2.4 7.6* 10.0 Total 339.7 * estimate. - 26 - TABLE 13: BANK RESOURCES: MISSIONS Performance rating Specialized Imple. Devel- Stage of project cycle Month/ Number of Days staff skills mentation opment year persons in field represented La status Lt objectives Type of problems Identification 3/87 3 8 FA,EN Preparation 7/87 8 20 FA,EN,EC Preappraisal 11/87 3 17 FA,EN,EC Appraisal 11/87 Postappraisal 5/88 1 3 FA Negotiation 12/88 8 5 EC, EN, LC Board approval 2/21/89 1 Signing 9/8/89 Effective 12/7/89 Supervision 1 9/89 2 14 FA TA implementation slow Supervision 2 3/90 2 7 FA same Supervision 3 7/90 1 7 FA same Supervision 4 1/91 1 7 FA same Supervision 5 6/92 1 7 FA same Supervision 6 6/93 1 8 FA 2 2 Supervision 7 7/94 2 7 FA 3 3 Completed subprojects had losses and poor debt servicing Supervision 8 5/95 2 5 FA, 00 3 3 same Supervision 9 11/95 3 5 FA, 00 3 3 same Supervision 10 5/96 3 5 FA, 00 2 3 same Supervision 11 11/96 5 7 FA, 00 2 3 same Completion 7/97 4 7 FA,EN,OO 2 3 same La EC: Economist; EN: Engineer; FA: Financial Analyst; LC: Legal Counsel; 00: Operation Officer; L 1: Highly satisfactory; 2: Satisfactory -27- APPENDIX A APPENDIX A: ICR MISSION'S AIDE MEMOIRE Introduction 1. A World Bank's ICR mission, comprising Zafar Shah Khan, Task Manager, Lu Nai Qin, Operations Officer, Raymond Chalk, Paper Specialist/consultant, and Amanda Hagy, Staff Assistant visited Tianjin from July 1 to July 10, 1997 for the preparation of ICR for TLIP. The mission also supervised the Tianjin Industrial Development Project. The mission met the officials of the Tianjin Municipal Government (TMG), the Tianjin World Bank Loan Office (TWBLO), CIB, and various subproject entities. The mission acknowledges with thanks the hospitality and cooperation received during its visit. Mission's main findings, conclusions, and understandings, which are subject to review by the Bank management, are recorded in this aide memoire. 2. The project has three main components; viz. enterprise reforms; restructuring of textile dyeing and finishing, packaging and paper subsectors; and technical assistance; which are discussed below: Enterprise Reforms 3. All the enterprise reforms agreed with the Tianjin Municipal Government (TMG) have been carried out. Price and production controls on the three subsectors have been removed and these are determined by market forces. Enterprises pay taxes on their income at a fixed rate instead of the remittance of entire net income to the government or profit contracts as practiced in the early period of reforms. Enterprises have been given the direct export rights. All new workers are hired on the basis of fixed contracts. Enterprises are free to choose their bank and vice versa. TMG uses economic and financial criteria (including ERR and FRR) in its investment decision-making process. In fact, the enterprise reforms in China, including Tianjin, have advanced over the last ten year period much further than contemplated at the time of preparation of this project. Nevertheless, as noted from the performance of subprojects financed under the Bank loan, the culture of most of the SOEs still needs significant additional changes. In particular, enterprise management has to be less dependent on the government, more market oriented and profit conscious, and show greater financial discipline. At the same time, SOEs need to be fully absolved of the social burden and surplus workers. Subsector Restructuring 4. The three subsectors of the project have been restructured in accordance with the strategies and programs agreed at the time of project preparation. However, most of the 15 subprojects financed under the Bank loan, have unsatisfactory operational performance and financial position as shown in Annex 1. -28 - APPENDIX A 5. The pulp and paper subsector (with two subprojects) has received the largest portion of Bank loan (59 percent of the credit line) for its Mills No. 4 and 5. These mills have been merged into a newly created company, viz. Tianlong Paper Industry Corporation (TPIC). The mission was favorably impressed with the overall physical installation of the civil works and the plant facilities. TPIC has now some of the most modem paper manufacturing facilities in China with the potential to produce high quality papers of international standard. At present, the two mills are not in operation and have not been run continuously since the first attempts at test runs some six months earlier. Therefore, it is not possible to make any meaningful comments on the plant operation. The mission was informned that neither mill has completed guarantee runs as specified in the contracts with suppliers, and unfortunately all funds have now been paid to the suppliers due to delays in completion. Furthermore, discussions with plant staff and TPIC management have revealed that there are a number of problems which will need to be resolved with the cooperation of the suppliers. The Austrian supplier of No. 4 paper mill, Voith, is scheduled to return to Tianjin in mid-July 1997 to continue trial runs primarily to continue improvements in paper quality. In the case of No. 5 mill, there is currently no schedule for the return of the Italian supplier, Overmechanica, although the company and the supplier have held meetings in Tianjin in March, 1997, and have prepared a list of the major problem areas needing attention. A date for their return should also be agreed as soon as possible. 6. On the basis of available information, it is the mission's present opinion, that the equipment installed at both mills is generally acceptable and capable of producing the paper grades and qualities originally planned. The types of problems reported to the mission do not appear to be particularly unusual for the startup of a modern paper mill, and no doubt can be solved through a cooperative approach of supplier and mill technical and operating staff. The initial startup and commissioning process to bring mills of this type to a level of continuous operation at consistently high levels of quality can be expected to take at least six months. 7. Grade Mix and Markets. No. 4 mill plans to produce high quality coated "Art Printing Paper" as originally planned . The very large domestic demand for this grade is currently being filled by imports and TPIC is confident that the 40,000 tons/year output of No. 4 will be easily consumed in the domestic market. No exports are planned. The mission generally agrees with this program but wishes to point out the necessity of maintaining an active domestic marketing program with continuous contacts with consumers. 