Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.12757-CHA

STAFF APPRAISAL REPORT

CHINA

ENTERPRISE HOUSING AND SOCIAL SECURITY REFORM PROJECT

JUNE 10, 1994

Environment and Urban Development Operations DivisionCountry Department II (China and Mongolia)East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performnance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Currency Equivalents(as of June 1994)

Currency Name - Renminbi (RMB)Currency Unit - Yuan (Y) = 100 fen

Y1.00= $0.11$1.00 = Y8.70

Fiscal Year

January 1 - December 31

Principal Abbreviations and Acronyms

CCG Central Coordination GroupCOE Collectively Owned EnterpriseCPRP Comprehensive Pilot Reform ProgramEIA Environmental Impact AssessmentEPB Environmental Protection Bureau

HMC Housing Management Company (Joint Stock Company)HRO Housing Systems Reform OfficeICBC Industry and Commerce Bank of ChinaJGF Japan Grant Facility

MOC Ministry of ConstructionMOF Ministry of FinanceMOL Ministry of LaborMOPH Ministry of Public Health

PAYG Pay-As-You-Go fundingPBC People's Bank of China (The central bank)PCBC People's Construction Bank of ChinaPFI Participating Financial IntermediaryPMO Project Management Office

RECD Real Estate Credit DepartmentSIA Social Insurance AgencySOE State-owned EnterpriseSPC State Planning CommissionSRC Systems Reform Commission

TA Technical AssistanceUI Unemployment InsuranceYHSB Yantai Housing Savings Bank

FOR OFFICIAL USE ONLYCHINA

ENTERPRISE HOUSING AND SOCIAL SECURITY REFORM PROJECT

LOAN, CREDIT AND PROJECT SUMMARY

Borrower: People's Republic of China

Beneficiary: Municipalities of Beijing, Chengdu, Ningbo and Yantai; and Ministry of Finance,State Planning Commission, Ministry of Labor, Ministry of Public Health, andSystems Reform Commission

Loan/Credit Loan US$275 millionAmount: Credit SDR 53.1 million (US$75 million equivalent)

Terms: Standard, with maturities of 20 years for IBRD loan and 35 years for IDA credit

Onlending Terms: From the Government of China to Municipalities: for 20 years, including 5 years'of grace, at interest rates equal to 87% of IBRD rate, with the foreign exchangerisks passed on to the municipalities. The municipalities will onlend the funds tothe participating financial intermediaries (PFIs), either in local currency at avariable rate at least I % above the two-year fixed term deposit rate as publishedby the People's Bank of China (PBC), the municipality bearing the foreignexchange risks; or in foreign currency at a rate at least 0.5% above the rate paidby the municipality, PFIs bearing the foreign exchange risks. Under botharrangements, the maturity will be 20 years including 5 years' grace. The PFIswill extend 20-year mortgage loans in local currency to Housing ManagementCompanies for development and acquisition of rental housing and to individualsfor home purchase, at a variable interest rate at least 1 % above the 3-year capitalinvestment loan rate as published by PBC.

Project Enterprises in Chinese cities directly provide their workers with housing, pension,Description: health care and other benefits. This system seriously impedes labor mobility and

enterprise systems reform, and distorts housing and services delivery. The projectwill help the four municipalities implement a strategy to develop a market-basedhousing system and a robust social safety net, freeing enterprises of direct welfareresponsibilities, and thereby helping reform the enterprise system. To rationalizethe housing system, participating enterprises will divest themselves of theirhousing stock and further obligations to provide and manage their worker housing,and instead provide cash wage supplements enabling the workers to rent or buyhousing at commercial prices. The enterprise housing stock will be used as equitycapital to create housing management companies (HMCs) which will rent and sellhousing on a commercial basis. Participating local banks will provide long-termmortgage loans for HMCs and individual home buyers on market terms. TheBank Group loan/credit will be used mainly to supplement market resourcemobilization during the transition from the current housing finance system basedon earmarked enterprise funds. The regulatory framework for corporategovernance and property rights has been improved to safeguard housing marketand mortgage lending operations. The project will also support technicalassistance for development of HMCs, housing finance and a related propertyrights framework. To strengthen social security, the project will help project

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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municipalities accelerate their programs to widen pension, unemployment andhealth insurance pools and improve contribution and benefit formulae. Theproject will support technical assistance and training required for developingnecessary policies and management institutions. Project progress and impacts willbe monitored and evaluated systematically, to allow adjustment of projectimplementation arrangements in view of experience and also economic andinstitutional developments of China and to help disseminate the model.

Benefits: The project will help enhance efficiency, equity, and sustainability in housing andwelfare services provision by introducing consumer budget constraints andconsumer choice that are lacking under the current systems, and by transferringtheir financing and management responsibilities from enterprises to specialistinstitutions and market mechanisms. By delinking housing and welfare servicesfrom specific jobs and enterprises, the project will help define enterpriseobligations and performance better, increase flexibility in labor and investmentmanagement, and strengthen social protection for individual workers. In turn, thiswill help increase labor mobility, and help clarify and ease concerns over welfareimplications of enterprise restructuring. By developing and testing a strategy toestablish the new systems in the four representative cities, the project will helpestablish an effective approach to, and useful lessons for, the needed reforms inChina's enterprise, housing, and social security systems.

Risks: Establishing a wide range of new institutions and systems poses a formidablepolitical, management and technical challenge. This is particularly true for urbanhousing reform pursued under the project, as it calls for actions that are far widerand faster than under the Government's gradual reform strategy which has beenineffective so far. In view of the political challenge involved, project cities havebeen selected primarily on the basis of the municipal leaders' demonstratedunderstanding of these actions and willingness to undertake them. The will andcapacity to implement the reform have been demonstrated by the completion ofcritical reform steps by the time of negotiations, including rent increases of up to20 times prevailing levels. Mortgage lending rules under the project link theBank Group financing to maintenance and expansion of the reform steps,including expansion of the HMC system, adjustment of rents along with costescalation, and collection of mortgage loans. A large amount of technicalassistance has been and will continue to be provided to establish or strengthennecessary institutional, legal and technical frameworks. During the project, asystematic evaluation of the implementation and reform progress, including acomprehensive mid-term review, will be carried out in order to allow adequateadjustment where necessary and to draw useful lessons for extension of reform.

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Project Costs/a: Local Foreign Total---------------- US$ Million-------------

Technical Assistance and TrainingSocial Security 2.8 10.7 13.5Housing and Housing Finance 1.8 4.4 6.2

Total Base Cost 4.6 15.1 19.7

Physical and Price Contingencies 1.9 3.4 5.3

Total TA in Current Prices 6.5 18.5 25.0

Total Cost of Housing Financed Partlyby the Project, in Current Prices 601.2 323.8 925.0

Total in Current Prices 607.7 342.3 950.0

Financing Plan:

Local Banks 325.0 - 325.0

Housing Management Companiesand Individual Homebuyers 274.5 - 274.5

Central and Municipal Governments 0.5 - 0.5

IBRD/IDA 7.7 342.3 350.0

Total 607.7 342.3 950.0

Estimated Disbursements:

IBRD/IDA Fiscal Year 1995 1996 1997 1998 1999 2000 2001------------------------ US$ Million------------------------

Annual 28.0 70.0 91.0 63.0 46.0 38.0 14.0Cumulative 28.0 98.0 189.0 252.0 298.0 336.0 350.0

Poverty Category: Not Applicable

Economic Rate of Not Estimated. The main project benefits from institutional and economicReturn: management reforms could not be quantified.

Map: IBRD No. 25747R

/a Does not include taxes, tariffs, supervision and management expenses.

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CONTENTS

1 Enterprise Reform, Housing and Social Security in Urban China: Current Systems andIssues

A. Issues in Enterprise Reform ..................................... 1B. Financing and Supply of Housing .................................. 2C. Social Security .............................................. 4

2 Strategies for Reform

A. Government's Economic Reform Strategies . ........................... 6B. Bank Group Strategies and Experience ................................ 6C. Strategies for Housing Reform .................................. 8D. Social Security Reform Strategy and Tasks .............................. 13

3 The Project

A. Project Background .15B. Objectives and Rationale ....................................... 16C. Systems Reform Action Plans .17D. Housing Mortgage Loans .20E. Technical Assistance and Training .21F. Project Cost and Financing .23

This Staff Appraisal Report is based on the findings of the appraisal mission that visited China inOctober-November 1994, comprising Songsu Choi (Task Manager), Nicolette DeWitt (Counsel),Yonghui Fan (Operations Officer), Andrew Hamer (Economist), Chingboon Lee (Economist), FengWang (Legal Consultant), T.J. Luckens (Consultant Housing Specialist), and Youxuan Zhu(Resettlement Specialist/Planner). Earlier missions also included Alain Bertaud (Urban Planner), IvyCheng (Financial Analyst), Zafer Ecevit (Division Chief), Kevin Ayre, Barry Friedman (ConsultantSocial Security Specialists), Nena Manley (Counsel), Joanna Siegle (Consultant Health PolicySpecialist), and Yuan Wang (Economist). Project preparation was supported by Japan Grant Fund,which financed services of consultants including: Brian Abel-Smith, John Arnott, Brian Christensen(Social Security/Health Specialists), Gilles Horenfeld, Community Association Services, Inc. (HousingSpecialists), Jianxiang Ding, Robert Josephs, Richard Lawrence, Neal Stender (Lawyers), AprilLeClair, Robert Losey, Edgar Su (Banking Specialists), Clarence Chan (Property Specialist),Gwendolyn Ball, Paul Chan, Alice Huang, Mingjiang Li, Zichao Li (Financial Analysts) andXiaoyong Wu (Information Specialist).Peer reviewers are Bertrand Renaud, Lawrence Hannah, and Adrienne Nassau. The managingDivision Chief is Katherine Sierra and Director is Nicholas C. Hope.

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4 Institutions and Finances

A. Central and Local Governments .................................... 25B. Social Security Administration .................................... 26C. Housing Management Companies and the Enterprises ...... ................ 27D. Taxes and Finances ....................................... 29E. Financial Intermediaries ...................................... 30F. Property Rights and Legal Framework . ............................... 31

5 Project Implementation

A. Project Preparation ....................................... 34B. Responsible Agencies ................... 35C. On-Lending Arrangements ................... 35D. Disbursement ................... 37E. Procurement ................... 38F. Monitoring and Supervision ................... 40

6 Benefits and Risks

A. Economic Benefits . ................................... 41B. Equity Aspects ................................... 41C. Environment and Resettlement ................................... 42D. Policy and Implementation Risks ................................... 43

7 Agreements Reached and Recommendation . .............................. 45

ANNEXES

1. Project Cities and Their Reform Programs ................................ 472. Housing Rents and Prices, and Wage Reform .. 523. TA Programs for Housing Management Companies and Housing Market Development .... 584. Housing Management Companies: Financial Projections .. 655. Summary of Criteria and Procedures for Appraising and Servicing Housing Mortgage Loans 746. Housing Finance Technical Assistance Program: Outline .. 787. Financial Projections of Participating Financial Institutions .. 818. Property Rights and Other Legal Framework .. 879. Social Security Policy Reform Framework and Schedule .. 9310. Social Security Technical Assistance Programs .. 9611. Projected Disbursements and Price Escalation Factors .. 10712. Project Costs and Loan/Credit Allocation by City .. 10813. Monitoring, Supervision, and Evaluation .. 10914. Selected Documents and Data in Project File .. 113

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TABLEs IN TEXT

3.1 Summary of Reform Action Plans of the Four Cities ......................... 183.2 Estimated Housing Construction and Financing by City ........................ 243.3 Summary of Project Cost and Financing . .................................. 245.1 Disbursement Arrangements ......................................... 375.2 Procurement Arrangements .......................................... 39

FIGURE iN TEXT

Figure 1 Housing Delivery and Finance: Current System in China and a Market-Based System . .9

MAP

IBRD 25747R (Location of Project Cities)

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1. ENTERPRISE REFORM, HOUSING, AND SOCIAL SECURITY INURBAN CHINA: CURRENT SYSTEMS AND ISSUES

A. IssuEs iN ENTERRSE REFORM

1.1 China's impressive economic growth in recent years owes largely to the economic systemsreform that started with the agriculture sector in the late 1970s and later expanded to urban enterprisesectors. Especially fast growing are non-state sectors consisting of a nascent private sector in the citiesand a significant township and village enterprise sector operating in the rural and suburban areas.However, the bulk of manufacturing and service sector output in China is still produced by state-ownedand collectively owned enterprises (SOEs and COEs) as well as public sector non-profit entities locatedin cities.

1.2 A major thrust of urban economic reform has been decentralization of management decisions,from the government to enterprise managers and from the central to local governments. Before thereform process began, the government exercised direct control over production, investment and labormanagement of the enterprises. Enterprises remitted all their operating surpluses to the government andreceived investment and operating funds. As part of the reforms introduced over the last decade,enterprises now have considerable autonomy in production and marketing decisions. "Contractmanagement" systems introduced in the mid-1980s converted SOEs' formal objectives from gross outputto profit maximization, and provided enterprise managers with substantially enhanced autonomy over theallocation of resources and labor within individual enterprises. Instead of remitting earnings, they nowpay taxes and allocate after-tax profits for investment, worker bonus and welfare, and other expenses,subject to certain guidelines.

1.3 While increased management autonomy has helped rationalize resource allocation within eachenterprise, reforms in pricing and financing systems have increased efficiency of resource allocationamong enterprises. Final output markets have become far less subject to state control but subject toincreasing competitive pressures. Energy and key raw materials are now sold at generally realistic marketprices, except for a limited amount of supplies allocated and priced under the state plan. Financing forindustrial investment has been largely shifted from the budgetary allocation to bank lending andenterprises' own retained earnings. State-fixed prices now govern less than 15 % of transactions, and thestate controls no more than a quarter of industrial investment. These reforms have resulted in a visiblyupward trend in urban enterprise productivity.

