PROJECT PERFORMANCE AUDIT REPORT
Description
ASIAN DEVELOPMENT BANK PPA: PRC 21197 PROJECT PERFORMANCE AUDIT REPORT ON THE SHANGHAI INVESTMENT AND TRUST CORPORATION PROJECT (Loan 933-PRC, LOE 7031, and TA 1086-PRC) IN THE PEOPLE’S REPUBLIC OF CHINA December 2000 CURRENCY EQUIVALENTS Currency Unit – Yuan (Y) At Appraisal At Project Completion At Operations Evaluation (October 1988) (October 1995) (September 2000) Y1.00 = $0.2687 $0.1183 $0.1208 $1.Y3.7221 Y8.4518 Y8.2773 ABBREVIATIONS ADB − Asian Development Bank EA − Executing Agency ERPS − exchange risk pooling system IDC − interest during construction ITIC − international trust and investment company LOC − line of credit LOE − equity MIS − management information system MOF − Ministry of Finance NBFI − nonbank financial institution OEM − Operations Evaluation Mission PCR − project completion report PPAR − project performance audit report PRC − People’s Republic of China SITEN − Shanghai SITICO Enterprise Company Limited SITICO − hai International Trust and Investment Corporation SMG − Shanghai Municipal Government SMZ − hai Municipal Zone SOE − state-owned enterprise TA − technical assistance NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars. Operations Evaluation Office, PE-561 CONTENTS Page BASIC DATA ii EXECUTIVE ...
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| Publié par | Zyog |
| Nombre de lectures | 55 |
| Langue | English |
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ASIAN DEVELOPMENT BANK PPA: PRC 21197
PROJECT PERFORMANCE AUDIT REPORT ON THE SHANGHAI INVESTMENT AND TRUST CORPORATION PROJECT (Loan 933-PRC, LOE 7031, and TA 1086-PRC) IN THE PEOPLE S REPUBLIC OF CHINA ’ December 2000
Y1.00 $1.00
CURRENCY EQUIVALENTS Currency Unit Yuan (Y) At Appraisal At Project Completion At Operations Evaluation (October 1988) (October 1995) (September 2000) = $0.2687 $0.1183 $0.1208 = Y3.7221 Y8.4518 Y8.2773
ABBREVIATIONS − Development Bank Asian − Executing Agency − exchange risk pooling system − during construction interest − trust and investment company international − line of credit − line of equity − information system management − of Finance Ministry − financial institution nonbank − Evaluation Mission Operations − project completion report − project performance audit report − Republic of China People’s − Shanghai SITICO Enterprise Company Limited − Shanghai International Trust and Investment Corporation − Municipal Government Shanghai − Municipal Zone Shanghai − state-owned enterprise − assistance technical
ADB EA ERPS IDC ITIC LOC LOE MIS MOF NBFI OEM PCR PPAR PRC SITEN SITICO SMG SMZ SOE TA NOTES (i) The fiscal year (FY) of the Government ends on 31 December. this report, “$ refers to US dollars.(ii) In Operations Evaluation Office, PE-561
CONTENTS
BASIC DATA EXECUTIVE SUMMARY I. BACKGROUND A. Rationale B. Formulation C. Purpose and Outputs D. Cost, Financing, and Executing Arrangements E. Completion and Self-Evaluation F. Operations Evaluation II. PLANNING AND IMPLEMENTATION PERFORMANCE A. Formulation and Design B. Achievement of Outputs C. Cost and Scheduling D. Procurement and Construction E. Organization and Management III. ACHIEVEMENT OF PROJECT PURPOSE A. Performance of Subprojects B. Performance of the Operating Entity C. Technical Assistance D. Sustainability IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS A. Socioeconomic Impact B. Environmental Impact C. Impact on Institutions and Policy V. OVERALL ASSESSMENT A. Relevance B. Efficacy C. Efficiency D. Sustainability E. Institutional Development and Other Impacts F. Overall Project Rating G. Assessment of ADB and Client Performance VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS A. Key Issues for the Future B. Lessons Identified C. Follow-Up Actions APPENDIXES
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BASIC DATA Shanghai Investment and Trust Corporation Project1(Loan 933-PRC) Project Preparation/Institution Building TA No. TA Name Type Person- Amount Approval Months($) Date 1086-PRC Institutional Support to SITCO A&O 36 450,000 13 Dec 1988 As per ADB Key Project Data($ million) Loan Documents Actual Total Project Cost 100.00 87.20 ADB Loan Amount/Utilization 100.00 87.20 ADB Loan Amount/Cancellation 12.80 ADB Loan Prepayment 55.10 Line of Equity 3.00 0.00 Key Dates Expected Actual Appraisal 18 Aug-3 Sep 1988 Loan Negotiations 16-17 Nov 1988 Board Approval 13 Dec 1988 13 Dec 1988 Loan Agreement 28 Aug 1989 Loan Effectiveness 27 Nov 1989 27 Nov 1989 Loan Closing 27 Nov 1993 27 May 1994 Loan Repayment 15 Sep 2003 24 Oct 1997 Months (effectiveness to completion) 48 54 Loan Borrower of the People’s Republic of China Government Executing Agency Shanghai Investment and Trust Corporation Line of Equity Administering Institution SITICO Enterprises Company, Limited Shanghai Mission Data Type of Mission No. of Missions Fact-Finding 1 Appraisal 1 Project Administration Review 1 Project Completion 1 Operations Evaluation 1 A&O = advisory and operational, ADB = Asian Development Bank, SITICO = Shanghai International Trust and Investment Corporation, TA = technical assistance. 1establishment, its name was Shanghai Investment and Trust Corporation. However, in 1993, its At the time of name was changed to Shanghai International Trust and Investment Corporation (SITICO). The name SITICO is used in this report.