8. No. 5 mill has considerably changed the originally planned grade mix and the mission questioned the validity of such changes. The original plan for No. 5 mill developed with the Tianjin authorities during the appraisal of TLIP involved a more rational use of cotton pulp which at that time was used for producing toilet paper. It was agreed that production of high quality writing papers with about 25 percent cotton content on a new paper machine and paper finishing line presented a good opportunity. This program seems to have been abandoned and the mill now plans to sell the cotton pulp in -29- APPENDIX A the domestic market. There seems to be some confusion about the production of so-called "Bond Paper", and a perception that such paper is limited to legal security papers, or perhaps for currency. TPIC is concerned that such paper is government controlled and not a suitable market for No. 4 mill. It is the mission's understanding that the original plan was never to produce currency paper (the mill and raw materials are not suitable) and that legal papers with consumer's own security water marks would not be part of the mill's production. The original intention was to produce high quality writing papers, watermarked with the mill's identification, and indication of its cotton content. Such papers, if quality is high, currently sell in international markets at prices ranging from $2000-3000/ton. It was to enter such markets, export and domestic, that No. 5 mill was designed. The mission does not agree with the current plan to produce lesser lower grade paper. Furthermore, the mission is not convinced of the viability of producing cotton pulp for sale in the domestic market. Bleached cotton pulp is not a commodity which is commonly, if ever, traded in the industry. Mills produce cotton pulp for internal consumption to make high quality paper in blends with wood pulp. The mission thinks it is unlikely that domestic mills would be prepared to pay the high price (equivalent to about $1000/ton) assumed in the mill's financial projections. The mission therefore recommends that TPIC reconsider the grade mix at No. 5 mill. TPIC is of the view that both domestic and foreign demand for high quality paper is not strong and therefore, as a temporary measure, it will produce lower grade paper. As soon as the demand and prices have improved, it would shift to the production of high quality paper based on a mix of cotton and wood pulp. The mission was also informed that the cotton pulp will be sold for making car filters and there is a buyer at a price of $1 000/ton. 9. Another major problem of TPIC is its financial structure. The two mills had large overrums which have been financed with loans. As a result, the company has a very heavy debt-burden. According to financial projections prepared by CIB, it would not be able to service its debt fully even if it starts normal operations. This situation needs to be corrected by increasing the equity and retiring some of the long-term debt. 10. The following actions are urgently needed to solve the problems of TPIC and paper subprojects: * The most pressing operational problem for TPIC is the provision of working capital to allow completion of trial runs and commissioning the mills for full scale commercial production. The two idle mills are costing about Y 10 million per month in interest payments alone. TMG should help in the arrangement of necessary funds. * TPIC, with the help of TMG, should restructure its capital so that it can have a reasonable equity base and a sound capital structure. Financial projections show that TPIC needs a debt/equity ratio of about 50:50. An improved capital structure would help to improve net income and debt-servicing of TPIC once the two mills have started operations. -30 - APPENDIX A * Additional assistance from the equipment suppliers is needed to help solve the various problems identified so far, as well as new problems which will show up as the machines move up to full speed and continuous operation. An understanding should therefore be reached with both the main suppliers as soon as possible. * At the same time that full scale production is being developed, a vigorous marketing effort must be maintained to ensure an outlet for the production when it is achieved. * TPIC should explore the possibilities to find a joint venture partner who can put equity investment and can also help in mill operation, quality improvement, and export of paper. 11. The textile dyeing and finishing subsector (with five subprojects) has suffered continuous losses. So far the enterprises have operated at high capacity, but some will close down in 1997 because they can not absorb more losses and their working capital would be wiped out. Although the major reasons for the sector's problem are the global surplus of supply over demand and higher cotton prices; the situation in China has worsened because of shortage of working capital, significant increase in workers' wages and prices of inputs, and competition with TVEs. In addition, the government has also reduced the rebate on textile exports from 17% to 9% in 1995. It is expected that a number of old textile plants will close and that the number of spindles in Tianjin will decrease from 600,000 at the end of 1994 to 400,000 at the end of 9th five year plan. In the medium- to long-term, this may be a good development and consistent with the general pattern of semi-industrialized and industrialized countries. Lower spinning will mean less demand for cotton thus its lower prices, In addition, with limited high quality textile production, there would be a need for high quality and high value-added dyeing and finishing that TLIP subprojects will be able to provide. 12. As regards the immediate future, an earlier Bank mission had pointed out that weaknesses in operation, management, and marketing have also contributed to losses. Lack of optimal utilization of new production facilities, surplus labor, and low concern for conservation of dyes and chemicals, energy and other inputs are contributing factors for poor financial performance. The financial results can be improved considerably through labor rationalization, savings in inputs, and higher sales revenues by product upgrading and efficient marketing. Direct export rights have not yet helped enterprises to maximize their export earnings because the managers are traditionally production oriented and have not been exposed to marketing management and cost controls. They need to shift focus from the quantity of production to the profitability of the enterprise. The mission was informed that several measures are planned for improving cost efficiency: * To reduce direct costs and overheads, industry standards will be set that all enterprises will have to follow. The mission advised that the standards should - 31- APPENDIX A be applied with flexibility so that the more enterprising managers may have the option to exceed them when they can earn higher profits. * The number of workers in No. I Dyeing and Finishing Mills has been reduced from 1,561 to 614 (with the monthly wage bill decreasing from Y 620,000 to Y 350,000). Other mills will also decrease the number of workers. * Some organizational changes have been made to help improve the operations and financial results of textile mills. For example, No. 4 Dyeing & Finishing Factory has been amalgamated with a weaving factory in June 1995. At present, they are still separate legal entities with one headquarters but they will soon become a single legal entity. No. 4 mill will benefit from better access to gray cloth and improved working capital situation. No. 1 Printing and Dyeing Factory has formed collaboration with an industrial cloth factory and other textile mills with similar benefits as above. 