1.4 The fundamental character of labor and welfare systems, however, has changed only modestly.Traditionally, workers were assigned jobs by the Government and provided with a whole range of in-kindbenefits along with nominal cash wages. The wages and benefits were provided by, or through, theenterprises but they differed little either among or within enterprises. In the state-controlled sector, thatsystem continues today with few major changes. Although a growing proportion of new workers are nowhired on contract basis, actual layoffs and job mobility are limited. Wage scales are strictly controlledby govermment regulations, with minimal variations across and within enterprises. For example, in early1993 monthly wages of the middle 60% of the workers in Chengdu fell within a narrow range betweenabout Yuan 320 and 350. Cash wages steadily increased with the economic growth, and all but displacedrationing of subsidized food and consumer goods. However, enterprise responsibilities for housing,health care, and pensions became stronger, as the government transferred the responsibility to financethe benefits, in addition to the management and delivery responsibility. This increase in enterprise

responsibility combined with increase in their authority over resource allocation has led to greaterdifferentiation of these benefits among and within enterprises, as the main available means ofcompensation. While this has helped introduce incentives needed for economic growth, it has reinforcedthe tie between benefits and jobs with serious negative effects both on the delivery of the servicesconcerned and on the enterprise system.

1.5 The in-kind benefits system has seriously limited efficiency and equity in housing and healthcare delivery. With little role played by consumer budget constraints and consumer choice, the standardsand levels of housing and health care services are constrained mainly by enterprise budget availability.As the fast economic growth and decentralization of the last decade eased the budget constraints onenterprises and local governments, housing and health care expenditures have grown much faster thanoverall growth of production, to levels far higher than those in countries at a comparable stage ofeconomic development (refer to Sections B and C below). However, the increased expenditures haveresulted more in rapidly escalating quantitative standards and unit costs of housing and health care, thanin increasing the range of service options and number of beneficiaries. As a result, inefficiencies in theresource use has grown as has the gap between those who enjoy improved standards of services and thosewhose employers are unable to provide them.

1.6 Another clear, negative consequence of this system is that it suppresses voluntary labormobility while severely restricting management and restructuring options on the part of enterprises. Thein-kind benefits, once extended, cannot easily be adjusted. As a result, the compensation system cannotbe used as an effective management tool. Each new worker hired requires a heavy commitment by theemployer, involving large lump-sum investments in housing and an entire obligation to provide healthbenefits and retirement pensions. This limits labor mobility, and deters employment expansion byprofitable enterprises, and entry by new ones. This particularly affects small COEs and private sectorfirms which do not have access to the welfare system catering mainly to SOEs and large COEs. Further,profitable enterprises bear a disproportionate burden of housing and welfare provision. Many employeesof unprofitable enterprises depend on the housing and health care benefits provided by family members'employers or by the government. The government also has to subsidize unprofitable enterprises to allowthem to provide welfare benefits.

1.7 Close to a third of SOEs and COEs are estimated to incur losses regularly. Their visible lossesare currently equivalent to about 5% of China's gross domestic product, and impose a large burden onthe Government budget, being twice as large as the net budget deficit. The economy suffers additional,hidden losses incurred to shield the unprofitable enterprises from hard budget constraints. The latter,indirect subsidies are incurred in the form of bank loan roll-overs, tax concessions, and cross-subsidiesprovided by profitable enterprises as described in para 1.6 above. These subsidies, necessary mainly inorder to protect workers of inefficient enterprises, have resulted in limited overall productivity growthof the SOE sector and inefficient resource allocation for the economy as a whole. Further developmentof China's economy would depend critically upon more vigorous growth of efficient enterprises andrestructuring of inefficient ones, which would be severely constrained by the tangled web of subsidiesand the lack of sustainable alternatives for housing and social security provision.

B. FINANCING AND SUPPLY OF HOUSING

1.8 Since urban economic reforms began in the early 1980s, fast economic growth and expandeddiscretion over resource allocation by enterprises and local governments fueled a housing constructionboom, sharply reversing the stagnation of the preceding decade, during which little urban housing wasadded. Each year during the last decade, approximately 150-200 million square meters of housing,equivalent to 3-4 million apartments, have been added to the urban housing stock. The stock stands todayat nearly 4 billion square meters of housing, of which more than two-thirds have been built after 1985.

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In contrast to the old system under which the government built and allocated housing to enterprises, mostof the new stock has been financed by enterprises and many local governments also transferred much ofthe older stock to enterprises. The housing is managed either by the enterprise that owns it or bymanagement companies under municipal housing bureaus.

1.9 Most of current urban housing, about 80% of total in a typical city, is owned by businessenterprises and other types of public sector work units and rented out to their workers at nominal rent.Throughout the 1980's, while housing construction was surging, average rents stayed the same at 13 Fenper square meter of floor space per month. Even after relatively large increases since 1988, currentaverage monthly rent stands at only about 35 Fen/m2 . Thus the rent of a typical apartment unit (52 m2

renting for about Yuan 18 or US$2 a month) accounts for less than 3% of household income and fallsfar short of minimal operation and maintenance cost. As one result, maintenance is neglected and muchof the existing housing stock, including that added in the last ten years, is likely to suffer seriousstructural deterioration and require large infusions of resources to deal with deferred maintenanceproblems in the near future. Within each enterprise, housing is generally allocated on the basis of job-related criteria such as seniority and rank, as well as "needs" defined by family characteristics and actualspace used. Once allocated, however, the housing is indefinitely kept by the employees, except to moveto better accommodation or to change jobs, even after retirement and even passed on to their offspring.These workers and their household members thus gain effective control over an asset worth about 20times average annual household income. Because individuals may live in housing provided by theemployer of another member of the household, or de facto inherited from a close relative, there is noone-to-one correspondence between the owner of a unit and the employer of the household head. In fact,as noted, enterprises with little if any profits depend on other enterprises and public authorities to housetheir workers.

1.10 Because housing has come to be viewed as an entitlement as well as a wage-related benefit,the government has maintained a powerful role in the sector, though reduced and indirect compared withthe former responsibilities of direct construction and allocation of housing. Periodically, the Ministryof Construction issues guidelines specifying the minimum desirable size of housing per person, which areoften further inflated by municipalities. The high and escalating standards have limited the number ofbeneficiaries of the housing boom of the last decade, who have been allocated new housing of highstandards, to typically less than half of the total population of the city. Households occupying less thanhalf the target level are usually classified as the "housing poor". Typically the "housing poor" are notlow-wage earners but employees of loss-making enterprises or non-profit agencies. Solving their housing"needs" then becomes a public policy issue, addressed by municipal governments through municipalhousing investment plans, financed by resources of the governments or other enterprises.

1.11 Long-term financing for housing is at a nascent, experimental stage in China, and mostenterprises purchase housing in cash. They acquire and maintain their worker housing units with fundsset aside from retained earnings and, although not formally sanctioned, often also from accounts reservedfor production and investment. Various "housing fund" systems have been introduced as an element ofthe Government's recent housing reform program, but most of them function not as genuine housingfinance systems but essentially as trust arrangements for funds earmarked for housing, raised fromenterprises and individual payrolls. One of the uses of the housing funds appears to be to assistenterprises which are otherwise unable to acquire housing for their workers, and otherwise solve theproblem of the "housing poor".

1.12 In contrast to housing management and financing systems, the housing development system hasundergone a process of significant reform. In the mid-1980s, a few real estate development companieswere first established as subsidiaries of large SOEs and COEs in several cities. Now there are numeroussuch companies in most cities, aggressively competing in a manner similar to their counterparts in market

economies. These companies no longer wait for specific orders but develop a supply pipeline basedpartly on municipal housing plans and vigorously market their products to enterprises. As a result, thereis increasing variety in design, although the basic pattern still are 5- to 6-story walk-up apartmentbuildings, and more high-rises in large cities. The materials supply industry has grown in a similarfashion. The land occupied by housing complexes used to be provided by the local government, eitherby requisitioning agricultural land from peri-urban communities or relocating existing urban occupants(often temporarily) to free up land for redevelopment. The investor who buys a housing unit has fullproperty rights over the structure, but only ambiguously defined "use rights" over the associated land.This system, however, is now being replaced in many cities by a system of land leases obtained throughcompetitive bidding or negotiation and carrying property rights that can be transferred or mortgaged.Relatively few of the distortions in urban enterprise housing, identified above, are seen in the suburbanareas which, as a result, are fast becoming suppliers of private rental housing for urban workers who areable to pay market rents.

C. SOCIAL SECURI

1.13 China's labor insurance system was established in the early 1950s in the context of an economymanaged predominantly by the state. Government prescribed a wide range of benefits mandated forworkers of SOEs and certain COEs, including retirement and disability pensions, health care, and evenunemployment protection. As part of the economic decentralization during the 1980s, responsibilities forfinancing and managing these benefit programs have transferred almost completely to enterprises, andresulted in increasing divergence of benefits among enterprises and growing problems of mismatchbetween resources and obligations of individual enterprises. In response to these and various other issuesarising with the changing economic structure, the Government is introducing piecemeal modifications tothe social insurance system as reform "experiments".

1.14 The social security responsibilities place a heavy and growing burden on enterprises. Overalllabor insurance costs of SOEs and urban COEs increased from about 20% of their total wages in 1982to 35% in 1992 (3.5% and 4.5% of GDP, respectively). Furthermore, this burden often falls mostheavily on enterprises that can least afford it, such as older enterprises in declining industries which haveinherited a large number of retirees and are experiencing declining profitability. In 1992, SOEs andCOEs, many of which were established in the early 1950s and 1960s, had pension expendituresamounting to 19% of the wage bill, compared to the 4% paid out by the relatively new group of jointventure, foreign- and privately-owned enterprises. With the aging of their work force, the pensionobligations of SOEs and COEs as currently structured are projected to reach 25 % of their total wages by2010. To buttress the social safety net, the government is compelled to subsidize such enterprises. Thiscontributes not only to the growing fiscal deficit but also to ambiguous enterprise accountability, impedingenterprise reform.

1.15 As a main thrust of the social security reform program begun in the mid-1980s, Governmenthas been promoting resource pooling for retirement pensions. By now pension pools for SOE workershave been established in most localities. In many cities, pension pools for COE workers and even forjoint venture workers has been formed, but separate from the SOE pension pool and at differentcontribution rates. Even within the SOE sector, funds for permanent workers are kept separate fromthose for workers hired under the new contract system, which has been in use for new employees since1987. In most cities, a considerable and growing portion of the workers of private and joint-ventureenterprises and smaller COEs are not included in any pension pool. While the pooling has achieved amodest redistribution of the pension burden among similar types of enterprises, the separation of pensionschemes severely limits their effectiveness and stability as a social safety net. Not only does the systemexclude the fast growing non-SOE workers, but it also separate young workers who tend to be oncontracts with SOEs or joint ventures from permanent SOE workers who are retiring in steadily growing

numbers. Further, management tasks to collect contributions and deliver benefits also remain mostly withenterprises.

1.16 Another important initiative introduced as part of the reform program is unemploymentinsurance for workers of SOEs and large COEs, funded with a 1 % payroll tax. However, the funds areused less for unemployment income support than for training and other employment services and so farhave run large surpluses. This is partly due to restrictive eligibility criteria for unemploymentcompensation, but fundamentally due to Government policies which still try to limit unemployment byrequiring enterprises to redeploy and retrain redundant employees.

1.17 Government operates health insurance, financed out of the general budget, only forgovernment employees and retirees, university students and demobilized soldiers. Each SOE is requiredto finance and operate its own group insurance providing coverage for active and retired workers. Asidefrom limited coverage and uneven burdens on enterprises, the most pressing problem of the existinghealth care system is the rapid cost escalation. Medical expenditures for active SOE workers increasedat an average rate of 23% a year during 1985-90, to account for 28% of total labor insurance costs in1992, and equivalent to 14% of SOEs' total payroll -- twice the budgeted figure. The rapid costescalation are largely attributable to a perverse incentive structure and a general lack of cost containmentmeasures. The lack of co-payment requirement encourages workers to overuse health care, and the rigidreimbursement formulae induce inefficient health care delivery by hospitals. To ease the uneven burdenof health care costs on enterprises, pooling for serious diseases has started in several cities on anexperimental basis. The Government is also designing and experimenting with a series of reform optionsincluding expansion of health insurance pools and implementation of various cost containment measures.

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2. STRATEGIES FOR REFORM

A. GOVERNMENT'S ECONOMIC REFORM STRATEGIES

2.1 Traditionally, the Government has advanced national reform programs through localexperimentation. This approach is due not only to uncertainties inherent to different, untested reformmodels but also to the great local diversity and autonomy, particularly after the decentralization duringthe last decade. Under the current inter-governmental system, the Government limits its role largely toguidance and coordination, giving local governments latitude to manage local affairs. Most Governmentpolicies are established as general guidelines, which require detailed local rules for implementation. Forissues for which solutions cannot be clearly defined, the Government often encourages local governmentsto experiment with new solutions, identify "best practices", and refine and disseminate them across thecountry as a whole.