No. of Person-Days 42 85 14 24 24
EXECUTIVE SUMMARY In December 1988, in line with its interim operational strategy on the People’s Republic of China (PRC), the Asian Development Bank (ADB) approved a $100 million line of credit (LOC) to the PRC. It was relent to Shanghai International Trust and Investment Corporation (SITICO), the Executing Agency, for onlending to industrial enterprises in Shanghai Municipal Zone for technology upgrading and rehabilitation of obsolete and inefficient plant and machinery. A line of equity (LOE) of $3 million was also approved for Shanghai SITICO Enterprise Company Limited (SITEN), a subsidiary of SITICO, to make investments in majority privately owned enterprises in industry or service sectors to support the Government’s efforts in encouraging foreign direct investment and technology transfer. A technical assistance (TA) grant of $450,000 was provided under the Japan Special Fund to help build institutional capacity. The objectives of the Project were to (i) help finance technology upgrading of viable enterprises, (ii) strengthen the role of the SITICO group as a major source of equity financing through SITEN, and (iii) guide and contribute to further development of SITICO and SITEN. The loan, to be drawn in various currencies equivalent to $100 million based on ADB’s foreign exchange risk pooling system, was funded from ordinary capital resources and attracted a variable interest rate. The loan had a term of 15 years including a grace period of three years. SITICO was expected to add a minimum spread of 1 percent and pass on interest rate and exchange rate risks to the subborrowers. The loan utilization period was four years, and the maximum size of the subloans was $10 million. The subproject sponsors were required to contribute 15 percent of the total subproject cost for existing projects and 20 percent for new projects. Expenditure incurred by subborrowers up to 90 days prior to receipt of subloan documents by ADB was eligible for financing under the LOC. The project completion report (PCR), although fairly candid and objective, did not specify an overall performance rating for the Project, but stated that loan utilization and subproject performance were generally satisfactory. With the benefit of hindsight, it indicated that the covenants should have been designed to cater to the specific needs of nonbank financial institutions in the PRC. In particular, the PCR illustrated that covenants should have insisted on institutional independence of SITICO, clearly defined reserves for doubtful debts, and specified more realistic financial ratios for SITICO given its rapid expansion. The Operations Evaluation Mission generally agrees with the PCR, but believes that it could have better analyzed the information available at the time to draw more meaningful lessons for future projects. This evaluation focuses on (i) effectiveness of project design, (ii) achievement of objectives, (iii) capacity building, (iv) monitoring and supervision, (v) performance of SITICO, (vi) performance of subprojects, and (vii) development impacts and sustainability. The project design incorporated flexibility on retroactive financing and subloan size limits that were responsive to potential demand. However, the design had some weaknesses as well. It followed the traditional LOC approach without adaptation suited to an economy in transition. Also, it was inappropriate to pass on the foreign exchange risk of a long-term loan to subborrowers without access to any risk mitigation mechanism. Market conditions at the time made utilization of the LOE under ADB’s guidelines impractical. Finally, the Project concentrated only on the credit needs of the enterprises and did not ensure that they would operate in an appropriate enabling environment to sustain their transition to a market economy. All 23 subprojects financed under the LOC were sponsored by state-owned enterprises in various industry sectors. To a large extent, the subprojects were successful in upgrading their equipment and surviving the transition to a market economy. The timing of the financing for the Project was opportune, as the LOC became effective when some other sources of foreign