13. The packaging subsector (with eight subprojects) has done a little better. One subproject (Tianjin People's Printing House) has high sales and profits. It will pay off the outstanding subloan in the next 1-2 years. The Tianjin No. 1 Board Containers Mills was also doing well but it has formed a joint venture with a Japanese company and fully paid off the subloan. Plastic Factory No. 1 has marketing and working capital problems. Tianjin Bureau of Finance has provided a working capital loan of Y3 million and this will help to alleviate the problem to some extent. Plastic Factory No. 3 is operating at more than its capacity of 3,000 tons of BOP film and plans to reach a target of 5,000 tons at which level it will break-even. It is however, suffering losses at present because its cost of production (Y 16,000/ton) is higher than the price (Y 15,000/ton). The price of BOP film has decreased by Y 5,000/ton over the last two years. Another subproject (Decal Printing Factory) cannot operate because its sole potential buyer-a bicycle manufacturer -has changed its product design and does not need decals. This factory has to explore other possible uses of its equipment and seek the advice of its machinery suppliers. The remaining four printing mills are also facing marketing and working capital problems. Two of them have joined themselves into a loosely formed body, called the Printing World, to support each other financially and provide a better and more-coordinated service to clients. The mission was informed that the following measures will be taken to improve the performance of this subsector: * Enterprises will identify new products and new buyers for their products. In this connection, they will seek the help of foreign experts (including advice from machinery suppliers), market research institutes in China, and trading companies. * TMG will help the enterprises in obtaining necessary working capital. * Dongfonghong Printing Mill, No. 2 Printing House, Plate Making Mill and Decal Printing Mill are likely to merge into the newly formed Printing World - 32 - APPENDIX A as one legal entity and, thus, have the economies of scale, savings in overheads, and better service to clients. Technical Assistance 14. The original plan was to strengthen eleven design and research institutes and vocational training schools in the three subsectors of the project at an estimated cost of Y50.6 million, including the Bank loan of $11.7 million. Two institutes were later dropped because of organizational changes. The work on remaining nine institutes and schools has been completed except for some training of the Textile Training Center's staff and the testing of equipment of the Packaging Research Institute. This will also be completed by October 1997. The actual cost of this component is Y89.09 million including a Bank loan of $8.88 million. It has contributed to import of new equipment and training of 345 staff. After the completion of this component, the number of clients has increased from 240 to 324 and the number of contracts from 512 to 672. Also, the value of contracts has increased. The design institutes' financial performance is satisfactory. The research institutes and training schools can not yet cover their costs but this was not contemplated in the near future. 15. Three studies have also been completed under the project: (a) a study of pulp and paper subsector to prepare its development strategy, (b) a study of management systems to improve organization, systems and procedures in paper and textile dyeing and finishing subsectors, and (c) a study to help prepare long-term industrial development strategy for Tianjin. The studies have been beneficial to the concerned industries and TMG in the preparation of the ninth five-year plan. The management system study's recommendations had been implemented with the help of consultants in two factories as a pilot project. These need to be fully replicated in other paper and textile factories to improve efficiency and cost-savings. 16. The implementation of the TA component was generally satisfactory though there were delays, particularly in staff training and selection of consultants for studies. Overall Assessment 17. All the three components of the project have been implemented despite delays and cost overruns which are more prominent in paper subprojects. All the loan covenants have been met except that the commitments of the central government [Section 3.01 (a) (i) of the Loan Agreement] and the municipal government [Section 2.01 (a)] regarding the provision of funds to meet project objectives have been met with delays. The implementation of the project is considered satisfactory because of the introduction of enterprise reformns; restructuring of three subsectors with specialization in production, closure of non-economic plants and polluting small pulp and paper mills, and import of modern equipment; improvement of technological infrastructure (support institutions); and completion of three important studies with the assistance of international consultants and partial implementation of their recommendations. However, the development objectives of the project have not been met as most of the restructured enterprises are not -33 - APPENDIX A yet financially viable and can not service their debt. Consequently, the project is considered unsatisfactory on this account. Furthermore, its sustainability is uncertain at this stage because if the market situation does not improve in the near future and additional working capital is not arranged urgently, paper mills will not be able to start operations and other loss-making enterprises will also close down. 18. CIB is the financial intertnediary for the line of credit component of the project. It has onlent to textile and packaging subsectors at its own credit risk and to the paper subsector as an agent for TMG because of the large size of the subprojects. It is obvious from the experience of the subprojects in the three subsectors of TLIP that CIB needs to be more careful in market evaluation of subprojects and conservative in cost estimates an'capacity utilization targets. During implementation, it should identify up-coming problems at an early stage and initiate prompt action to alleviate these problems with the help of owners (in this case, TMG), other banks, and the enterprise management. Also, it should proceed with legal action and foreclosure of security (assets of the subborrowers) when it sees no other prospects of loan recovery. Operational Plan and-Performance Targets 19. The operational plan of the project should focus on the immediate start of paper subprojects and alleviation of problems of loss-making enterprises in textile dyeing and finishing and packaging subsectors. To achieve this objective, following actions have been agreed to be taken by TMG, CIB and enterprises: (a) TMG will cause to arrange necessary working capital for paper mills no. 4 and 5 latest by September 30, 1997. In addition, TMG will take measures to improve the debt/equity ratio of TPIC so that it becomes financially viable. (b) CIB will assess the additional working capital needs of all other subborrowers and work with TMG to arrange these funds by October 31, 1997. (c) TPIC will reach agreement as soon as possible with the two main machinery suppliers on the timing of their visit to Tianjin to help in the start of trial runs and solve the teething problems of paper mills. (d) Enterprises will shift their focus from production to marketing. They will try to identify new products and new buyers for their products. In this connection, they will seek the help of foreign experts (including advice from machinery suppliers), market research institutes in China, and trading companies, strengthen their sales and sales promotion departments, and send managers and staff for training in marketing. - 34- APPENDIX A (e) Following the example of No. 1 Dyeing and Printing Mill, targets for labor reduction will be set for all other enterprises in textile and packaging subsectors and the surplus staff will be transferred by June 30, 1998. (f) Wherever appropriate and feasible, similar enterprises in a subsector will be merged into one legal entity to obtain economies of scale and savings in overheads. It has been already done for the paper subsector and is also planned for some of the enterprises in textile and packaging subsectors. (g) Enterprises will optimize the use of new equipment by diversifying the product-mix (based on market research) and producing high value-added products. (h) Recommendations in the study of management systems (by IDI) will be implemented in all textile and paper mills and cost-cutting measures, including savings in various inputs-raw materials, energy, etc.