2.2 Having succeeded in facilitating fast economic growth through introduction of new managementarrangements and market mechanisms, the Government has recently begun fundamental reforms in fiscal,financial, macroeconomic management, enterprise and labor systems in order to move forward with thenext stage of economic development. Central to these is enterprise reform, as the problems of SOEs andCOEs lie at the root of many difficulties in other areas. Therefore, Government is promoting broad,structural measures to enhance enterprise autonomy and accountability. Extending the managementdecentralization, the Government is promoting corporatization of SOEs, by conversion into shareholdercompanies and exercise of ownership through corporate boards, and reorientation of government agenciesfrom direct interventions and operational controls to regulatory oversights. Beyond these measures toimprove enterprise management, the current strategy to develop a "socialist market economy," officiallyadopted in 1992, calls for more aggressive measures to increase accountability and efficiency of theenterprise sector as a whole. These include measures to even the playing field for enterprises regardlessof ownership status, and hence promote non-state sector enterprises; and those to restructure inefficiententerprises such as leasing or sales of small unprofitable SOEs to better performing enterprises or privateinvestors, and even bankruptcies. Reform measures in other areas, including financial and fiscalmanagement systems, and accelerating of reforms in output and factor markets aim largely at fundamentalreforms in the framework within which enterprises operate so as to facilitate enterprise restructuring.

2.3 The scope and pace of actual enterprise restructuring, however, have remained limited andcautious partly due to the traditional strategy through experimentation but also largely due to concernsover the potential social impact of fundamental restructuring. SOE and COE work force number around100 million and, along with their dependents, represent most of the urban population. Consequently, itis now widely recognized that establishing sustainable housing and social security systems is a crucialprerequisite to broad economic restructuring. As a result, a new reform initiative, Comprehensive PilotReform Program (CPRP) to be launched soon in several selected cities, will combine steps to reformenterprise, labor, housing, and social security systems.

B. BANK GROUP STRATEGIES AND EXPERIENCE

2.4 The main thrust of the Bank Group's assistance strategy for China has been to help facilitateChina's transition from a planned to a market economy, while safeguarding the social safety net and theenvironment, by supporting innovative, flexible approaches to advancing the forefront of reform,particularly in SOEs and their operating environment. As an important part of the Bank Group's

assistance, an extensive series of sector studies has been carried out to define the issues and reformoptions for enterprise, labor, housing, and social security sectors. The relevant sector reports include"Industrial Policies for an Economy in Transition" (Report No. 8312-CHA, 1990), "Reforming SocialSecurity in a Socialist Economy" (Report No. 8074-CHA, 1990), "Urban Housing Reform: Issues andImplementation Options" (Report No. 9222-CHA, 1991), "Reforming the Urban Employment and WageSystem" (Report No. 10266-CHA, 1992), and "Industrial Restructuring: A Tale of Three Cities" (ReportNo. 10479-CHA, 1992). The Bank Group has also supported industrial finance projects in a number oflocalities and a growing number of lending operations to assist municipal and provincial governments inimproving infrastructure planning, pricing, and management.

2.5 The findings of the sector work and earlier industrial lending operations have indicated thatenterprise reform needs to be combined with reforms in the enabling framework, comprising variouselements across the usual sectoral boundaries, including social and management infrastructure. Reflectingthese findings, the Bank Group has been supporting several municipally-based industrial developmentprojects that emphasize reform of the sector infrastructure including technology support and the localgovernment's economic management systems. Realizing the need for even broader reforms, the BankGroup is preparing operations to support reform of enterprises together with other broad economicframeworks. The Bank Group has recently initiated preparation of national operations to support reformsin the financial sector, legal framework, technology transfer, and labor market systems as well as amunicipally-based comprehensive enterprise reform project. The proposed project represents an importantand critical element of this new series of assistance operations.

2.6 However, experiences accumulated through operations to help reform the frameworks forenterprise restructuring are still insufficient; and there have not been any lending operations aimedspecifically at reforming employment benefits systems either in China or elsewhere. The most relevantlessons for the project may therefore be drawn from housing, institutional development, and sectoraladjustment operations supported by the Bank Group world-wide.

2.7 Drawing lessons from housing and housing finance operations supported by the Bank Groupin the last 20 years as well as experiences of industrialized countries, the Bank's Housing Policy Paper(1992) found that performance of the housing sector depends on the pricing and regulatory structure ofthe sector as well as the economy as a whole; in particular, housing finance was found critical as agenerator and regulator of demand. Conversely, the housing sector was shown to have a significantimpact on national fiscal and macroeconomic health. Incorrect pricing of housing and housing loans hascontributed significantly to fiscal deficits and macroeconomic instability in some countries. The HousingPolicy Paper endorses operations involving non-traditional instruments to address broad sectoral andinstitutional issues.

2.8 Experiences with institutional development and sectoral adjustments, however, point outpotential difficulties facing operations that address a broad range of policy and institutional issues andsuggests important lessons to apply. While such operations need to deal with complex sets of interrelatedissues to be effective, the reforms must be carried out in a careful sequence, buttressed by early andvisible benefits for various stake-holders. Careful project preparation and borrower involvement,essential conditions in general, were found to be even more crucial for the policy reform and institutionaldevelopment programs. These lessons have been incorporated in the proposed project design andpreparation.

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C. STRATEGIES FOR HOUSING REFORM

Market-Based Housing System

2.9 There is general agreement on the desirability of a market-based housing delivery system whereend users select housing solutions from a wide range of options offered by independent commercialproviders. In such a system, enterprises would not have any direct responsibility for their employees'housing other than providing full, competitive wages. Figure 1 illustrates such a system in contrast withthe current system of housing delivery and finance in typical Chinese cities (Figure l.a) discussed inSection 1.B. Supply and financing of housing, functions now performed mainly by employers in China,would instead be carried out by independent housing consumers, suppliers and financial intermediariesin the market system. In order for commercial suppliers to sell or rent housing without subsidies, salesprices would have to recover all costs and earn profits, while rents would have to be high enough toallow investors to recover costs over the economic life of the housing. Consumers would deal directlywith suppliers to choose housing according to their needs and affordability. As costs of housing assetsare large compared to the homeowner's income or to rental receipts, long-term credit is an essentialingredient of a well-functioning housing market. In order to ensure sustained resource mobilization,financial intermediaries will have to offer competitive returns on deposits and charge interest rates thatcover the cost of funds and their intermediation. Credit risks need to be controlled by strengthening thelegal framework that provides for effective property and mortgage rights. Further, a fully developedhousing finance system should include various institutional channels and resource mobilization instrumentsthat will allow secondary mortgage markets to emerge and encourage the participation of different typesof investors.

Government Strategy to Date

2.10 In order to ease the enterprise burdens and at the same time meet demand for new housing,both of which were growing rapidly in the 1980s under the system, a large number of municipalgovernments adopted programs in mid-1980s to promote individual homeownership by providingenterprise and government subsidies of up to 70 % of purchase prices. It soon became apparent, however,that these programs were financially unsustainable, unable to generate significant housing sales, andinequitable. In view of the worsening problems, a State Council directive in 1988 banning deep discountson housing sales and encouraged experiment with alternative ways toward a view toward commercializinghousing, or establishing a market-based system of housing provision. For a specific model, it selectedtwo small cities of Yantai and Bengbu in 1987 to experiment with substantial but restricted rent and wageincreases and housing finance operation. In 1991 revision of the directive to make it applicable to allcities, the Government retained basic tenets of the 1988 directive, but lacking consensus for a bold reformstrategy, set more gradual targets for rent and wage increases.2.11 Consensus has been established that the current housing system needs to be transformed intoa market-based one, and that commercialization requires raising the currently nominal levels of housingrents to levels covering current and capital costs. In view of low cash incomes of households, however,only gradual rent increases are considered possible initially. As incomes have been rising consistentlyover time, relatively modest increases in the portion of household income spent on housing were expectedto lead to a satisfactory pace of rent increases. This strategy was put into practice in an experiment in1987 involving a small number of cities. A schedule of rent increases was adopted as a part of thenational housing reform program in 1991. Progress to date has been disappointing, however, falling farshort of the modest target for rents to recover current costs plus depreciation (the so-called "3 factors")by 1993. In fact, rents fell in most cities in real terms since economic reform began (Refer to para 1.9).

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Figure 1. Housing Delivery and Finance: Current System In China anda Market-Based System

Fig. 1.a Current Housing System In China

ENTERPRISE BUILDER

HOUSEHOLD BANKS

Key:

,-i Flow of Housing

Ezzz= Flow of Funds

E==* Housing Contributed as Equity

-::. ADvidonds

Fig. 1.b A Market-based Housing System

ENTERPRISE BUILDER

HOUSINGCOMPANY

HOUSEHOLD BANKS

CAPITAL MARKET

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2.12 Paralleling the rent increases, another important element of the Government strategy has beenhomeownership promotion. Housing units owned or bought by enterprises are offered to enterpriseemployees at "standard prices," set at cost adjusted for depreciation. Further discounts, thoughdiscouraged, are in fact common in many municipalities. Loans, carrying maturities of up to ten years(but most often about five years), are offered at interest rates that are lower than commonly available onloans of shorter maturities. The combination of low prices and low interest rates, however, has failedto generate significant housing sales to the general public, mainly due to low levels of income and savingsand to disincentives to buy created by low rents.

2.13 The Government has also promoted the creation of "housing funds," partly to supportindividual homeownership and more generally to augment the resources for housing construction. Tomanage the housing funds, local specialized institutions were established in Yantai and Bengbu as partof the 1988 reform experiment. However, in most cities, housing finance is handled by "Real EstateCredit Departments (RECDs)" belonging to local branches of the People's Construction Bank of China(PCBC) or the Industrial and Commercial Bank of China (ICBC). These institutions are described inmore detail in Chapter 4. Most of the funds are deposited by enterprises as part of the welfare reserves.Beginning in 1991, they have been supplemented with "provident funds" contributed equally byindividuals and their employees and kept in individual accounts. This essentially amounts to creating atrust for earmarked funds, with rates for both deposits and loans lower than other prevailing rates.Because the demand for individual loans has been insignificant, most of the housing funds have so farbeen used as short-term loans to enterprises for housing construction or purchase approved by the localgovernment.

2.14 A critical shortcoming of the strategy described above is its inability to bring an end to theenterprise's direct obligations for employee housing. Given that current rents will have to be increased10 to 30 times in real terms to reach commercially viable levels, it is doubtful such a target canrealistically be achieved in gradual steps and be acceptable to consumers. As apparent from the lack ofprogress so far, consumers are likely to resist even gradual rent increases if these are not fullycompensated by income growth. This is because raising the proportion of income spent on rent, asenvisaged in the Government strategy, represents real income reduction, albeit small. The affordabilityanalysis that underlies this approach is fundamentally flawed, as it ignores expenditures incurred byenterprises for employee housing and thus available for compensating wage adjustments when rents arerestructured. In effect, then, the current strategy is geared less toward establishing a market-basedhousing system than to mobilizing more resources for housing, in some cases even increasing theenterprise responsibility for housing. Due to the lack of efficacy of the current strategy, either for truecommercialization or for increased resource mobilization for housing, there is growing discussion amonggovernment and enterprise managers aimed at identifying an effective and feasible alternative strategy.In addition to the experience under the common model of housing reform decribed in the foregoing, moreambitious experiments have been carried out in a few cities. These have shown values and needs ofbolder reforms, but could not be expanded for lack of support and follow-up actions. Such experimentsin Chengdu and Yantai are briefly discussed in Annex 1.

An Alternative Strategy

2.15 An alternative strategy for commercialization of housing would focus on converting the in-kindhousing benefits into cash wages, and setting rents and sale prices at levels which cover at least the fullcost. The rent increases would be large -- in a typical city, about 15 to 20 times the current rents (fromabout Y20 per month to about Y350), compared with average household cash income of about Y900 amonth. However, workers would be fully compensated by wage adjustments and gain more freedom ofchoice. As this strategy redirects the flow of resources that are already available and used in the system,the rent and wage adjustments would be affordable at least at an aggregate level. An effective alternative

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strategy, however, would need to have devices to deal with key issues of transition, including the initialabsence of the market-based systems of housing delivery and finance, wage adjustment formulae, andaffordability problems faced by specific individuals and unprofitable enterprises.

2.16 A model of a market-oriented system to effect the transition is illustrated in Figure l.b.Critical elements of the model include:

(a) Autonomous for-profit companies, providing housing directly to consumers, that would takeover housing stock now owned and operated by enterprises;

(b) Commercially viable housing rents and sales prices that would recover the long-run marginalcost of housing;

(c) Cash wage supplements to compensate for rent increases;

(d) Market-oriented long-term mortgage lending operations for owner-occupied and rental housing;and

(e) Policy and regulatory frameworks that allow sustainable operation of the housing managementand finance institutions.

2.17 Housing Management Company. An effective device both to initiate a market-based housingdelivery system and to help the divestiture of enterprise housing would be the creation of joint-stockhousing management companies (HMCs). Several enterprises would join together to create an HMC bycontributing their housing stock as equity capital in return for ownership shares. The HMC wouldadminister this housing stock and also acquire new housing to rent or sell at commercial prices. Suchan HMC would be, in the usual typology of Chinese companies, a collectively-owned enterprise, whichas a class has shown relatively strong autonomy and accountability. Clearly defined ownership rights andcorporate governance structure would help reinforce these characteristics. During the transition, furthermeasures would be required to reinforce incentives for market-based behaviour and to preventcontinuation of ties between enterprise and housing. For example, while shareholders would want anHMC to maximize profits and hence dividend distribution and share values, they would also have othershort-term interests that conflict with the profit objective: to suppress HMC housing rents so as to limittheir wage adjustment burden; and to maximize HMC acquisition of new housing and hence housingsupply to their employees, which could reduce short-term cash flow and even financial stability of theHMC. Therefore, minimum pricing rules and other safeguards would be essential to ensure commerciallyviable behavior.