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currency loans had virtually dried up. In the absence of the loan, these state-owned enterprises would have faced difficulty in maintaining efficient production given the obsolete state of their machinery and technology. During implementation, however, several subloans had to be restructured due to severe financial problems caused by exchange rate adjustments. The TA provided consultancy services for a total of 12 months to SITICO and SITEN for project appraisal, monitoring, and supervision, as well as financial planning and liabilities management. It also provided overseas training for 13 middle managers in project appraisal and supervision, which appears to have been successful. Some of the staff members who received the overseas training are now in key management positions. The first computer hardware and software system for financial management was also set up as a result of the TA. SITICO’s operations witnessed significant growth in the 1990s in its various lines of business. Since 1997, SITICO has been proactive in its asset management, focusing on quality by tightening risk management, reclassifying assets, adjusting its credit structure, and improving its portfolio quality and return on capital. It streamlined its operations, diversified investments, strengthened institutional capacity, and improved operational strategies and practices in several areas, including project appraisal and management information systems. Given normal circumstances, it is likely that SITICO will be able to survive competition and invest prudently in the PRC’s changing environment. The overall Project is rated successful. However, the overall assessment is at the lower end of what constitutes successful due to the weaknesses in design that affected the efficacy of the Project. With ADB’s interim operational strategy, its objectives were appropriate at the time it was formulated. A majority of the subprojects that benefited from the financing are operating normally. Some subprojects faced difficulties and SITICO has helped them survive. SITICO, as an institution, has fared relatively well and has gained prominence in certain areas such as investment banking, aided by project inputs. In addition, the TA was helpful in building institutional capacity of SITICO through the management information system and financial management upgrades and human resource development through training. The LOE was premature and was not utilized. ADB projects of a similar nature in transition economies should move away from the traditional LOC design, carefully consider the constraints and needs of enterprises in a transition economy including their ability to cope with reforms, and provide for associated risk factors. They should also ensure, through policy dialogue, project design, or donor coordination that not only are enterprises’ credit needs met but also that they have an enabling environment to sustain their transition to operating in a market economy. Several enterprises operating in the Shanghai Municipal Zone lack operational autonomy and commercial viability. The Government needs to undertake restructuring of these, encourage more autonomy in management, and ensure that they have appropriate links within and outside the PRC to respond to technological changes and market conditions. Current procedures followed by international trust and investment companies promote unhealthy and distorted delays in portfolio cleanup. The Government, in addition to reviewing its Bankruptcy Law, should require international trust and investment companies to reclassify their assets according to standard international accounting practices and allow them the freedom to allocate sufficient provisions before profit to depict an accurate picture of their financial position. SITICO has taken significant steps to reorganize its structure so as to achieve its market potential and is further automating its business processes using the latest technology to become competitive in its business niche. To continue its focus on prudent and efficient operations, it should (i) strive to use staff with specialization in handling problem accounts and managing nonperforming loans, (ii) increase the level of loan-loss provisions, and (iii) effectively carry out
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loan and investment monitoring through the use of a risk-rating system capable early warning signals and of segregating problem assets at an early stage.