-will be introduced by the end of 1997. (i) CIB will play a more active role in assisting subborrowers in solving their operational and financial problems. It will also be free to reschedule the loan repayment in justifiable cases and proceed with foreclosure proceedings where, in its opinion, there are little prospects for the rehabilitation of a subproject. (j) TMG, as the owner of enterprises, and the enterprises themselves, will actively seek joint venture partners who can bring technical, marketing and management skills and help to turn around the loss-making enterprises or improve the profitability of other subborrowers. 20. Based on the successful implementation of above measures, new performance targets of subprojects were prepared by the Tianjin side and discussed with the mission. They will be finalized and sent to the Bank by July 19, 1997. It was agreed that the Bank will be informed by TMG and CIB, through TWBLO, of implementation of operational plan and achievement ofperformance targets on a six-monthly basis. Others 21. The mission had detailed discussions with TMG and CIB on their contribution to ICR. Their draft evaluation report was reviewed and agreements reached on additional information and clarifications. Zafar Shah Khan for the World Bank Mission ANNEX 1: PERFORMANCE OF TLIP COMPLETED SUBPROJECTS (1995-97) (Unit: thousand yuan, thousand dollars) Sales Profit Export Loan repayment Name of subproject 1995 1996 1997* 1995 1996 1997* 1995 1996 1997* 1995 1996 1997* Tianjin No. 1 Plastic Factory 12,666 6,071 6,600 1,342 -3,224 0 918 T 0 0 0 0 0 Tianjin No. 3 Plastic Factory 18,710 50,670 26,650 1,510 -800 -940 0 0 0 0 0 0 Tianjin No. I Paper Board Container Mill 46,620 83,570 0 514 310 0 0 0 0 371 58,173 0 Tianjin People's Printing House 30,100 34,000 58,680 8,980 14,030 29,580 0 0 0 1,978 1,077 196 Tianjin DongFangilong Printing House 4,840 2,560 3,000 3 -1,390 0 0 0 0 179 0 0 Tianjin No. 2 Printing Factory 5,850 10,000 3,410 50 -593 0 0 0 0 0 0 0 Tianjin Plate Making Factory 3,538 4,450 4,470 0 0 0 0 0 0 0 0 0 w Tianjin Decal Printing Factory 1,761 380 1,070 125 -997 -80 0 0 0 0 0 0 Tianjin No.2 Printing& Dyeing Mill 172,190 144,240 31,520 22 -9,900 -800 28,000KM 3,910 860 257 0 0 Tianjin No. 1 Printing& Dyeing Mill 166,380 141,110 26,330 6 -500 -10,030 14,959KM 3,070 1,640 0 0 0 Tianjin Sanhaun Textile Printing & Dyeing Co. 179,970 140,830 6,470 -969 -25,020 -19,760 22,320KM 8,240 0 0 0 0 Tianjin No. 4 Dyeing & Finishing Factory 92,835 69,660 33,000 -1,203 -4,150 -3,450 6,790KM 4,000 1,790 31 0 0 TianjinNo. I Dyeing& Finishing Factory 45,550 19,730 11,700 -13,250 -10,100 -5,080 3,860KM 0 0 0 0 0 * 1997 represents actual figures for January - May. -36- APPENDIX B APPENDIX B: BORROWER'S CONTRIBUTION TO THE ICR A. General The preparation for Tianjin Light Industry Project started in March 1987. The agreement on loan for the project was signed on Sep. 8 1989 after identification, preparation, appraisal and was effective on Dec. 7 the same year. The project includes: reform of 15 enterprises of Paper-Making, Packaging and Textile Dyeing and Finishing subsectors and 9 supporting institutes, study on 2 consulting topics and consulting service by exports. USD 154 million dollar of the World Bank loan was planned as well as RMB 290 million yuan. The actual disbursement of USD 153.81 million dollars and RMB 850 million yuan is estimated. All of the tasks under the project have been basically finished so far. B. Objectives of Project 1. Promote system reform of the three subsectors in Tianjin, encourage and guide the enterprises to participate competition and raise the competitiveness of subsector enterprises. 2. Reform major enterprises in the subsectors, update technology and facilities, improve grade and quality of their products, increase export of textile products and raise flexibility of the products to meet the demand of marketplace. 3. Strengthen organization of the supporting institutes, improve design capability and level of design institute, raise technical development capability of research institute and capability and level of training school so that they can offer support to the enterprises. 4. Improve organization structure and management of enterprises of three subsectors, raise management level of enterprises, develop a long-term development strategy for paper subsector, assist paper subsector to realize the goals on organizational structure and reform. 5. Help Tianjin to develop a long-term strategic action plan for the development of Tianjin's industries. C. Evaluation of Realization of the Goals 1. Realization of reforms specified in the development strategy for light industry Tianjin Municipal Govermment carried out a series of reform in industries based upon "Development Program and Strategy of Tianjin Municipal Government on Textile Dyeing & Finishing, Pulp & Paper and Packaging subsectors" and within overall -37 - APPENDIX B framework of National policies and reform. The principal targets are to: raise benefit of investment, expose enterprises to markets, make them market responsive, grant enterprises with autonomy and responsibilities and raise economic benefit of subsectors. Tianjin Municipal Government has taken the following measures for three subsectors: (1) Direct Export Tianjin Municipal Government started direct export by enterprises on a trial basis in 1988. Dyeing subsector selected individual enterprise (Sanhuan Textile Printing & Dyeing Group, created by Tianjin Textile & Dyeing Factory) for a trial in 1989 and five enterprises in dyeing subsector under part A of the loan were authorized to export directly in 1993. All the enterprises under the project (or their subsidiary Groups) have been authorized to export directly and sections for export business set up. (2) Use of Economic and Other Criteria for Investment Decision The current economic criteria for Project evaluation are: internal rate of return is no less than 14% and financial rate of return is no less than 12%. The Departments of Tianjin Government involved examine: a. if it suits the direction of subsector's development and the subsector policy of the Nation; b. if the economic, financial and internal rate of return reach the criteria; c. if construction