2.18 Initially, HMC customers would primarily consist of workers employed by the enterprises thatoriginally owned the stock. This is likely not only because the shareholding enterprises would want togive priority to their own employees, but also because commercial rents and prices would not beaffordable to employees of other entities whose wages would not be adjusted. The access to affordablehousing would induce other employers, such as private and joint-venture companies that are profitablebut lack housing, to invest in HMCs by making cash equity contributions. However, as additionalenterprises invest in or create HMCs and provide higher cash wages to their employees, a more openhousing market would emerge, providing wider choice for consumers and greater profit opportunities forHMCs and their shareholders. Again, it would be necessary to ensure that HMCs are not closelyidentified with a few shareholder enterprises and that more HMCs and other housing suppliers enter themarket and compete.

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2.19 Finance. Commercial levels of housing rents and high cash wages of individuals would makecommercially priced housing loans for HMCs and individuals feasible. In turn, lenders would be ableto mobilize financial resources from the market without resorting to forced savings or subsidies. Undercurrent market conditions, however, very long maturities, fixed interest rates, or reliance on foreclosuresale would impose undue risks to lenders. The large asset base of existing housing, which is fully paidfor, would provide a large rental income stream as well as a secure collateral for loans. The cash flowwould also allow a HMC to repay loans for new housing over a reasonable maturity shorter than thehousing's economic life, without having to charge extremely high rents on the new housing, which wouldbe necessary if the loan repayments are to be made solely by income from the new housing. Further,the cash flow would be large enough to allow the HMC to pay substantial dividends to shareholders,which would support wage adjustment, especially for enterprises which have made large investments andcontributed a sizeable stock of housing. This financial structure is discussed in more detail in Chapter4 and Annex 4.

2.20 Wages. Compensating for higher costs of renting or buying housing, enterprises wouldprovide cash wage supplements to allow workers to pay higher rents or mortgage payments. Thesupplements would be financed mostly from the savings of housing expenditures that are no longernecessary, supplemented with HMC dividends. As allocation of housing is currently used as a tool toincrease compensation differentials between different groups of workers, the wage adjustmentcompensating for housing rent increases will steepen the current flat wage distribution, and allow it tomore closely reflect job-related characteristics. In principle, the rent increase would be fully compensatedfor most workers. This is necessary to ensure that the workers' real incomes are not reduced; this is alsojustified and affordable as the total amount would not exceed what the enterprises have been paying toacquire and maintain housing. However, it would be important not to tie wage supplements directly andcontinuously to specific housing consumption that would vary with individual employees' needs and time.Therefore, the supplement would be determined on the basis of typical housing occupied by workersholding comparable jobs, not the specific housing unit occupied by a particular individual; and it wouldbe made a part of the comprehensive wage and subject to adjustment as a whole, not according to changesin housing consumption in the future.

2.21 Clearly, there will be winners and losers: those who have lesser housing than others incomparable positions and will now receive a supplement exceeding the rent increase; and those whooccupy disproportionately large housing and now would have to pay rent in excess of the wagesupplement awarded. While the ultimate solution for the latter would be to adjust their housingconsumption, by moving or subletting, transitional relief may be given in the form of an excess allowancethat is phased out, say, in three years. Transitional payments would also be needed for workers whosespouses are employed by enterprises which do not join the new housing system and do not pay a wagesupplement. This type of problem would constitute the largest demand for excess payments, and wouldpose significant problems when the reform covers only part of the city. However, eventual withdrawalof these subsidies would force other enterprises to pay the wage supplement for employees living inhousing not built by them and therefore spur them to join the new system. Such transitional paymentssimply monetize the cross-subsidy provided to the other enterprise and as such would not imposeadditional burdens to the enterprises joining the new system. As the transitional payments are withdrawn,the resources would be used instead to provide wage supplements to participating enterprises' ownworkers who have previously received neither housing nor wage adjustments.

2.22 Regulatory Framework. The proposed new system would require strengthening a numberof legal and regulatory instruments in China, including those governing registration and valuation ofproperty, landlord-tenant relationships, foreclosure, eviction, and condominiums. At present, contractsare commonly used to overcome specific deficiencies in the national legal framework. However, furtherdevelopment of the regulatory framework will become increasingly important as the housing market

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develops. In the meantime, local regulations would be needed to strengthen the current framework.Formal regulations aside, it would be difficult to enforce eviction and foreclosure and to apply othermarket disciplines in the housing delivery system in general unless public housing is provided toaccommodate the dispossessed and the poor.

2.23 Beyond Transition. The strategy outlined above focuses on the rental sector for reasonsmentioned in para 2.12 above. However, the strategy would establish commercial levels of rents, highercash wages, and long-term mortgage financing, that would lead to viability of ownership options.Therefore, provisions must be made to allow households, who wish to buy units and can accumulate thenecessary downpayment, to obtain mortgage loans. The success of HMCs would create a viable rentalmarket which would attract further investment from private sources and insurance funds. However, ashomeownership spreads, it would present a more important area of private investment. Because newhousing would increasingly reflect consumers' tastes and budget constraints, the intrusive regulations andguidelines governing housing unit sizes and other related aspects would lose much of its justification andshould be replaced with a set of ordinances to safeguard health, safety, and environmental considerations.

D. SocIAL SECURITY REFORM STRATEGY AND TASKS

2.24 A reformed social and health insurance system is critical to the creation of more efficient laborand enterprise systems in urban China. Such a system would need to be separated from the fortunes ofindividual enterprises, financed in a sustainable and equitable manner, portable, and providing a minimumsafety net. This requires a wide pool to allow redistribution of costs across enterprises and workers andover time, and benefit and contribution formulae that are consistent with each other and workers' needsand means. They would in turn require efficient management organizations that can take over a numberof tasks currently performed by enterprises. The Government is now pursuing reform initiatives andexperiments directed broadly toward these objectives and has made considerable progress, particularlyin pooling retirement pension funds. These initiatives, however, have yet to be consolidated into acoherent and detailed program with specific implementation plans. What is needed at this point is todefine the necessary next steps and schedules, to refine benefit and contribution formulae, and to developa necessary institutional framework and management capacity.

2.25 Benefits and Funding. For various pension and insurance programs, it is important thatbenefit and contribution formulae be defined consistent with the program aims and resources. Forpension reform, the Government is emphasizing individual contributions and encouraging local authoritiesto establish benefit and contribution formulae appropriate for different tiers of retirement income support:the basic social safety net managed publicly, enterprise-based pension schemes, and individual retirementsavings. Further, the Government is also encouraging modest prefunding in view of the growing pensionobligations that may be difficult to meet by the pay-as-you-go system currently used in most pensionschemes other than those for the SOE contract workers. As a near-term task, it would be important todefine at least the first, basic tier of retirement pension linked to changes in effective wages and livingcosts, and define a corresponding contribution requiring workers to pay a share. It would also beimportant to project resource requirements and availability of pension schemes and review variousinvestment options, with a view toward defining a benefit and funding formulae that would be consistentwith each other and sustainable in the long-term.

2.26 The main issue facing the health care system is the rapid escalation of costs. While costcontainment measures would include those to improve efficiency of health care delivery itself, the mostpressing task would be to correct the perverse incentive structure by a better definition of benefits andpayment methods. The Government is supporting experiments in selected cities with alternative healthcare management systems, including for example: a fee-for-service system combined with co-paymentand strong cost control measures; and a capitation system. Results of the experiments are being

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disseminated to help other localities formulate new payment and funding systems. It would be importantto introduce co-payment requirements and implement initial cost control measures in the light of theseexperiences, while continuing with further experiments with different strategies in various pricing andmanagement measures.

2.27 In contrast to the considerable reforms in retirement pension and health care systems led bythe Government, programs to provide treatment and compensation for work injury and income andemployment support for the unemployed remain perfunctory and ill-defined, left largely to individualemployers. The Government is now working to better define work injury protection and standardize thebenefits. Protection for labor redundancy is a most serious issue, whose resolution depends on a broadrange of fundamental structural reform policies. Government's current policy is to minimize layoffs bymaking the employing enterprise responsible for finding or creating jobs for the redundant labor, withsome assistance from the government agency supervising the enterprise. Although efforts are under wayto introduce improvements in unemployment insurance and related employment support services, theirsignificance would remain marginal without fundamental decisions on labor and enterprise restructuring.In the meantime, it would be important to clearly define benefit criteria, strengthen the labor informationsystem, and enhance the job training and placement services.

2.28 Pooling. The main thrust of Government reform strategy has been to pool resources forvarious components of social protection, from pension to health insurance, to spread the burden andenhance labor mobility. As described in Chapter 1, most progress has been made in pension pooling:pools for different types of enterprises and workers have been formed in many cities and counties. Theseare to be combined into provincial pools, which have already been formed in several provinces, and thennational pools. Given that there are separate current pools for different types of work units, however,it would be more productive to broaden and consolidate the pooling across different types of workerswithin each city before moving on to pooling over wider geographical areas. Efforts are under way toform insurance pools for health, work injury, and unemployment at city or county level. It would beimportant that such pools cover as wide a proportion of the work force as possible, given experience withthe pension pools.

2.29 Institutional Capacity. Strengthened management and policy analysis capabilities are neededto support the reform tasks, including pooling and establishment of new benefit and contributionformulas. For example, health facility utilization and cost studies are essential to formulating new servicepayment systems and setting health insurance premia. The contribution and benefit formulas for pensions,now being revised, as well as various insurance schemes, must be evaluated and updated periodically withbetter projection of needs and resources.

2.30 To manage pension pools, social insurance agencies (SIAs) have been established under localgovernments. These currently function mainly as clearing houses that collect funds from enterpriseswhose required contribution exceeds the pension costs of their own retirees, and transfer the surplus toenterprises running deficits. Basic pension management tasks remain with each enterprise, including thecollection of contributions, compilation of individual wage histories, calculation and delivery of benefits.For genuine pension pools to function effectively, most of these functions need to be taken over by acentralized management agency. This will bring about substantial economies of scale, particularly if datahandling is computerized. Once a system is established to collect contributions centrally, it could handlethe collection of all contributions and premia for pension, health insurance and other related schemes,although the different schemes would have to be managed separately.

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3. THE PROJECT

A. PROJECT BACKGROUND

Project Origin

3.1 The Bank Group has been supporting the Government's search for housing reform models sincethe reform experiment started in 1987. Initial assistance was provided through a series of occasionalpapers and policy seminars and formal sector work ("China: Urban Housing Reform: Issues andImplementation Options," op. cit.), analyzing weaknesses of the existing system as well as recommendingand elaborating on elements necessary for market-based systems. The sector work, delivered in 1991,provided a significant and timely input as the Government held a series of discussions to review theprogress of housing reform experiments begun in 1987 and to define a new national policy frameworkfor housing reform. While accepting the goal of market-based housing system, the Governmentconsidered the steps needed for rapid commercialization of housing well beyond what was consideredfeasible in China at the time and eventually adopted a revised, cautious national housing reform policyincorporating gradual rent increases and other steps, as described in Section 2.C. At the same time,agreement was reached that the Bank Group would help develop an operational model of an alternativestrategy and test it in selected cities prepared to carry out bolder reforms. In view of the Bank Group'sassistance focus on enterprise systems reform, it was decided that the project would also includeassistance for divestiture of enterprise social security burdens, another important enterprise reformconstraint. This component would include modest assistance to responsible central authorities to refineand implement national policy guidelines.

3.2 In late 1991, a Bank Group mission visited several cities in China to explore options for theproject. In view of the far-reaching reforms necessary, it was decided that they would be implementedin municipalities selected competitively on the basis of the following criteria:

(a) a demonstrated willingness and capacity to carry out the fundamental reform strategies asoutlined in Section 2.C;

(b) representativeness in terms of location and population size; and

(c) likely demonstration effect if included under the project.

Project Cities

3.3 The Government selected a short list of fourteen candidate cities, representing a wide rangeof size and location. Among these were several municipalities that had participated in earlier housingreform experiments. After the proposed reform framework was discussed between a Bank Groupidentification mission and the representatives from each of the short-listed municipalities in early 1992,the five municipalities of Beijing, Chengdu, Guanghan, Ningbo, and Yantai were selected. Shanghaimunicipality later joined the list but decided in 1993 not to participate in the project. It would insteadconcentrate on implementing an alternative housing reform program, begun in 1992, which focuses onincreasing housing construction by mobilization of "housing provident funds" (refer to para 2.13) ratherthan by pricing reforms and related measures. Later, Guanghan municipality was unable to participatein the project as it was reluctant to take the major step of raising the rents on the agreed timetable. These

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developments were symptomatic of the difficulties involved in commercialization of housing and theconsequent lack of national consensus and demonstrated model on how to proceed with housing reform.

3.4 The four municipalities participating in the project represent a sample of large and medium-sized cities of China: Beijing has about 6 million permanent urban residents, Chengdu 3 million, Ningbo600,000, and Yantai 450,000. It is significant that the cities of Chengdu, Ningbo, and Yantai are amongthe 18 (mostly medium-sized) cities chosen recently for the Government's Comprehensive Pilot ReformProgram to change enterprise, labor, housing, and social security systems. It is also significant thatYantai and Chengdu have carried out reform experiments that involved significant rent increases, housingsale, and new housing management or finance institutions. Although these experiments fell far short ofmarket-based operations, they were significantly bolder, compared with the gradual reforms carried outnationally, so as to demonstrate the value of a transition to a market-based housing system. Chengdu,the capital of Sichuan province (110 million population), also has been active in advancing the reformsin social security. Annex 1 outlines the profiles of the participating cities and their reform programs.

B. OBJECTIVES AND RATIONALE

3.5 Project Objectives. The project will support the implementation of a strategy to develop amarket-based housing system and a robust social safety net, freeing enterprises of parallel responsibilities,and thus helping promote labor mobility, enterprise restructuring and management improvement. Testedand developed in the four selected municipalities, the new models can be replicated in other cities inChina. Features of the models and strategy, discussed in Chapter 2, include: autonomous for-profitcompanies specializing in housing delivery direct to consumers, taking over housing stock owned andoperated by enterprises; commercially viable housing rents and sales prices; cash wage supplements thatcompensate for rent increases; market-oriented long-term mortgage lending operations for owner-occupiedand rental housing; policy and regulatory framework that allows sustainable operation of the housingmanagement and finance institutions; comprehensive pools of retirement pension, health insurance, andemployment services managed centrally by specialized municipal agencies; and enterprises freed ofresponsibility for directly providing and managing worker housing and social security benefits.