of
providing
I. BACKGROUND
A. Rationale 1. The early years of the operations of the Asian Development Bank (ADB) in the People’s Republic of China (PRC) were guided by an interim operational strategy developed in 1987.1To maximize the level of ADB’s effectiveness, the strategy required operations to focus on the heavily populated eastern region and three high-priority sectorsindustry, energy, and infrastructure. As such, Shanghai Municipal Zone (SMZ) was among the first recipients of ADB loans. The Shanghai Investment and Trust Corporation2Project was intended to modernize and rehabilitate obsolete and inefficient plant and machinery of the enterprises located in SMZ. Despite its long history as PRC’s economic center, the growth and performance of SMZ had lagged behind other provinces during 1982-1986. The loan was to help redress SMZ’s industrial decline by providing foreign exchange resources to finance the cost of imported equipment needed by small and medium-sized industrial enterprises. 2. The Shanghai International Trust and Investment Corporation (SITICO) was established in 1979 under the ownership and supervision of the Shanghai Municipal Government (SMG). SITICO is a leading international trust and investment company (ITIC) in Shanghai, and has played an important role in fostering the economic development of SMZ by providing long-term loans mainly to state-owned enterprises (SOEs) and PRC-foreign joint ventures. Its main operational activities includedbesides providing long-term (foreign or local currency) loans making equity investments in domestic and foreign joint ventures, providing consultancy services, assisting in the procurement of machinery and technology from abroad, and helping to set up joint ventures in SMZ. To undertake these activities, SITICO’s articles of association3 allowed a variety of activities, including lending and investment, consulting and advisory services, accepting savings and trust deposits, issuing bonds, international settlement of letters of credit, and dealing in spot and forward currencies. B. Formulation 3. Subsequent to preliminary discussions with ADB staff in 1987, the Government requested a credit line from ADB during the Country Programming Mission in March 1988 to meet a part of SITICO’s foreign exchange requirements for providing assistance to state-owned, collectively owned, and privately owned industrial enterprises, including joint venture enterprises located in SMZ. A project preparatory technical assistance (TA) was not considered necessary, and a Fact-Finding Mission was mounted in June 1988. The Appraisal Mission of August 1988 confirmed that the Project had been given high priority by the Government, and that SITICO was a suitable channel for ADB financing (described below). 1became a member of ADB in March 1986. The first country operational strategy study for the PRC was The PRC 2t degnahc saw hchi wn,ioatorrpCoraperp91 ni de. 91tie ot ht A me of establishment, its name was Shanghai Investment and Trust Shanghai International Trust and Investment Corporation (SITICO) in 1993. The name SITICO is used in this ort. 3rope .tSe ndpeApe percompect on rletio fxi1 rpjoht e
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4. In December 1988, ADB approved a $100 million line of credit (LOC) to the PRC for relending to SITICO, and a line of equity (LOE) of $3 million to Shanghai SITICO Enterprise Co. Limited (SITEN), a subsidiary of SITICO, to support the Government’s efforts to encourage foreign direct investment and technology transfer. In addition, a TA grant of $450,000 was provided under the Japan Special Fund for institutional capacity building of SITICO and SITEN. At the time of project approval, ADB was the only multilateral agency assisting SITICO improve the performance of the industry sector.4The objectives of the Project were to (i) help the PRC foster technology upgrading and modernization of the industry sector by financing equipment investments of viable enterprises in SMZ, (ii) strengthen the role of the SITICO group as a major source of equity financing through SITEN, and (iii) guide and contribute to institutional development of SITICO and SITEN. 5. At the time of project appraisal, the PRC’s foreign exchange reserves were not as abundant as it is today and nonstate sector was still developing. Therefore, ADB played an active role in arranging a cofinancing loan of $50 million from the Export-Import Bank of Japan. But this was never finalized.5 Instead,SITICO has secured a number of long-term foreign exchange loans from other sources since the launch of the ADB Project.6 The Project was expected to mobilize $200 million in incremental capital, generate annual foreign exchange earnings of $100 million, and create 5,000 jobs. Although the loan was geared to enhance productivity and improve product quality in established production facilities, it was also available for establishing new projects that would facilitate technology transfer. C. Purpose and Outputs 6. The basic purpose of the Project was to redress the industrial decline in SMZ by enhancing industrial productivity and strengthening SITICO and SITEN in aspects such as project evaluation and debt or equity financing. The expected outputs were sustainable subprojects financed by the LOC and SITEN’s equity investments, and the enhanced capacity of these institutions to evaluate and supervise such subprojects. The TA was expected to provide (i) services of three consultants for a total of 12 months to SITICO and SITEN in project appraisal, monitoring, and supervision, as well as financial planning and liabilities management capabilities; (ii) overseas training for about 15 middle managers in project appraisal and supervision; (iii) equipment and training f a c i l i t i e s to implement the a b o ve t r a i n i n g ; and (iv) two- month consultancy services to study accounting and management information system (MIS) computerization. The savings from the TA components were utilized to purchase SITICO’s first mini-computer and set up an information division in the corporation.7 Since this was the first ADB loan to SITICO and considering its project appraisal capabilities, the free limit for SITICO’s approval was set at $1 million. This was raised during implementation to $2.5 million, demonstrating ADB’s confidence in SITICO’s project appraisal capability.