conditions, such as raw materials, energy, technical capability and environment, available or up to the standard; d. if the investment scale is rational; e. feasibility study of the project had been carried out. (3) Price Reform The Municipal Government has adopted a price reform policy to gradually increase the proportion of products for which the price are based on free negotiations. The prices of products in three subsectors are deregulated and the enterprises can set the prices based on market. (4) Production Planning Reform T'he first step of the reform is the transit from mandatory planning to indicative planning which inspires enterprises constantly diversify their product lines according to market situation. Since China adopted a socialist market economy in 1993, the economic system has gradually undergone changes where market dominates. Enterprises prepare production plan based on demand and organize production on order. (5) Labor Mobility The term employment system for management staff and contracting system for workers are practiced in the enterprises. The labor mobility depends fully on enterprises demand or coordination between factories, as well as recruitment from the society. The surplus laborers started going to society to be reemployed as reform is deepening and reemployment is taking different forms either internally or externally. (6) Profit Contract "Profit Contract" has been abolished after several years of practice. All the enterprises pay tax according to tax regulation. -38- APPENDIX B (7) Financial Reforms The relationship between Government and Banks has been changed from administration leadership into economic guidance through years of reform. Banks are practicing commercialized self-operation. Banks and enterprises can make mutual choice for the loan making and project financing. (8) Enterprise Reform Enterprises Reform started in 1994, e.g. make clear the enterprise ownership, set up and perfect legal entity system and restructure enterprise according to "Corporate Law", so that enterprise can take a real part in market competitive and become a legal entity. (9) Institutional Reform To change the governmental function and quicken institutional reform, the original Industry Bureaus were changed into Group or General Corporation, i.e., the original administrator becomes a legal person to operate State-owned property or a State investor within the scope of authorization by the Government. The original administrative relationship between Bureau and enterprises becomes property and investment relationship. 2. Evaluation on Part A of the Project The targets for three subsection's reform have basically been realized, such as production specialization for Textile and Dyeing subsector has been realized, old facilities, out-of- date technology, high consumption of material and energy and serious environmental pollution changed in paper and package industries. (1) Packaging Subsector Through technology introduction and improvement of facilities in recent years, a industry with modem process facilities has been formed in Tianjin packaging printing subsector: new printing material replaced traditional material. The up-to-date technology of electronic scanning and plate making replaced out-of-date process of manual photo, netting and plate making. The automatic offset press with high speed and multicolors replaced manually operated old ones of low speed and monochrome. Relief printed trade mark and label printing appeared. Flexible plate, plastic packing base materials and corrugated cardboard box with seven layers represent advanced level in Tianjin. People's Printing House, a star among 8 World Bank loan projects in this subsector, has their sales revenue and profit reached and beyond design level, the profit was RMB 8.75 million yuan in 1995 and no overdue loan. The stock of this enterprise was listed in stock market in Oct. 1993. The First Paper Board Containers Mill set up a joint venture with a Japanese firm and the loan paid off in one bill. Two plastic projects have been put in operation since the middle of 1996 and two years is estimated to reach break-even point. There are problems in profitability (loan repayment is poor) in other four projects (printing and plate making). -39- APPENDIX B (2) Textile Dyeing and Finishing Subsector The textile dyeing and finishing subsector added some key equipment, adjusted products mix and raised grades and quality of products, for example, No. 1 Printing & Dyeing Factory developed six series of products, production period shortened and foreign currency earning capability increased by meeting the demand of small batches and diversified products. The capability of the enterprises for the market changes and competition is better than that before. However, because of short supply of funds and the too heavy original burden, sales value is decreasing and loss is becoming worse in five enterprises of the project and loan repayment is poor. (3) Paper-making Subsector By using the loan on project of art paper and bond paper in No. 4 and No. 5 Paper Factory, old facilities and production technology were phased out, new ones of advanced level in 1990s were introduced and environmental pollution is reduced. However, for various reasons, operation has not started as scheduled. According to the evaluation report by CIB, price of the product is higher than previous estimation, but the price of input has gone up also. The internal rate of return for art bond paper are 5.7% and 6.3% respectively. Generally speaking, the reform of three subsectors of Tianjin light industry promoted the change of management system for enterprises, enterprises become economic entities; environmental pollution reduced; old technology and high consumption of energy and materials are being improved. However, the micro-benefits on finance in some of the Projects are not ideal. Considering the performance both micro- and macro-operationally and analysis above, the projects are basically good, yet the People's Printing House and the First Paper Board Containers Mill are better by criteria of the World Bank. T'he factors which make micro-operation not ideal are as following: First, the increase of input price is greater than the products price. The costs of coal, water supply, power supply, average salary and foreign exchange rate had increased by 161%, 330%, 274%, 162% and 152% respectively from 1991 to 1995, therefore, sales income cannot cover the cost. Second, the cost is not under well control. Some of the costs are beyond the control of enterprises and are part of overall economic system reform. As social insurance system has not been set up, surplus workers are still in the enterprises, for example, No. 1 and No. 4 Dyeing & Finishing Factories, Sanhuan Textile Printing and Dyeing Group and No. 1 and No. 2 Printing & Dyeing Factories have the surplus laborers as much as 550, 150, 550, 440, and 350 respectively. This lowers the margin of workers and increases the cost. Third, the development of market is not sufficient. As being in the transit period, enterprises failed to change their ideas of planned production towards the operation under marketing system at once, have not set up a effective network of marketing on time, or have their users too concentrated, thus operational risk formed. For example, No. 1 -40 - APPENDIX B Plastic Factory exported 2,000 ton of PVC sheet to U.S. in 1995, but the new market has not been developed very well. Occupying of market is a hard process although the enterprises are authorized to export by themselves. Fourth, because of the unavailability of counterpart funds on time and construction cost increasing, construction period postponed from planned 2 years to 5-6 years. This increased cost make loan repayment difficult and entrance of market late and the project cannot reach scale. 