3.6 Rationale for Bank Group Involvement. The new systems to be established under the projectwill help increase the efficiency and sustainability of the housing and social security systems, whichrepresent a large and increasing part of the national economy. At the same time, the new systems willease a critical obstacle to urban labor market development and enterprise restructuring. The project willestablish basic frameworks that provide for increased private investment in housing, growth of small andprivate enterprises due to reduced entry costs, as well as continued development of social securitymanagement capacity and related regulations. Thus the project represents a key element of the BankGroup's country assistance strategy, to facilitate China's transition to a market economy by supporting,among others, innovative and flexible approaches to establishing appropriate frameworks for wide-rangingreforms. The Bank Group's involvement and experience in China's reform process and in policy andinstitutional development elsewhere would be helpful in integrating diverse elements of the necessaryframeworks. The transition from a housing finance system dependent on enterprises and forced savingsto one based on market resources would leave an interim funding gap that can be bridged with BankGroup financing.

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C. SYSTEMS REFORM ACTIONS

Housing and Wages

3.7 In the four project cities, the strategy to establish a market-based housing system, as describedin Section 2.B above, will be implemented. This would include the following actions, many of whichhave already been implemented:

(a) Several joint-stock Housing Management Companies (HMCs) will be created in each city, withthe housing stock that participating enterprises will contribute as equity capital;

(b) The HMCs will rent and sell housing at prices that recover all costs, initially giving preferenceto employees of participating enterprises;

(c) Participating enterprises will provide cash wage supplements to compensate for the averagerent increases, monetizing the in-kind housing benefit and funded partly by dividends fromHMCs; but the enterprises will no longer provide or maintain housing for their workers;

(d) Participating financial intermediaries (PFIs, two in each city) will mobilize market funds andprovide long-term mortgage loans at competitive rates; and

(e) Regulatory framework governing the definition and enforcement of property rights, includingmortgage and condominium rights, needed to safeguard operation of HMC and mortgagelending will be strengthened.

3.8 Assurances were obtained during negotiations that the project municipalities would carry outtheir respective housing systems reform programs and related technical assistance programs (see paras3.23 and 3. 25) according to time-bound action plans satisfactory to the Bank Group. The housing andwage reforms would start with enterprises that are willing to turn over their housing and join the HMCsystem and able to provide necessary wage adjustments. By April 1993, pre-incorporation conferencesapproved draft charters of at least one HMC in each project city. By appraisal in October 1993, theseHMCs had been formally incorporated, with enterprises pledging housing stock with total floor space ofabout 1.5 million m2. By the time of negotiations, this housing stock had been valued and transferred,and the rents and wages adjusted. While most of the enterprises joining the HMC system will do so byturning over worker housing in return for HMC shares, others with little housing stock will be allowedto join by contributing cash equity. Each HMC is projected to manage between 5,000 and 15,000apartment units. The number of HMCs will increase over time during of the project period, so that by2000, about 20% of the urban enterprise workers of Beijing and Chengdu are expected to be covered,70% of Ningbo's, and virtually the entire population of Yantai. The coverage and schedules of housingreform under the project are summarized in Table 3.1. Rent and wage adjustments are described in theparagraphs below and Annex 2, which have been incorporated in formal plans of action. Mortgagelending arrangements are discussed in Section 3.D below, which will be the basis of re-lendingagreements between the municipalities and PFIs. Institutional, financial and legal frameworks werestrengthened during project preparation, and are discussed in Chapter 4 and Annexes 3 and 8.

3.9 HMCs will charge housing rents and sales prices to recover all costs, including the cost of landlease, plus an allowance for profit. The minimum rents will include all current and capital costs ofhousing, or the so-called eight factors -- current costs of operation and management, depreciation (3%on structure and straight-line depreciation of land lease), return on investment (4-5 %), property and landuse taxes where applicable, insurance, and profits. However, for a limited number of years in Yantaiand Chengdu, the minimum rents for existing housing will cover the so-called five factors -- excluding

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profits, insurance, and land use tax (which is not applicable in other cases either) from the full eightfactors (refer to Table 3.1). The basis of rent calculation, for both new and existing housing, is to bethe cost of new housing construction current each year, adjusted for quality and location. Therefore,rents, even at the 5-factor level, will cover the long-run marginal cost of housing. According tocompleted valuations, the housing stock being transferred to the first HMCs is valued on average at 75 %-85 % of the costs of new housing, depending on the city. Although HMCs will be allowed to charge rentshigher than the specified minimum, HMC shareholders, employers of most of the tenants, are initiallylikely to keep rents near the minimum specified levels. As the HMCs begin to cater to a wider publicand the separation between employment and housing provision grows clearer, rents and sales prices areexpected to be set increasingly at market-clearing levels.

TABLE 3.1 SUMMARY OF REFORM ACTION PLANS OF THE FIVE CITIES

Beiiing Chengdu Ningbo Yantai TotalHOUSING

Project Coverage. 1994Participating Workers '000 92 93 50 60 275Existing Housing '000 m2 550 610 480 550 2290Number of HMCs 1 1 2 1 5

Proiect Coverage, cumulative by 2000Participating Workers '000 750 350 300 250 1650Housing 'million m2

Existing 7.0 3.5 3.0 2.5 16.0New (Estimate) 2.6 1.4 1.1 0.9 6.0

Minimum Number of HMCs 10 6 4 4 24

Rent Reform Time Table: Year when rents for existing housing will cover S or 8 factors of cost (Refer to para3.9). All new housing units built under the project will cover the 8 factors from 1994.

S factors from year N/A 1994 N/A 19948 factors from year 1994 2000 1994 1995

Average Rent in 1994, Yuan/n2 11.5 7.5 8.4 6.9 8.9

SOCIAL SECURITYYear by which to establish:

Comprehensive Pension Pool 1998 1993 1994 1994Major Medical Insurance Pool 1996 1993 1994 1995Centralized Pension Management 1997 1996 1997 1997

3.10 Most enterprises have queues of workers who have been waiting for many years to be allocatedhousing. The new rents are expected to reduce the excess demand for housing that exists in every city.However, the consumption adjustment process will take time and demand could still exceed housing thatHMCs can provide in the near term. In view of this, rationing would be inevitable for the initial periodbut will be limited by a priority system as follows. First preference in allocation of vacant units will begiven to tenants wishing to relocate, in order to facilitate the process of consumption adjustment. Foradditional housing allocation, the HMC will issue each shareholder a number of priority rights inproportion to the number of shares subscribed. The total number of priority rights issued will be up to25% of HMC housing stock, or an equivalent of two or three years of housing construction. Theenterprises will not be involved in housing unit allocation beyond distributing the priority rights.

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3.11 Wages (and pensions) will be adjusted to compensate for radically higher rents. The wage andrent adjustments would not, however, be exactly offsetting for all individual workers. Rather, the wageadjustments would be based on the average housing occupied by persons comparable in rank, seniority,and other defined job characteristics. These job-related factors are reflected, however imperfectly, in thetotal compensation paid currently to workers, including housing. Therefore, the wage adjustment for anindividual will be approximately, but not always, the same as the rent increases. A transitional excesshousing allowance will be granted to soften the negative impact on those whose wage adjustments areshort of the rent increases -- those who are occupying housing far larger than comparable workers andthose whose spouse's employer fails to pay the necessary wage adjustment. This allowance will bephased out over three years, and the resources used for wage adjustments for workers initially withouthousing units, who therefore were not included in the initial wage adjustment. (Refer to paras 2.20 and2.21). Further details of rent and wage reforms are described in Annex 2.

Social Security

3.12 To accelerate and enhance the on-going social security systems reform programs, each of theproject municipalities will carry out the following:

(a) Establishment or extension of retirement pension, work injury insurance, unemploymentinsurance, and health insurance pools covering all enterprises within each city;

(b) Refinement of the benefit and contribution formulae for the above, to require individualcontribution and to link benefits better with resources and needs;

(c) Implementation of improved health care payment methods and cost containment measures; and

(d) Building capacities of municipal agencies to manage the above pools, to take over most of theadministrative tasks from the enterprises.

3.13 Many of these steps have already been carried out during project preparation. For example,the four municipalities had, by October 1993, begun requiring all beneficiaries to contribute to thepension funds, to go along with enterprises' contributions; and revised pension formula in Chengduguarantees a minimum safety net through indexation and provision of a basic floor, and reflect the leveland length of individual earnings. Target dates for some of the reform actions are listed in Table 3.1 andfurther actions are described in Annex 9. Assurances were obtained during negotiations that each projectmunicipality would carry out its social security systems reform programs including related technicalassistance (see para 3.26) according to a time-bound action plan acceptable to the Bank Group.

3.14 To support the municipal reform efforts and develop a national policy framework consistentwith them, the Government will, through the joint efforts of the Ministry of Labor (MOL), Ministry ofPublic Health (MOPH), Ministry of Finance (MOF), State Planning Commission (SPC) and SystemsReform Commission (SRC):

(a) Develop a framework of social security and health care information systems;

(b) Monitor and disseminate policy analysis and reform experiences in the project cities;

(c) Develop and revise details of national guidelines for pension, work injury insurance,unemployment insurance and related services, and health insurance reforms.

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D. HOUSING MORTGAGE LOANS

3.15 Most of the Bank Group financing will be used by participating financial intermediaries (PFIs,two in each city) to partly finance long-term housing mortgage loans. This will serve two purposes: tohelp establish a new market-based housing finance system (para 3.7 (d)); and to help fill the transitionalfunding gap arising in the process of replacing the "housing funds" mobilized from enterprises withresources mobilized from the market. As this replacement process is expected to proceed gradually, theBank Group financing will be provided in a sliding scale: up to 65% of the amount of eligible loansdisbursed up to the end of 1996, 50% of such loans disbursed from then to the end of 1998, and 40%of loans disbursed thereafter. In aggregate, Bank Group financing, about US$325 million, is expectedto account for about 50% of the total mortgage loans made by PFIs during the project.

3.16 The Bank Group funds will be made available to PFIs on a first-come, first-served basis,without predetermined allocation between the two PFIs in each city or between individual and HMCloans. Two types of housing mortgage loans will be eligible for financing under the project: loans forindividuals to purchase new housing offered by HMCs for sale; and loans for HMCs to purchase or buildnew rental housing stock or rehabilitate rental stock. Both types of loans will have a maturity of 20years. The interest rate on each loan, set by each PFI according to its lending policies acceptable to theBank Group, will be variable every two years and will be at least one percent over the rate for 3-yearordinary investment ("capital construction") loans, set by the People's Bank of China (PBC), or anequivalent reference rate acceptable to the Bank Group. Such mortgage loan rates will be the highestamong formal lending rates available from local banks, and provide for a spread of about 2.5 %-3 % overthe rate on two-year term deposits, the most popular household savings instrument. The administeredinterest rate structure is adjusted periodically along with general price movements. Understanding wasreached during negotiations that these mortgage terms would be subject to review and modification duringproject implementation, so as to ensure that the terms are consistent with market-based resourcemobilization and financial sector development (para 5.10).

3.17 Loans for individual homeownership will finance up to 70% of the purchase price of thehousing. These loans will be secured by the lien on the housing purchased, appraised according toconmmon mortgage lending practices in market economies, and will be repaid in equal installments ofinterest and principal.

3.18 Loans to HMCs will normally cover up to 80% of the cost of purchase or construction of newrental housing. In view of start-up costs including those for establishment and land lease, loans up to90% of the capital expenditures may be given during the first year of operation of the eligible HMC.Loans financing construction of HMC rental housing will be disbursed according to progress, andprincipal repayment will be deferred for up to 2 years or the actual construction period, whichever isshorter. An HMC's acquisition or construction of housing for sale would not be eligible for long-termfinancing, although individuals purchasing such units will be eligible for individual mortgage loans. PFIsare expected to provide HMCs with short-term bridge loans, but such bridge loans or mortgage loans forpurchase of existing occupied units will not be eligible for financing under the project.

3.19 HMC loans will include unique conditions that reflect the current characteristic of the HMCsand the housing market. In view of the likely pattern of growth in debt service burdens of a typicalHMC, the loan will be repaid in equal amortization of principal, i.e., with interest payments decliningover time at a given interest rate. As foreclosure sale of a large number of rental units is likely to bedifficult in the near future, the borrower will be required to pledge as collateral its rental units that willgenerate net cash flow equivalent to at least 150% of the initial loan repayment, and that are generating,at the time of loan appraisal, net cash flow more than 120% of the initial loan repayment. In the eventof default, the lender may foreclose on the mortgaged property using streamlined statutory procedures

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and either sell the property or collect rental revenue using a management agent. The lender will assessnot only the collateral, but also the viability of new housing being purchased or built, and financial statusof the HMCs. Important points of appraisal will include reasonableness of costs and inco-me projectionsof the new housing being financed, the borrower's debt-equity position, and the extent of capitalexposure. Prior review by the Bank Group will be required for the first two HMC loans made by eachPFI and, thereafter, any single mortgage loan over US$7.5 million. The Bank Group may adjust thisthreshold from time to time to ensure adequate number of loans are reviewed from each city each year.