4SITICO was an eligible participating financial institution under the $150 million industrial development Although project loan to SMG approved by the World Bank in January 1991, it did not utilize this facility. 5 The terms of the cofinancing were not acceptable to SITICO. 6 Since 1990, SITICO has raised two overseas bonds in the amounts of Y35 billion and $70 million. It has also borrowed Y9.15 billion and $145 million on the international markets since 1990. 7 Project documents indicate that the computerization study was carried out with SITICO funds by local consultants. ADB found SITICO’s request to use savings of TA components amounting to $150,000 to set up the information division justified.
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D. Cost, Financing, and Executing Arrangements 7. The loan amount was equivalent in various currencies to $100 million funded from the ordinary capital resources under ADB’s foreign exchange risk pooling system (ERPS),8 and attracted a variable interest rate and a commitment charge of 0.75 percent per annum. The loan was to be effective after SITICO’s Policy Statement and Development Strategy Statement had been submitted to ADB. The Government was to relend the loan at the same rate to SITICO, the Executing Agency (EA). The loan had a term of 15 years (up to 2003) including a grace period of three years. SITICO was expected to add a minimum spread of 1 percent for onlending to subborrowers and pass on exchange and interest rate risks to them. SITICO would also make arrangements to protect itself from foreign exchange risk from the time of recovery of subloans and repayment to ADB by maintaining and relending these funds in foreign currency. The loan utilization period was four years and the subloan applications were to be submitted within two years of loan effectiveness. The maximum size of the subloan was $10 million. The subproject sponsors were required to contribute at least 15 percent of subproject costs for existing enterprises and 20 percent for new subprojects. Advance purchases made up to 90 days prior to receipt of subloan documents by ADB were reimbursable under the subloan. 8. of $3 million was to be administered by SITEN, established in 1987 to promoteThe LOE venture capital investments. To be eligible for ADB equity investment under the LOE, enterprises had to be (i) incorporated in the PRC in the industry or service sectors, (ii) be majority privately owned, and (iii) enjoy considerable management autonomy and freedom to determine pricing for their products. The main beneficiaries were expected to be PRC-foreign joint ventures. The minimum and maximum investment limits were $100,000 and $1 million, respectively, and ADB’s participation was generally limited to 25 percent of the share capital of the investee enterprise. SITEN was required to make at least a matching investment. In addition, a minimum of 20 percent of the investment cost had to be provided by the sponsors. All appraisals of investment proposals had to be submitted for ADB review within the loan utilization period of two years. 9. The $450,000 TA grant was divided into four components to be implemented according to the terms of reference indicated in the project documents. First was $180,000 to finance the services of three consultants to strengthen project evaluation, project supervision, and financial planning and liabilities management. Second, $170,000 was allocated for overseas training of about 15 middle managers for a duration of 3-6 months. The third and fourth components were provided respectively for a two-month study on computerization of SITICO ($30,000) and provision of office equipment and training facilities ($70,000). The reports of the consultants were to be reviewed by SITICO and ADB, and consultants’ recommendations were to be implemented with the agreement of both parties.9 10. As part of its restructuring efforts (para. 38), SITICO prepaid the ADB loan in October 1997, six years ahead of schedule. ADB waived the prepayment premium. The prepayment occurred three years after completion, and about two years after the preparation of the project completion report (PCR). SITICO’s reason for requesting prepayment was the high cost of servicing the loan, since SITICO had by then gained access to cheaper sources of external funds. 8capital resources rate was 6.53 percent. ERPS was a means ADB had the time of appraisal, the ordinary At ado ed to allocate the foreign exchange risk on loans among its borrowers. 9no svElaauitnoM ission n era toliavelbaor fhe tpe Otiraptf thns oatiomend sewattnsnlu eocnatuornf Umocer lluf ,ylet review as final reports of three TA components could not be found at either ADB or SITICO, except for one of the parts (financial planning and liabilities management) of the first TA component.