3. Evaluation of Part B of the Project Nine supporting institutes, two consulting topic studies and consulting service by specialists are involved in Tianjin Light Industry Project. USD 9.96 million dollar from the World Bank loan and RMB 9 million yuan were planned. The following tasks have been finished so far. USD 9.94 million dollar and RMB 22.55 million yuan have been used actually. (1) By assisting the supporting Institutes under Part B, (a), the design capacity, design quality and design level of Design Institutes raised, modem CAD system and office automation system set up, design period shorten and economic benefit and competitive power improved; (b) development capacity for new technology and new product of Research Institutes increased, research topics undertaken and results on development increased and difficulties on finance overcame; (c) capacity and level of training schools raised, number of students and Dept. enlarged. 351 of technician and teachers trained, USD 460,000 dollar used and quality of staff in supporting institutes raised. (2) Many recommendations were put forward through consulting on management of enterprises in three subsectors and development strategy for paper industry and some of the recommendations have been implemented; the adjustment of product mix and consolidation of enterprises realized based on requirements in the strategy for paper industry. 4. Impact of the restructuring through World Bank financing and Overall Comment on TLIP Impact on Subsectors (1) By restructuring No. 4 and No. 5 Paper Factories, the gap for high grade paper in Tianjin filled up, restructure and reform in paper industry promoted, domestic demand on high grade art paper, bond paper and writing paper met and import substitution realized. (2) Without increasing production capacity, enterprises in textile dyeing & finishing subsector imported advanced equipment, production technology and process, production environment improved, product lines increased, level and quality raised, export increased and power to suit market strengthened. -41- APPENDIX B (3) By restructuring principal enterprises in paper package, plastic package and printing package subsectors, level and quality of packaging materials raised, added value of packages increased. The export of packaging materials is promising and export competitiveness is stronger than before. (4) The improvement of the supporting institutions' ability in technology development, product design and training and the use of new technology have further strengthened their ability to provide support to the development of subsector enterprises. Overall comment Generally speaking, TLIP has promoted the development of three subsectors, raised overall strength of the industry, enlarged production scale and created conditions for the enlargement, group operation, set up of Joint Venture, development of new fields by many enterprises. However, as the deepening of Chinese reform and the implementation of reform measures (such as financial reform, foreign exchange system reform, foreign trade system reform and price reform), enterprises cannot adapt new situation immediately themselves, face temporary difficulties operation and not reach the expected goals, as a result, the ability to service their debt is affected. D. Problems on Implement and Factors affecting Goals There are problems both internally and externally: A. Because of the change of method for tendering (one-stage tender changed into two-stage tender) and excessive high bidding price at bid opening, the requirement of counterpart funding became is too high for the four projects and the time used for equipment procurement was extended. As a result the completion of TLIP as a whole was postponed. B. Because of the foreign exchange reform system in China and exchange rate (USD 1 dollar = RMB 3.72 yuan at the time when the project was appraised, the rate is 1:8.4 now ) and increase of the price of input, debts of the enterprises and costs increase, thus the realization of expected benefit is affected. E. Comment on World Bank Tianjin has been strongly supported and assisted by the World Bank since the effectiveness of Tianjin Light Industry Project in 1989. The strict and scientific procedure of the World Bank, the earnest and responsible attitude as well as the spirit of the staff have left us a deep impression. We have learned quite a lot and will take reference for the construction and management in future. F. Comment on Borrower and Intermediate Finance Institute Tianjin Planning Commission (the administration body of TLIP), Tianjin Finance Bureau (debtor/creditor of TLIP and an implementing agency of Part B of TLIP), CIB (onlending bank for all the subprojects except the paper subprojects where CIB is an agent), all worked jointly, collaborated closely and finished the project well according to the -42 - APPENDIX B requirements of the World Bank and duty and obligations on the Agreement of Loan, as well as offering possible convenience during the implementation. The consciousness and strict auditing were realized for purchasing, tendering, paying and managing of the account. Besides carrying out the regulation and policies of the World Bank and the Ministry of Finance, they developed a series of rules and regulations to control management of the Project in conformity with specific situation to assure a smooth progress of procurement and disbursement, as well as financial control of subprojects. G. Future Operation and Development Plan 1. Accelerating the Establishment of Group companies (1) Set Up Tianlong Paper Corp. Ltd. Tianlong Paper Corp. Ltd. (the Company) has been set up with investment from First Light Industry General corp., Paper Corp., No. 4 and No. 5 Paper Factory to produce high grade art paper, bond paper and writing paper. A management system suitable for the development of the company will be set up and the marketing of products while sales network will be formed for major products of high grade art paper, bond paper and writing paper. The proportion of equity capital will increase step by step to reduce the debt of the Company, so that the debt structure will become rational and products more competitive. (2) On the basis of the existing Sanhuan Textile Printing & Dyeing Group, No. 4 Dyeing & Finishing Factory joined Tianyi Textile Group in June 1996; No. 1 Printing & Dyeing Factory joined Lianyuan Textile Group to improve the competitiveness of the Groups. (3) Tianjin Plastic Groups Ltd. will be set up to incorporate the two Plastic subprojects (No. 1 and No. 3 Plastic Factory ). The assets combination of BOPP Project is realized already. (4) Tianjin Package Printing World Ltd. has been set up by incorporating some of the enterprises in packaging subsector. No. 2 Printing Factory, a subproject under TLIP, has been incorporated. Other World Bank Projects will be incorporated to create group advantage with vertical integration of product development, plate-making, printing and marketing to raise competitiveness. 