3.20 The Bank Group financing will be limited to mortgage loans for housing which has never beenoccupied before, and may not exceed construction expenditures for the housing incurred after April 1,1993. The PFI making the mortgage loan will be responsible for examining the construction accountsto verify that these limitations are complied with. These limitations are to ensure that the Bank Groupfunds are used only for productive purposes. The time limit, April 1, 1993, has been set in view of thefact that pre-incorporation of the first HMCs had been completed by then. Given the fact that housingconstruction usually takes about two years, however, this time limit is expected to leave room forfinancing for HMCs to procure housing under construction or awaiting occupation; such housing wouldhave been purchased by participating enterprises if their housing delivery functions were not taken overby the HMCs. It is estimated that only about US$3 million of the loan/credit will be applied towardfinancing procurement of housing currently under construction or awaiting occupation. This limit relatedto housing construction expenditures is to be distinguished from limitations on timing of mortgage loandisbursements by PFIs that may be financed retroactively up to a certain aggregate amount (para 5.15).

3.21 Assurances were obtained during negotiations that PFIs would make mortgage loans on termsand conditions and according to appraisal criteria satisfactory to the Bank Group. The terms, conditionsand appraisal criteria will include those described above in this Section and the appraisal criteria andprocedures described in Annex 5, as confirmed with the PFIs and the Government.

E. TECHNICAL ASSISTANCE AND TRANING

3.22 As the project involves establishing new institutions and practices or strengthening existingones, there is a large need for technical assistance and training (TA). Project preparation to establish orstrengthen a minimum necessary institutional framework has been helped with considerable TA financedlargely by the Japan Grant Facility (JGF) and by an Australian Development Assistance Grant. Duringthe project, further TA and procurement of equipment required for developing management institutions,policies, and regulatory frameworks will be supported, as summarized below.

3.23 TA programs for HMCs, to be managed by municipalities (detailed in Annex 3; at a totalestimated cost of US$4.8 million including contingencies), will be directed at:

(a) Development and computerization of accounting and management information systems,including property and customer registers;

(b) Development of residential property management and development systems and manuals; and

(c) Establishment and operation of training programs for operators in each city as well ascentralized training for middle and senior management.

3.24 The participating rmancial intermediaries will undertake TA (details in Annex 6; total costUS$2.5 million including contingencies) aimed at:

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(a) Improvement of mortgage loan appraisal and servicing procedures, including revision ofrelevant manuals;

(b) A study to recommend improvements in housing finance practices and environment - resourcemobilization and lending instruments, and asset-liability management;

(c) Development and computerization of mortgage servicing systems and adoption of the newaccounting system;

(d) Training of staff and senior managers in the above topics; and

(e) Hands-on assistance for mortgage lending operations by a resident advisor.

3.25 Municipal housing reform offices (HROs) and associated bureaus will undertake TA (detailsin Annex 3; total cost US$0.7 million including contingencies) for:

(a) Improving property rights and property registration systems;

(b) Improving property valuation capabilities; and

(c) Improving housing market monitoring and regulation.

3.26 Municipal labor and health bureaus will undertake TA (details in Annex 10; total costUS$15.6 million including contingencies) aimed at:

(a) Developing management systems for collection of contributions and payment of benefits forpension, health, and unemployment insurance;

(b) Developing a model to project long-run costs and resources for social security systems;

(c) Developing options for investing social security funds;

(d) Establishing the basis to expand labor exchange, job placement, training, small businessdevelopment, and other services for unemployed workers;

(e) Developing an information system on costs, utilization and quality of health services; and

(f) Studies to develop options for a health care cost reimbursement system and the financing andcoverage of health insurance.

3.27 The central government ministries concerned with social security (MOL, MOPH, SRC, SPCand MOF) will undertake TA programs (details in Annex 10; total cost US$1.5 million includingcontingencies) directed at:

(a) Strengthening capabilities lo analyze and develop policy and operational guidelines for furtherreform in the retirement pension, work injury, unemployment and health insurance systems;

(b) Establishing a health information system;

(c) Research on health care cost escalation, on alternative systems of paying providers, and themanagement of health insurance systems; and

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(d) Monitoring the progress of reforms undertaken by the project municipalities, to utilize thelessons for the design of new reform policies.

F. PROJECT COST AND FINANCING

3.28 A large part of expenditures under the project is subject to high expected inflation. It isprojected that construction costs are likely to increase faster than general price levels in Renminbi (RMB)terms during the project period, especially in the early part, and urban labor costs even faster. Pricecontingencies for all local expenditures under the project are estimated on the basis of the projectedconstruction cost escalation, and are expected to be about 56.8 % in RMB over the entire project period.The exchange rate between the RMB Yuan and US Dollar is assumed to move along with purchasingpower parity defined by the relative movement of general price levels. As a result, the local pricecontingencies expressed in US$ is projected to be about 30.1 % over the project period, compared with11.3% for the foreign expenditures. The price escalation factors used in estimating the pricecontingencies are shown in Annex 11. The costs of TA and computerization are estimated by adding tothe base costs physical contingencies equivalent to 10% of the base cost and adding the pricecontingencies as described. They are summarized by component in the preceding Section.

3.29 Most expenditures under the project consist of those for housing construction financed by acombination of the Bank Group loan/credit proceeds, matching funds mobilized by PFIs, and self-financing by borrowers. The Bank Group financing is expected to be matched about evenly, over theproject period, by the PFIs. Self-financing by borrowers can be estimated from expected behaviour ofdifferent borrowers and the minimum self-financing specified for mortgage lending (Section 3.D). HMCswill be by far the dominant users of the project financing. In the initial years after incorporation, theywill face a strong demand by shareholders for quick increases in housing supply and will need large cashoutlays to cover start-up costs. At the same time, they will have a large amount of existing housing topledge as collateral with no offsetting real estate debts. As a result, they are likely to borrow themaximum available mortgage loans. In later years, however, many established HMCs would find it moreadvantageous to use internal cash flow to finance a larger portion of their new housing acquisition, asdebt service burdens increase and opportunities for expansion become limited. Demand for individualhome loans is likely to be small in the initial years because homeownership and debt financing arenovelties and because potential home buyers have limited incomes and few assets. Experience has alsoshown that individual home loan borrowers do not avail themselves of maximum allowed borrowing (70%of cost under the project) for various reasons, including the relatively high ratio of housing cost to incomeand a traditional aversion to debt.

3.30 Based on these considerations, it is projected that individual homeownership mortgage loanswould average 60% of housing purchase prices, accounting for about 20% of all mortgage loans madeunder the project, and that HMCs will borrow the rest, for an average of 75 % of the cost of housingacquisition. Under this projection, the Bank Group loan/credit for housing loans (about US$325 million)would support about US$650 million (Yuan 7,000 million) in mortgage loans which would in turn supporthousing construction costing about US$925 million or Yuan 9945 million in current prices. Theseexpenditures would finance construction of about 6 million m2 of housing, equivalent to about 120,000apartment units. These expenditures will be mostly in local currency, but are estimated to contain indirectforeign cost components of about 35%. The projected quantities of housing loans and construction,summarized by city in Table 3.2, represent small proportions of total housing construction in all projectcities. The total cost of the project is estimated to be about US$950 million, or Y10,210 million,including price contingencies of US$218 million or Yuan 3,200 million. Table 3.3 summarizes the costsby component and financing.

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Table 3.2 Estimated Housing Investment and Financing by City

Beiiing Chengdu Ningbo Yantai Total

Mortgage Loans, Yuan million 3,392 1,572 1,126 910 7,000Total Housing Investment Financed

Yuan million 4,820 2,230 1,600 1,295 9,945US$ million 449 207 149 120 925

million m' 2.56 1.35 1.08 0.88 5.87

@ Unit Cost, Yuan/m2January 1994 1,200 1,050 950 950 1,115Averaee Current Cost 1.881 1.646 1.490 1.490 1.697

Table 3.3 Summary of Project Cost and Financing

Project Costs* Local Foreign Total---------------- US$ Million-------------

Technical Assistance and TrainingSocial Security 2.8 10.7 13.5Housing and Housing Finance 1.8 4.4 6.2

Total Base Cost 4.6 15.1 19.7

Physical and Price Contingencies 1.9 3.4 5.3

Total TA in Current Prices 6.5 18.5 25.0

Total Cost of Housing Financed Partlyby the Project, in Current Prices 601.2 323.8 925.0

Total in Current Prices 607.7 342.3 950.0

Financed by:

Local Banks 325.0 - 325.0

Housing Management Companiesand Individual Homebuyers 274.5 - 274.5

Central and Municipal Governments 0.5 - 0.5

IBRD/IDA 7.7 342.3 350.0

Total 607.7 342.3 950.0

* Does not include supervision and management expenses, taxes or tariffs.

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4. INSTITUTIONS AND FINANCES

A. CENTRAL AND LOCAL GOVERNMENTS

4.1 China's system of government is undergoing fundamental redefinition in its relationshipwith society at large as well as within itself. As discussed in Chapter 1, devolution of production andwelfare responsibilities from Government to enterprises created or intensified problems linked to theprovision of in-kind benefits. The reforms discussed here will play an important part in the redefinitionof the Government's role. In the case of social security, the reform involves an unambiguous increasein the role of specialized public institutions. The housing systems reform will redirect the Government'srole from that of directly guiding details of housing production and distribution decisions of enterprisesand builders to that of providing the regulatory and legal framework within which the market operates.Government's role is likely to remain critical in leading and shaping the transition from old to newsystems, however, partly due to the Government's ownership and still considerable control of enterprisesbut also due to the wide scope of issues and number of entities involved that require policy level directionand coordination.

4.2 The government system is organized as a matrix: each local administrative unit reportsboth to the respective line ministry of the central government and to the mayor and local people'scongress. Decentralization during the past decade has increased local autonomy and weakened sectoral,vertical alignments. While the central government sets taxation and revenue sharing rules, localgovernments are largely free to allocate resources within their jurisdictions. In general, central ministriesno longer issue detailed norms or control implementation and budgeting details of their local counterparts,but limit their involvement to establishing general guidelines and standards. Local government units areexpected to adapt the guidelines to local situations and establish detailed implementation rules and plans.The central government not only routinely approves local variations but actively encourages and promoteslocal innovations, as experiments for national reforms.

4.3 Local autonomy varies to some extent with the level of local government, due to theapproval processes and the need for regulations to be consistent with those of the higher level ofgovernment. Beijing municipality has the status of a province and is therefore more autonomous thanmost municipalities. On the other hand, as the capital of the country, its constituents consist mainly ofentities directly controlled by the central government, limiting the municipal government's sphere ofdirect influence. Other project municipalities enjoy more autonomy than most at comparable levels thanksto the special status given to municipalities at the forefront of economic reform. Chengdu, Ningbo, andYantai municipalities are at the level below provinces but they have the "independent planning" statuswhich allows them to prepare their own economic and systems reform plans and report to the centerdirectly.

4.4 Traditionally, the Ministry of Construction (until 1987 the Ministry of Urban and RuralConstruction and Environmental Protection) has been principally responsible for housing. However, inview of the need for housing reform and the wide range of the associated issues and interest groups, theGovernment has established a Housing Systems Reform Leading Group directly under the State Council.The Leading Group includes representatives not only of the Ministry of Construction, but also of theMinistry of Finance (MOF) and the People's Bank of China (PBC), among others. The secretariat of theLeading Group, the Housing Systems Reform Office (HRO) is established within the Systems Reform

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Commission (SRC), a super-ministerial body in charge of coordinating economic systems reform. Thisorganizational arrangement is replicated at different levels of local government.

4.5 The fact that SRC and its HRO are not implementing line agencies makes the role ofmunicipal governments particularly important in housing reform. In most municipalities, HRO is led bythe Real Estate Management Bureau, traditionally responsible for housing, and the ConstructionCommission, its supervising agency. Other municipal agencies also play important roles: LandAdministration Bureau, which controls supply and pricing of land; Economic Commission, whichregulates industrial and commercial enterprises; Labor Bureau, which regulates wages and other laborbenefits; and Finance Bureau, which controls taxation and investment. Since the housing systems reformin the project cities takes an approach and proceeds at a pace different from the ones applied nationally,most necessary measures have been and will be formulated by these municipal government entities, withthe approval or exception granted by the central government.

B. SOCIAL SECURrIY ADMINISTRATION

4.6 Four ministries are involved in administering the social security system, each responsiblefor a different type of workers and benefits. MOL is responsible for the social security benefits of urbanenterprise workers. MOPH is responsible for health insurance coverage for government employees,university students and demobilized soldiers, and also for supervision of public hospitals which are themain providers of health care. However, most benefits for government employees, except for healthcare, are the responsibilities of the Ministry of Personnel; and the welfare of rural workers, socialassistance to the poor, and social relief to those adversely affected by natural disasters are theresponsibilities of the Ministry of Civil Affairs. These ministries help design the benefit programs intheir specific areas of responsibility and, through their provincial and local offices, administer thebenefits. In addition to these line ministries, central coordinating authorities such as the State PlanningCommission (SPC), SRC, and MOF participate in the design of policies and financing.

4.7 Segmentation of the social security administration in China constrains the portability ofbenefits and limits risk-sharing across programs administered by different line ministries. It also addsto administrative costs by not allowing the substantial economies of scale that can result from jointlymanaging such tasks as the collection of contributions. In view of these problems, options to unify socialsecurity administration under a single line of authority have been considered in the past. Although afeasible solution is yet to be determined at the central level, stronger coordination has been possiblewithin most local governments, with the Labor Bureau playing a major role. Under the project, suchcoordination will be further strengthened, including joint management of such functions as maintainingthe rolls of active and retired workers and collecting different social and health insurance premia.

4.8 Under the guidance of MOL, administration of social security benefits is undertaken bylocal labor bureaus. Within a typical labor bureau, the employment services department is responsiblefor unemployment insurance and employment support programs, while the social insurance departmentdeals with all other labor benefit programs -- pensions, retiree services, health benefits, work injurycompensation, and maternity benefits of enterprise workers. The social insurance department hasdifferent divisions, each dealing with one type of program. In addition, when pooling of pensions beganin the mid-1980s, many municipalities set up municipal pension pool offices. Public hospitals and healthcare of government employees are supervised by MOPH and local public health bureaus.