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E. Completion and Self-Evaluation 11. The loan was closed in May 1994 after one extension, six months later than the original schedule with 87 percent utilization. ADB prepared the PCR in January 1996, following the Project Completion Review Mission of June 1995. The PCR attributed the underutilization of the loan to the noncompetitive variable interest rate charges of ADB. However, it did not analyze the repercussion of the foreign exchange risk borne by the subborrowers. Though fairly candid and objective, the PCR did not specify an overall performance rating for the Project. However, it concluded that loan utilization and subproject performance were generally satisfactory. With the benefit of hindsight, it indicated that the covenants should have been designed to cater to the specific needs of nonbank financial institutions (NBFIs) of the PRC. In particular, it noted that (i) special covenants should have been included for SITICO to become more institutionally independent of SMG, (ii) reserves for doubtful debts should have been defined more clearly, and (iii) financial ratios to be maintained by SITICO should have been more realistic given its phase of rapid expansion at the time. It recommended SITICO to (i) establish accounting and MIS procedures to monitor loan and equity portfolio performance; (ii) develop operational rules and regulations to manage problematic loans; and (iii) institute appropriate career development programs for its staff, particularly on securities and derivatives instruments. The Operations Evaluation Mission (OEM) generally agrees with the PCR, but believes that it could have better analyzed the information available at the time to draw useful lessons for future projects. The PCR did not evaluate the consultants’ performance or present any lessons learned from the design and implementation of the Project and the actual performance of subprojects. F. Operations Evaluation 12. This project performance audit report (PPAR) is based on a review of the appraisal report, the PCR, other documents in ADB files, and records, as well as discussions with staff members of ADB and those met during the OEM. The OEM visited Shanghai in September 2000 and its members met with staff from SITICO, SMG, and the People’s Bank of China (Shanghai Branch) and visited the sites of five of the 23 subprojects financed by the loan (Appendix 1). SITICO staff were cooperative in discussing many aspects of the Project and provided mainly its publicly available financial data to the OEM. It also helped the OEM obtain responses from six subprojects to the basic questionnaire (in Mandarin) that was forwarded prior to the OEM.10 Inthe ADB office, and met with staff at the World Beijing, the OEM visited Bank resident mission, as well as the Ministry of Finance (MOF). The major points examined by the OEM included (i) effectiveness of design, (ii) achievement of objectives, (iii) capacity building, (iv) monitoring and supervision, (v) performance of SITICO, (vi) performance of subprojects, and (vii) development impacts and sustainability. 13. Subproject analysis is based partly on the results of a survey completed by six subborrowers. The OEM found it difficult to obtain survey data from some of the subprojects, particularly those that had repaid their loans. The OEM aimed to visit at least one third of the total subprojects, representing several industry categories, and asset and loan sizes. The actual site visits depended on the availability and willingness of subproject owners to meet with the 10General information on the subprojects was provided in aggregate form by SITICO, but specific details of restructuring, amounts written off, and outstanding balances for each subproject, were not made available to the OEM.
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