2. Strengthen internal control of cost for enterprises. Set cost targets and carry out Cost Overrule Method. 3. Adjust product mix and accelerate the development of new products. 4. Carry out ISO-9000 Quality Assurance System in major enterprises to improve quality and increase value-addedness of products. 5. Strengthen marketing. Supply and Sales Dept. for pulp and paper has been set up already in Tianlong Corp. The enterprises in Dyeing & Finishing subsector will -43 - APPENDIX B accelerate to set up overseas sales company and agent (in the United Arab Emirates and Burma), occupy the market in non-quota Regions and increase export. 6. Enlarge production scale, realize scale economy, lower cost and expand market share through various means and financial resources. H. Experience and Lessons By implementing Tianjin Light Industry Project, the following experience is obtained: 1. Project appraisal and market forecast should be strengthened. All possible means should be applied to collect international market information and careful projection should be made for investment projects with international competitiveness as a precondition. 2. Strictly control the investment cost, supervise and manage the project with greater effort. 3. Effectively combine World Bank procedures with Chinese ones and make effective use of funds. Create all the conditions and accelerate project implementation so that they can become operational as early as possible. 4. Strengthen project management and reform management system for enterprises to meet the needs of construction. 5. We suggest the World Bank to simplify the procedures and shorten cycle time for the projects with competitive nature. -44- APPENDIX B ANNEX 1: ADDITIONAL BORROWER COMMENTS ON WORLD BANK ASSESSMENT RATINGS \ovenber i3, SC7 Mr. Laf'ar Shah Khan, Principal Financial Specialist. Finance & Private sector Development lnit The World Bank Dear M-. Khan: We have revieved the 7Mplementaticn Completion Report ( ICR) on Tianjin Light Industry Project (TT IP) and found1 it wvell prepared and it woulLd be a guideline in oujr future work.. AAnd we will see to it that best effort wvll be used by the concerned institutions to implement the recommendat-ons contained in -C?R. However, ve vould ; ike to po:nt out rhat -r is not atrrropriate tO consider the outcome oL TLIP unsatistactorv. We reuiuese that it be revised to rz.--d quote the ouzcome of the oroject -s3 considere- unsatisfaczory at Fresent unquote. 1n .add ion. the-rze are a few iiaccurate or :naiCpro-r-ate descr:npt ons wht,ich are recuesead t c e changed or dele-ted and indicated b v handwriting in pages where such revisions are needed. ,ve voul d have nn o ICR i.f rthe aepi ested ch anzes or delet:ons are made. We send to vou tnrough EMS th-s 'etter aztachec w:h the -:ages where changes cr deietions are needed and our Evaiuat:on ieport. Regards. Wang Gongiu '9ce Direcror : an,:n Viorld Bank n san C fLIce APPENDIX C: CIB-COMPARATIVE (ACTUAL AND PROJECTED) FINANCIAL STATEMENTS FOR THE YEARS ENDING DECEMBER 31, 1990-96 (Yuan million) I PROJECTED ACTUALS 1990 1991 1992 1990 1991 1992 1993 1994 1995 1996 Income Statements Total Income 772.20 1,062.80 1,366.60 855.21 881.43 1,094.43 1,758.27 2,635.26 3,358.83 3,709.00 Total Expenses 556.40 761.50 977.60 736.43 764.91 969.30 1,616.87 2,524.12 3,236.91 3,036.00 Netlncomebefore Inc. Tax 207.70 284.80 367.60 118.78 116.52 125.12 141.40 111.14 121.92 377.12 Income Taxes 114.30 156.60 202.20 72.46 71.08 76.33 82.01 65.53 54.49 168.44 Net Income 93.40 128.20 165.40 46.32 45.44 48.80 59.38 45.61 67.43 208.67 Balance Sheet Statements Cash/due from banks 715.80 583.50 978.90 1,801.96 1,929.47 2,425.33 4,090.73 7,724.27 9,083.63 9,609.18 Current assets 1,371.60 1,649.50 2,788.40 3,653.51 4,568.37 5,685.64 6,814.34 11,314.58 18,478.71 25,107.84 Investment Loans: -local currency 2,584.70 3,441.90 4,040.50 1,615.22 1,565.15 1,719.84 2,414.50 3,117.57 2,074.91 2,196.25 -foreign currency 6,238.60 8,509.80 10,822.70 5,346.79 5,616.38 5,703.83 6,594.88 10,254.15 10,019.22 10,861.12 -Working capital loans 2,144.86 4,297.94 8,401.13 9,848.55 13,528.00 15,114.83 18,225.84 Total Investment loans 8,823.30 11,951.70 14,863.20 9,106.87 11,479.47 15,824.79 18,857.93 26,799.72 27,208.96 31,283.21 less: Accu. Provisions 572.60 1,002.70 1,552.70 109.28 109.28 227.99 376.98 531.25 524.03 569.22 Net Investment Loans 8,250.60 10,949 00 13,310.50 8,997.59 11,370.19 15,596.80 18,480.95 26,268.47 26,684.93 30,714.67 Long-temm Investments 84.50 142.10 223.70 17.41 26.68 98.40 205.30 256.25 312.91 678.11 Net Fixed Assets 10.60 18.80 36.10 15.50 27.97 34.27 125.91 199.39 296.58 363.59 Other Assets 115.00 125.00 380.00 830.78 1,331.02 2,451.41 4,279.51 5,967.36 6,422 92 4,203.04 TOTAL ASSETS 9,832.40 12,890.30 16,738.60 13,514.79 17,324.23 23,866.51 29,906.00 44,006.06 52,196.05 61,067.26 Deposits: 471.60 599.40 769.50 -local currency 939.68 1,651.63 4,044.41 7,511.10 10,173.07 17,703.81 26,794.42 -foreign currency 927.73 1,331.23 2,090.32 2,132.92 3,820.30 4,229.35 4,992.22 Total current Liabilities 1,330.80 1,435.70 2,150.70 4,033.66 5,300.54 9,569.28 14,821.20 22,62225 31,751.00 42,451.34 Long-term Debts: -local currency 1,320.00 1,420.00 1,520.00 1,355.81 2,853.56 3,567.28 2,011.48 2,561.06 2,152.74 2,400.79 -foreign currency 4,955.30 7,537.80 10,441.20 5,245.22 5,622.09 5,991.98 7,029.84 10,283.67 9,372.61 9,350.29 TotalLong-termDebts 6,275.30 8,957.80 11,961.20 6,601.03 8,475.65 9,559.25 9,041.32 12,844.73 11,525.35 11,751.07 Other liabilities 280.00 26000 100.00 1,059.12 1,702.51 2,906.24 4,243.26 6,259.26 6,517.95 4,259.01 Equity 1,946.20 2,236.90 2,574.50 1,748.53 1,845.53 1,831,75 1,800.22 2,279 83 2,401.75 2,605.84 TOTAL LIAB. & EQUITY 9,832.40 12,890.00 16,738.60 13,442.33 17,324.23 23,865.53 29,906.00 44,006.06 52,196.05 61,067.26 RATIOS Current Ratio (X) 1.03 1 15 1.30 0.91 0.86 0.59 0.46 0.50 0.58 0.59 Long-Term debt/equity ratio(X) 3 22 4 00 4.65 3.78 4.59 5.22 5.02 5.63 4.80 4.51 Acc. Provisions/gross loan 6.49 8.39 10.45 1.20 0.95 1.44 2.00 1.98 1.93 1.82 portfolio (%) Net Income/Equity (%/.) 