4.9 As discussed in Sections 1.C and 2.D above, however, most of the social securityschemes are funded and managed by enterprises. As a result, the public agencies carry out little of theactual management tasks. Even in the case of retirement pension pools, the function of a typicalmunicipal pension management office is limited to collecting summary statistics by enterprise and

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redistributing deficits and surpluses among enterprises. For health care, although insurance schemes havebeen established in some enterprises, they are little more than tax-deductible expense categories, as thecosts are paid by the enterprise as they arise without requiring workers contributions. Therefore, the roleof the labor bureau as the supervisory agency remains marginal. A health insurance management officeunder the public health bureau performs the function of an in-house health care office as it deals only withhealth care coverage for government employees.

4.10 Due to the relative absence of direct management tasks, the elaborate administrativeapparatus of most labor bureaus and public health bureaus lacks adequate staffing, skill, and equipmentto handle large data processing and benefits delivery. In order to establish a social security systemseparated from individual enterprises, therefore, it is essential to strengthen the capacity of the municipallabor bureaus, public health bureaus and social insurance agencies (SIAs) to enable them to take overmuch of the benefit delivery and management responsibilities from the enterprises. As mentioned in para4.7 above, the project municipalities will move toward consolidating various insurance management tasksunder a SIA. It is also important, given the experimental stage of the social security reform whencontinuous evaluation and revision of new systems are necessary, that the capacity for policy analysis isstrengthened.

4.11 As discussed in Section 2.D, retirement pensions are funded on a pay-as-you-go basis bytransferring funds from enterprises whose contributions exceed their retirees' pensions to enterprises inthe pension pool that run deficits. Any overall surplus, if at all, tends to be small. In contrast, a largepart of pension funds for SOE contract workers and the unemployment insurance funds remain unspentand accumulated. Most of the surplus funds from these as well as the pension pool are mainly kept asfixed-term deposits in the banks. Some are also invested in government securities, corporate bonds andeven local development projects. Partly because the contract worker pension will be pooled together withother pension funds and partly because of the projected pattern of population aging, a partial prefundingof the pension will be started or planned under the project and the funds investment method will beimproved. One of the TA activities supported under the project will be to examine the future resourcesand needs for pension and social insurance benefits and explore different benefit, contribution and fundingformulae.

C. HOUSING MANAGEMENT COMPANiES AND THE ENTERPRISES

4.12 HMCs are organized by participating enterprises mainly to divest themselves of directresponsibilities to provide and manage worker housing. As such, each HMC is capitalized for the mostpart with worker housing turned over by the participating enterprises. In return, the enterprises receiveHMC shares that entitle them not only to customary ownership rights, including votes in shareholdermeetings and dividend distribution, but also to preferential access to housing for their employees duringthe initial period. This privilege would be particularly attractive to young enterprises which ownrelatively little housing; they could contribute cash or land for additional shares. The shares are allcommon shares, without distinction among forms of equity contributed. However, enterprises withdifferent needs will be allowed to trade rights to dividends with rights to priority housing allocation. Inorder to avoid excessive reliance on any one enterprise, no shareholder will be allowed to hold more than20% of the shares except in initial years after incorporation.

4.13 Participating enterprises will control the HMC's affairs by voting in shareholder meetings,normally convened annually, reviewing and approving major company policies and programs includingbudgets and dividends. Shareholders will exercise their ownership control mainly through electing ordismissing the executive board of directors, which will have between 5 and 20 members, and a board ofsupervisors, comprising 3 to 5 members. The executive boards will meet, in full or in managementcommittee, at least every two months to oversee operations, approve budgets and associated operating

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plans, select key management personnel, and decide annual dividends. A general manager, who normallywill be a director of the board, controls the day-to-day operation of the HMC.

4.14 One of the major technical tasks in incorporating a HMC is valuation of the propertiestransferred as paid-in equity. As the basis of determining the number of equity shares and subsequentlyrents of different apartments, it is essential that valuation be professionally done, with results acceptableby participating enterprises. In Beijing and Chengdu, substantial number of market transactions havetaken place, enabling valuation of housing and land based on market comparison. In others, buildingsare valued on the basis of the replacement cost of an apartment, appropriately discounted for age andlocation. Land lease values are established through negotiations between the local Land AdministrationBureau and the HMC or enterprise, or through auction. Enterprise housing is to be transferred with fullownership rights and associated responsibilities and land, with land use rights converted to long-term landlease by the enterprise or by the HMC so that the properties may be sold or mortgaged withoutgovernment approval.

4.15 Managing rental housing will be the HMCs' core business. HMCs' primary business willalso include acquisition or development of new housing for expansion of the rental stock and for sale toparticipating enterprise workers. Further, as opportunities arise consistent with its primary operation,an HMC will develop, rent, or sell a limited amount of commercial properties and high-income"commodity" housing. The various activities of an HMC generate different risks and rewards,particularly given short-term expectations of participating enterprises for dividends and capital expansion.It will be necessary, therefore, for the HMC executive board to limit the extent of capital investment ingeneral, and of secondary activities in particular, to prudent levels. The existing housing stock turnedover from the participating enterprises will have been fully paid for and therefore will provideconsiderable cash flow (depreciation and return on investment) and dividends. New rental stock will, onthe other hand, will require not only cash outlay for acquisition but also debt service, which will exceedrevenue generated for several years and thus depress an HMC's overall cash flow and dividends in theshort term. Acquiring or developing new housing for sale could be profitable but is likely to involvehigher risks, especially in the initial years when demand for owner-occupied housing is uncertain. Thelong-term mortgage loans to be partly financed by the Bank Group will not be available for suchacquisition of housing for sale. Further, any such ventures costing more than 10% of a HMC's equitywill be considered a major capital risk in appraising other types of loans to the HMC, unless justified bythe prior sales records.

4.16 A typical HMC will be organized in five functional divisions reporting directly to thegeneral manager: estate management, customer services, finance, acquisition and development, andgeneral administration. An HMC will maintain a small core of professional staff for financial control,planning and contract management as well as field staff for routine maintenance and customer services,recruited through an open selection process. Specialized maintenance, construction, and otherprofessional services will be contracted out to specialist firms. The organizational structure of an HMCand the technical assistance program to help develop accounting, operational, and strategic systems aredescribed in more detail in Annex 3.

4.17 Under the current system, most enterprises deploy their own staff to operate and maintaintheir housing stock. Except for a few large enterprises, they designate few workers to do these tasksexclusively. Technical staff attend to housing matters as needed, and administrative work is often sharedthrough rotation. The entire set of management activities related to the rental stock is to be taken overby the HMC staff and contractors upon transfer of the housing, except that rents may be collected throughsalary deduction on the tenant's written agreement. When an enterprise joins a HMC, its excess laborwill be absorbed in its core business activities or be eliminated over time. For large enterprises with their

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own housing crew, workers might be recruited by the HMC individually or organize themselves tocompete for operations and maintenance contracts.

D. TAXES AND FINANCES

4.18 The HMC generates transactions that formerly have remained non-monetized as in-kindbenefits: housing rents, cash wage supplements, HMC profits and dividends. These would normally besubject to business and property taxes, personal income tax, and corporate income tax, under the currenttax code. However, in view of the fact that these amount to nothing more than explicit accounting ofuntaxed transactions implicit in the current housing delivery system, the Government has grantedexemptions of these taxes for the first two years of the project, when they will be reviewed and extendedif still justified. The HMC's operations for clients other than participating enterprise employees, suchas sale of commodity housing, would be subject to usual business and income taxation.

4.19 For an enterprise to join an HMC, a critical condition is the ability to provide wagesupplements necessary to compensate for the rents the HMC will charge. While part of the wageadjustment would be funded with HMC dividends, the major portion would have to be funded by savingsin housing expenditures incurred before joining the HMC. According to national tax rules presentlyundergoing revision, housing expenditures, along with bonus and welfare payments, are in principle paidout of a Welfare Special Fund which is allocated from after-tax income. However, as discussed earlier,enterprises frequently do not distinguish housing operation and maintenance from business operations.Further, many even include depreciation and interest expenses due to housing with those of productionfacilities. These practices are related to the "contract management" system, vary among localities andbusinesses, but often include a certain amount of tax payments as a performance goal. In view of this,different project municipalities will allow major (but different) proportions of wage supplements to beincluded as part of the production expenses.

4.20 With these exemptions and accounting allowances, the housing reform is expected tohave a neutral effect on government tax revenues. The project would involve two other measuresaffecting municipal finance: land lease and off-site infrastructure. Municipal governments commonlyrequire developers to build, entirely or partly at their own expense, such facilities as schools and mainroads that benefit a much larger population than the intended residential occupants. HMCs will berequired to build only facilities that are directly needed for their housing developments. On the otherhand, partly off-setting the negative impact on municipal finance, the HMCs or the participatingenterprises will make lease payments for land occupied by existing and new housing, something otherowners of existing housing are not required to do. In the medium-term, as part of the project monitoring,various fiscal impacts of the new housing system will have to be closely evaluated with a view towarddeveloping an effective and equitable system of tax and charges.

4.21 Financial projections have been prepared for all HMCs established by the end of 1993,reflecting current operational plans. A sample is shown in Annex 4, along with an explanation ofassumptions used and sensitivity analysis. Diskettes containing projections for all HMCs are availablein the Project File. The Annex also presents a summary of similar projections for the entire HMC systemin each city, based on the schedule of project coverage expansion. Annex 4 (Table 3) shows a pro formaprojection that compares implications of new and old systems of housing delivery on enterpriseexpenditures and worker housing, based on the same assumptions used in the HMC project with a fewsimplifications. The projections show that HMCs will be able to generate considerable cash flow anddividends even if they increase the standards of operation and maintenance to much higher levels thancurrent; and increase housing supply faster than possible under the current system, while requiringenterprises to incur no more expenditures for wage supplements than those for housing. The sensitivityanalysis shows that the levels of interest rate and capital investments have the most significant effect on

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the financial viability of an HMC; and the debt-service ratio (ratio between cash flow from operationsand debt service) tends to be very sensitive to such key parameters. In order to evaluate long-termfinancial impacts of their investment decisions, the HMCs would be required to continue to prepare andrefine their financial projections. Assurances were obtained during negotiations that, as a condition ofborrowing mortgage loans, the HMC would be required to: prepare a 3-year projection of its operationsand finance and submit it to the PFI and Bank Group by October 31 of each year; and to maintain cashflow from operations not less than 1.S times the total debt service.

E. FINANCIAL INTERMEDIARES

4.22 In each city, two banking units have been selected to provide mortgage financing underthe project. This arrangement is intended to (i) ensure competition while keeping the institutionaldevelopment task manageable, and (ii) support experimentation with two different models of housingfinance operation. One of the financial intermediaries is the Industry and Commerce Bank of China(ICBC) branch, which will develop mortgage lending as one of its diverse commercial banking activities.The other is one of the specialized housing finance institutions -- the Real Estate Credit and LoanDepartments (RECD) of the People's Construction Bank of China (PCBC) branches in Beijing, Chengdu,and Ningbo, and the Yantai Housing Savings Bank (YHSB). Annex 7 presents a summary of financialstatus of the PFIs and complete financial statements and projections of one of them. During projectimplementation, other financial intermediaries, acceptable to the Bank Group, may be added to orsubstituted for these PFIs if necessary and appropriate for implementing the project strategy.

4.23 ICBC is China's largest bank, holding more than a third of all banking assets in a typicalcity. It is one of the four "specialized" national banks, traditionally focused on short-term lending anddeposit taking in urban areas. With gradual easing of business restrictions, however, it has diversifiedinto various other types of banking activities. Recently, especially since 1991, it has begun to offer short-or medium-term loans for housing and other real estate. Under the project, its branches in the fiveparticipating cities are expected to start offering long-term mortgage loans, diversifying its portfolio stillheavily dominated by short-term loans. The mortgage lending operation will be managed as a profitcenter, drawing most of the necessary funds from the general savings within the branch as a whole.

4.24 PCBC is another of the "specialized" national banks, which originally focussed onmedium-term financing of fixed assets. Due to its traditional focus on fixed asset loans, PCBC was thefirst specialized bank to offer mortgage financing and establish Real Estate Credit Departments (RECDs),and is still the dominant housing lender in the country. RECDs are units of local PCBC branches andare subject to the credit and operating policies of the latter. However, they keep independent accountsand pay taxes to local governments, whereas other PCBC earnings are consolidated nationally and taxeddirectly by the central government. Most local PCBC RECDs -- including those in Beijing, Chengdu andNingbo -- manage "housing funds" as the most important part of their business. The housing funds areearmarked and mandatory deposits by enterprises and their workers are lent out for housing purchase orconstruction by enterprises, in conformity with the local governments' housing policies. Under theproject, however, the housing funds will have to be replaced by competitive deposit mobilization. Theparticipating RECDs are therefore planning to draw on general deposits mobilized by the branch as awhole and their own special housing deposits, tied with its housing loan facilities, to fund the new long-term mortgage loans. These activities will be separated from any remaining housing fund operations.

4.25 In 1993, Government approved a plan to restructure the overall banking systemfundamentally, which would strengthen the People's Bank of China as an autonomous central bank, freedfrom responsibilities to automatically finance fiscal deficits. In addition, the various specialized banks,including PCBC and ICBC, would be reorganized as purely commercial banks. Their policy-based loanswould be either moved to new "policy" banks or otherwise administered independently from commercial

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operations; the housing fund operations of RECDs based on low deposit and lending interest rates maysimilarly be divested in this manner. The first of the policy banks, the State Development Bank, startedoperating in early 1994 and two more are slated for establishment in the near future.