4.80 5.73 6.42 2.65 2.46 2.66 3.30 2 00 2.81 8.01 As % of total assets: -total income 7 85 8.24 8.16 6.33 5.09 4.59 5.88 5.99 6.44 6.07 -net income 0.95 099 0.99 0.34 0.26 0.20 0.20 0.10 0.13 0.34 -administrative/other expense 0 16 0.15 0.15 0 15 0.10 0.41 0.56 APPENDIX D: COMPARISON OF PROJECTED AND ACTUAL RESULTS OF SUBPROJECTS No. 3 Plastic No. 1 Plastic Plate Making Dong Fang Hong People's Printing Decal Printing Name of enterprise Factory Factory Factory Printing House House House Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimnate Actual Fixed costs 38,385 95,380 36,671 102,218 11,522 26,496 8,496 21,464 19,289 31,257 10,722 18,782 Total cost including net working 42,405 115,047 48,286 120,018 11,992 26,496 9,713 21,464 20,709 31,257 11,022 18,782 capital Completion date 1991 1995 1991 1995 1991 1991 1991 1991 1992 1991 1991 1991 Data in second year of operations Capacity utilization(%) 100 100 100 60 100 100 100 80 100 100 80 5 Cost of production 33,763 43,200 53,023 10,959 1,000 1,779 2,248 17,031 735 588 8,420 360 Sale value 41,533 50,500 69,240 12,666 2,000 1,864 3,696 19,203 1,620 726 14,633 426 Exports (in '000) 7,533 0 0 0 0 0 0 0 0 0 0 0 Net profit (loss) before tax La 7,769 8,000 13,025 610 1,000 85 1,448 107 875 120 4,910 66 Principal and interest payment as 0 0 0 0 0 0 % of total due and payable during the year Current ratio 2.7 1.22 5.68 4.92 2.1 0.95 3.26 3.6 3.45 1.97 5.1 2.67 Debt/equity ratio 5.88 116 6.91 80.5 1.84 20.24 0.75 1.02 1.37 2.42 1.24 37.25 Return on equity 0 0.0379 0.156 ERR (%) 17.55 20.59 20.4 6 27 4.56 18.66 12.86 39.5 27.38 49.7 12.08 FRR(%) 17.90 15.84 20 4.82 20 4.56 15.69 7.95 24 16.53 15.29 4.6 *** data not available La Actual profit is before depreciation and interest accrued but not paid, and therefore not a true picture. No. 2 Printing First Paper Board Sanhuan Textile Printing No. I Printing and No. 2 Printing and No. 4 Printing and Name of enterprise Mill Containers Mill and Dyeing Mill Dyeing Dyeing Dyeing Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual Fixed costs 3,870 8,964 25,717 51,194 22,351 27,792 43,840 63,101 34,864 453,341 25,049 42,879 Total cost including net working 4,370 8,964 33,523 51,194 23,467 27,792 45,700 63,101 36,724 53,341 26,189 42,879 capital Completion date 1992 1991 1991 1993 1991 1993 1991 1994 1992 1993 1992 1993 Data in second year of operations Capacity utilization (%/6) 100 50 100 100 100 59 100 67 100 63 100 61 Cost of production 12,688 3,990 53,236 54,850 162,974 163,010 127,204 106,915 109,610 146,160 58,893 98,774 Sale value 15,868 4,657 59,049 57,210 168,474 186,650 130,000 123,076 113,800 167,540 85,532 110,740 Exports (in '000) 0 0 0 0 117,866 33,040 72,650 20,540 77,400 24,780 73,695 12,180 Net profit (loss) before tax La 3,180 227 5,813 2,360 5,500 5 2,796 -939 4,190 730 20,369 0 Principal and interest payment as 18 0 0 0 0 % of total due and payable during the year Current ratio 5.38 2.68 7.28 0.91 3.4 0.65 2.48 0.71 3.79 0.76 2.93 0.79 Debt / equity ratio 0.47 1.32 3.94 2.42 0.69 11.33 1.9 12.6 1.5 23.02 1.19 8.82 Return on equity 0.01 0.09 0 ERR (°/0) 21.4 11.28 25.98 5.43 27.55 4 26.82 *** 19 3.4 75.3 0.4 FRR (%) 25.5 4.9 16.84 4.13 25.73 0 18.93 *** 23.79 2.44 23.81 0 * * * data not available La Actual profit is before depreciation and interest accrued but not paid, and therefore not a true picture. No. 1 dyeing and Tianjin No. 4 Paper Tianjin No. 5 Paper Name of enterprise finishing Making Mill Making Mill Estimate Actual Appraisal Estimate Appraisal Estimate Estimate (1997) Estimate (1997) Fixed costs 25,532 41,241 217,007 836,540 224,365 734,070 Total cost including net working 26,760 41,242 250,995 956,540 240,526 834,070 capital Completion date 1992 1993 1993 1997 1993 1997 Data in second year of operations Capacity utilization (%) 100 21 80 75 80 75 Cost of production 108,080 91,713 153,846 289,898 128,305 245,619 Sale value 114,000 82,731 191,930 396,581 160,512 354,872 Exports (in '000) 67,500 6,460 89,516 0 68,211 0 Net profit (loss) before tax L/ 5,920 -8,982 15,782 -34,619 18,163 -37,504 x Principal and interest payment as 0 0 0 0 0 % of total due and payable during the year Current ratio 2.46 0.6 5.3 2.24 1.88 2.24 Debt / equity ratio 0.97 60.9 4.5 1.54 3.54 1.54 Return on equity ERR (%) 26.82 15.37 2 18.48 10 FRR (%) 18.93 *** 15.28 2 21.42 6.02 *** data not available la Actual profit is before depreciation and interest accrued but not paid, and therefore not a true picture. 3v APPENDIX E: MONITORING TARGETS Part A /a Plate Making Decal Donfanghong No. 2 People's First Paper Tianlong Paper No. I No. 2 No. 4 Sanhuan No. I No. 1 No. 3 Factory Printing Printing Printing Board Con- Ltd Company Printing & Dye & Dye & Group Dye and Plastic Plastic tainer Mill Dyeing Finishing Finishing Company Finishing 1. Operational develop plate develop develop high develop develop high it has formed develop Art increasing variety, develop they have ceased tap the market, lower Strategy making tech. screen print quality printing label quality & fine JV and paid coated paper multicolor products, increase the operations costs, and develop products on thick paper products prints off loans and bond paper production of higher value-added high value- added product products. 2. Capacity design 1997 70 15 60 80 100 0 60 55 70 50 100 1998 70 20 60 80 100 50 70 65 80 66.7 100 1999 75 20 60 80 100 75 75 75 85 75 100 2000 80 20 60 80 100 90 75 75 90 95 100 3. No of production lines 1997 5 5 20 0 30 24 40 10 3 1998 5 5 23 3 40 40 50 12 4 1999 5 5 23 4 50 40 60 14 6 2000 5 5 23 4 50 50 60 20 10 4. Sales (Y'000) 1997 9,400 500 500 700 138,000 0 60,000 60,000 75,000 31,600 58,000 4: 1998 9,400 600 500 800 151,800 405,200 72,000 70,000 85,000 42,150 65,000 'D 1999 10,000 600 500 1,000 167,000 607,800 80,000 84,000 90,000 50,000 68,000 2000 12,000 600 500 1,000 167,000 724,360 90,000 95,000 100,000 60,000 70,000 5. Net income (Y) 1997 0 0 0 51,000 0 -14,000 -6,000 5,500 0 0 1998 0 0 0 56,000 -88,810 -5,000 -4,000 -3,000 0 0 1999 100 0 0 61,000 -34,440 -3,000 -3,000 -2,000 1,000 2,000 2000 200 0 0 61,000 -6,380 0 0 0 2,000 4,000 6. Production million CM CR CR CR CR T (million meters) T T 1997 6 33 600 10,000 10,000 900,000 0 20 15 19 3,000 3,800 1998 6 33 800 10,000 10,000 1,000,000 35,000 24 20 24 4,000 4,000 1999 7.00 800 10,000 10,000 1,050,000 52,500 28 26 25 4,500 4,500 2000 7.00 800 10,000 10,000 1,100,000 63,000 32 32 25 6,000 5,000 7. Export (Y'000) 1997 30,000 28,000 45,000 0 0 1998 35,000 35,000 55,000 5,000 ° 1999 40,000 40,000 55,000 5,000 0 2000 45,000 45,000 55,000 15,000 0 8. Debt service (Y'000) 1997 600 400 60 300 0 0 0 \ 1998 600 400 80 300 0 0 0 t 1999 650 400 100 400 20,000 1,000 2,000 2000 650 400 100 62,170 2,000 4,000 L Does not include Tianjin Paper Corporation which received $0.3 million for testing equipment and training. Note: CM=square centimeters, CR= color rings Part B a Light Industry Textile Design Printing Res. Ins. Plastic Res. Ins. Package Res. Ins. Paper Res. Institute Printing Tech. Textile Training Design Ins. Institute School Center 1. Operational To become leading To become the To develop Identify and develop Identify and develop To become pilot To become the Provide new modem Strategy light industry design leading textile holograph & new markets and new markets and center for paper filter training center for facilities to the institute in China design institute in imitation-proof new product lines new product lines and paper processing the subsector textile sector China technology engineering 2. Capacity design 1997 1 4 3 16 1998 0 6 4 16 1999 4 8 6 20 2000 5 10 9 20 3. No of production lines 1997 200 1,000 1998 200 1,000 1999 200 1,000 2000 200 1,000 4. Sales (Y'000) 1997 586,050 220,000 1998 400,000 240,000 o 1999 450,000 260,000 2000 450,000 300,000 5. Net income (Y) 1997 12,000 4,110 1,500 3,000 200 2,300 1,200 2,000 1998 12,000 4,300 1,700 3,500 600 2,600 1,200 2,000 1999 13,000 4,500 2,000 4,000 2,000 2,600 1,200 2,000 2000 13,000 5,000 2,200 5,000 6,000 3,000 1,200 2,000 6. Production 1997 300 100 0 20 0 0 0 200 1998 500 150 0 40 0 0 200 1999 500 200 50 60 50 50 0 200 2000 600 250 100 120 100 100 0 200 7. Export (Y'000) 1997 31 30 50 99 10 230 1998 36 35 65 41 15 234 1999 36 39 70 43 30 240 2000 36 40 70 47 40 240 1/ Does not include Tianjin Paper Corporation which received $0.3 million for testing equipment and training. Note: CM=square centimeters; CR= color rings