4.26 Yantai Housing Savings Bank (YHSB) was chartered as a local specialist bank in 1987as part of the Government's housing reform experiment in selected cities, and gained considerable skillsin housing finance operation. Its ownership is shared by branches of the national specialized banks aswell as the municipal government. Its lending is restricted in general to housing and real estate relatedloans. Due mainly to the limited opportunities for mortgage lending, its operation remains small, with1992 total assets of Y950 million. Currently, it relies heavily on earmarked housing funds like PCBC'sRECDs (discussed above.) Unlike the latter, however, it does not have access to funds within a largerbanking system or interbank lending. Its only available alternative to the housing funds will be depositsand bonds, a full range of which it is authorized to offer, subject to normal approval procedures. Givenits limited market base and range of banking services, however, increased deposit mobilization will bepossible only by offering higher deposit interests than competitors. This is allowed to a limited extentunder the current regulations. In order to maintain viability, however, it would need to be allowed toexpand its market area and range of services so as to compete evenly with other financial institutions.

4.27 Assurances were obtained during negotiations that, as a condition of re-lending to aPFI, the PFI will be required to adoptfinancial and operating guidelines acceptable to the Bank Group.These guidelines will include the requirement that the PFI shall maintain its housing mortgage loanportfolio to meet the following performance criteria, some of which represent significant modificationsto general regulations, allowed by the Government as an experiment:

(a) arrears in excess of three months shall be less than 2% of housing loans outstanding,and shall be put on a non-accrual status;

(b) foreclosure actions will be taken for arrears in excess of one year, and the account willbe reconciled by writing off any portion not recoverable;

(c) loan loss provision shall be maintained at more than 1.0%, or at actual rate of lossexperienced in the previous two years, of housing loans outstanding; and

(d) interest spread shall be over 1.8%.

4.28 The PFIs have adequate appraisal, accounting, and control procedures for general creditoperations. Proper operation of long-term mortgage loans and the new accounting system (introducedsince July 1993), however, will require considerable technical assistance and training which will becarried out under the project (Refer to Section 3.1D and Annex 6). The local banking units are supervisedperiodically by local branches of PBC, local government finance bureaus and, in the case of ICBC andPCBC, the headquarters. However, the supervision is in general neither sufficiently frequent norsubstantive. The Bank Group is currently supporting a major technical assistance project to helpstrengthen PBC's prudential regulation capability, among others. To develop policy and regulatorycapacity regarding housing finance, PBC officers at headquarters as well as at branches in theparticipating cities will participate in the technical assistance and training carried out under this project.

F. PROPERTY RIGHTS AND LEGAL FRAmEWORK

4.29 Real Property Rights. There is a national legislative framework, supplemented by localimplementing regulations in each of the project cities, which allows individuals and firms to own

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buildings or units within buildings, and to transfer and mortgage these ownership rights by contract. TheState owns all urban land and used to allocate "land use rights" for specific uses. However, a new legalframework in effect since 1990 allows individuals and firms to obtain leasehold rights over urban landfor fixed periods of up to 70 years. Such leaseholds may be transferred or mortgaged by contract. Mostof the housing stock managed bv enterprises is based on allocated land use rights. These will beconverted into leaseholds either by the enterprises before transfer to the HMC or by the HMC after thetransfer.

4.30 Registration. Currently, urban land and building are regulated under two separate linesof administration -- State Land Administration and Ministry of Construction, respectively. Accordingly,the rights to land and buildings are usually recorded in two separate certificates issued by the local LandAdministration Bureau and Real Estate Management Bureau, respectively. This practice is not onlyinefficient but could lead to inconsistencies. Given the difficulty of unifying different administrative lines,some municipalities, including Beijing, are making efforts to better coordinate the two. The municipalregulations in the project cities have been revised during project preparation to: cross-reference theseseparate property records; allow for the recording of additional assignments or mortgages; and make themmore accessible for public review.

4.31 Condominimn Regime. Where individuals or firms own units in a building, they holdan undivided interest in the common elements of the property. National regulations and existing localregulations prescribe ways to deal with issues raised by mixed-ownership buildings and the managementof common elements, such as elevators or green spaces. During the project preparation, modelcondominium regulations and management agreements were developed in each city. These provide aunified framework for the creation and management of condominiums, including ways and means toassess and collect common area expenses, and enforcement of liens for such expenses as needed. Thesevarious requirements have been incorporated into local regulations and appropriate contract documents.

4.32 Landlord-Tenants Relations. Civil law recognizes the rights of individuals andenterprises to enter into contractual agreements, including leases. Failure of one party to fulfill itscontractual obligations gives the other party the right to take remedial measures and claim compensationfor its losses. Local regulations govern landlord-tenant relations in each project city. Model leaseagreements developed during project preparation spell out the rights and obligations of landlords andtenants in detail. The circumstances under which a lease may be terminated are also specified. Existinglocal regulations provide that if a lease is terminated and a tenant refuses to abandon the premises, thelandlord may seek a court order of eviction through streamlined procedures elaborated during projectpreparation.

4.33 Mortgages. The concept of security interest in property is established in the Civil Codeand further interpreted by Supreme People's Court opinions. Furthermore, national laws regardingbuilding ownership and urban land leases specifically allow real property rights to be mortgaged. Undergeneral rules established in the Civil Law and Civil Procedure Law governing the relationship betweendebtor and creditor, the mortgagor may seek a court-ordered sale of the property to recover the debt.A national law on mortgage is currently under preparation, drawing upon local experiences. Underanother project now under preparation, the Bank Group would provide support for this effort. In theabsence of a national law, a few municipalities in China have established regulations relating to mortgage.In most cases, however, mortgage loan contracts have been drawn up on the basis of internal rules of thelending banks, which often require other guarantees in addition to the mortgaged properties. TA duringproject preparation included providing examples of mortgage instruments, foreclosure procedures, andregistration of liens. Municipal regulations and PFIs' internal rules have been amended taking these intoconsideration. These measures strengthen the existing basis for securing mortgages. However, theexisting instruments used for mortgage lending themselves have not been widely tested, and hence the

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effect of the additional measures developed during project preparation is difficult to predict. During theproject mid-term review, the experience with mortgage lending will be evaluated with a view to definingways to strengthen the governing framework.

4.34 Dispute Resolution. While the Civil Code provides for arbitration and litigation toresolve disputes on contracts and their performance, specific procedures for eviction or foreclosure arenot spelt out. In general, procedures for resolving disputes regarding properties are specified in moredetail at technical and local levels. Professional arbitration committees specialized in the settlement ofhousing disputes already exist in each city. As eviction and foreclosure cases are increasing with growingjob mobility and experiments in mortgage lending, specific procedures on these matters are beingdeveloped in many cities. As part of project preparation, procedures for eviction and foreclosure wereelaborated and adopted as local regulations. Participating municipal governments will set aside housingdesignated for eventual redevelopment to provide temporary housing to persons who lose their housingas a result of eviction or foreclosure proceedings.

4.35 HMCs. It has been a well-established practice to create a company (collectively-ownedenterprise) by pooling resources of several enterprises or a group of individuals. However, the HMCsare among the first to be organized as joint stock companies with a formal structure and procedures inline with common international models for public companies. The HMC charters have been establishedon the basis of a guideline ("View on Norms of Joint Stock Companies" 1992) which, with minormodifications, was incorporated into the Company Law of 1993. That Law provides a framework fordifferent types of companies. According to the Law and each HMC charter, ownership rights areexercised in a customary fashion by votes proportionate to shares, to approve major policies and plansand to elect or dismiss the board directors. The Law allows listing of shares of joint stock companieswhich have met a set of minimum performance standards over the past three years.

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5. PROJECT IMPLEMENTATION

A. PROJECT PREPARATION

5.1 The following critical reform actions were completed prior to negotiations:

(a) formal establishment of at least one HMC in each city, with satisfactory charter andmanagement staff;

(b) transfer to the HMCs of enterprise housing stock, amounting to 8-20% of all stock to bebrought under the new system over the project period in each city;

(c) increase of rents of the transferred housing to commercially viable levels as described in para3.9;

(d) provision of wage supplements to the affected workers of the participating enterprises asdescribed in para 3.11; and

(e) adoption of municipal regulations supplementing the legal framework goveming exercise ofproperty rights by HMCs and PFIs.

5.2 The project, involving creation of new institutions and practices or significant modification ofexisting ones, has required extensive preparation efforts. Since project identification, preparation effortswere led by the participating municipal governments which, aside from establishing municipal regulationsand social security reforms programs, organized and guided the efforts of diverse concerned parties inand outside the municipal govenmments. Public education campaigns were carried out to explain the newhousing and wage systems. Later stage project preparation also benefitted from unusually activeinvolvement of the central government, which not only provided active encouragement for the project butalso allowed significant modifications to existing tax, accounting, and other formal regulations (seeSection 4.D). The Government formed a Central Coordinating Group (CCG, described in para 5.5below) that identified constraints imposed by existing central regulations and helped obtain necessarymodifications or exemptions as well as coordinating activities of the participating municipalities and PFIsto facilitate mutual learning.

5.3 Detailed technical work during the latter part of preparation was helped with consultantassistance, much of which was financed by JGF and also by an Australian Development Assistance Grant.Major technical assistance included: preparation of a model HMC charter and operating procedures;assistance in initial operational planning and projections of HMCs and PFIs; assistance in valuation ofproperties transferred to HMCs; technical guidelines for mortgage lending operations; models or examplesof legal instruments related to property rights, including those for condominium, mortgage financing,foreclosure and eviction, and lease; and review and advice on social security benefit formula revision andcomputerization plans. By the time of appraisal, the new HMCs had identified sites for their firstdevelopment projects and some had already secured leasehold to the sites and started design work. Aconsultant has been selected and expected to commence work in June 1994 on the first TA for HMCs todesign and install initial accounting and management information systems. Draft consultant TOR andcomputerization plans for the entire social security TA have also been completed.

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B. RESPONSIBLE AGENCIES

5.4 Most of the specific project implementation activities will be carried out by HMCs, PFIs, andthe municipal and central government agencies benefitting from TA. As discussed in Section 4.A,however, their activities are significantly influenced by the municipal and central governments. In orderto lead and coordinate the policy reforms, therefore, each of the municipalities has established a ProjectLeading Group chaired by a Vice Mayor and including senior managers of relevant municipal governmentunits, PFIs, and PBC branches. To support the Leading Group and carry out day-to-day coordinationof project preparation and implementation, each municipality has established a Project Management Office(PMO). PMOs are led by HROs and supported by the Finance Bureaus, except in Beijing where theleadership role is reversed. Main functions of the PMO will include: coordination of projectimplementation and policy reform; monitoring and evaluation of project and reform progress; review ofproject expenditures to ensure their consistency with the Loan, Credit, and Project Agreement; andcommunication with the Bank Group.

5.5 Policies and regulations of the municipal governments in turn are framed by those of thecentral government. Relevant central authorities include: MOF, MOL, MOPH, SPC, and SRC.Similarly, operations of PFIs are regulated by the PBC and headquarters of ICBC and PCBC. To providenational-level policy support for the project and to monitor, evaluate and disseminate the reformexperiences of the participating cities, the Government has established a Central Coordinating Group(CCG) comprising representatives of these authorities and chaired by MOF. Assurances were obtainedduring negotiations that the Project Leading Groups, PMOs, and CCG would be maintained withresponsibilities and staffing satisfactory to the Bank Group, and that, as a condition of effectiveness, CCGwould assign staff in number and with qualifications satisfactory to the Bank Group. Understanding wasreached during negotiations that CCG staff would include at least six full-time professionals with trainingand experience in social security, finance, economics, housing and administration, and at least one staffassistant.

5.6 Administration of Technical Assistance. Much of the TA requirements are common acrosscities and much of the consultant services can be shared among cities and central implementing agencies.In order to maximize efficiency and consistency, therefore, many parts of the TA would be managedcentrally rather than by each benefitting agency. Most foreign consultants and their national counterpartwill be recruited under consolidated contracts managed by CCG on behalf of the project cities as well asthe central authorities responsible for social security TA. The cost of such consultant contracts, exceptthose services exclusive to specific cities, will be shared by municipalities (and central agencies for theirpart of the social security TA) in proportion to total loan/credit allocated to them. Centralized trainingwill be managed in the same fashion. Some overseas study tours may also be organized centrally.Various agencies would need a large number of computers and related equipment, most of which shareessentially the same performance specifications. Procurement of such equipment will also be managedby CCG, and the cost of the specific pieces will be charged back to individual agencies receiving them.Within each city, TA for HMC development will be managed by PMO rather than individual HMCs,since the results of TA need to be made available to HMCs created later. Assurances were obtainedduring negotiations that CCG would provide the assistance to the project municipalities and PFIs formanagement of TA activities as described above.

C. ON-LENDING ARRANGEMENTS

5.7 The Bank Group will provide financing of US$350 million equivalent in total, consisting ofan IBRD loan of US$275 million equivalent on standard terms and maturity of 20 years including 5 yearsgrace, and an IDA Development Credit of SDR 53.1 million (US$75 million equivalent) on standardterms and maturity of 35 years including 10 years grace. Of this, the Government will use US$1.5

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million for the central TA for social security and health care. The Government will make available theremaining US$348.5 million equivalent to the four participating municipal governments: BeijingUS$168.5 million, Chengdu US$80 million, Ningbo US$55 million, and Yantai US$45 million.Loan/credit proceeds onlent to each municipality will be in the same blend of currencies as the loan andthe credit provided by the Bank Group, with a maturity of 20 years including 5 years grace, and aninterest rate equal to 87% of the IBRD rate. Municipal governments will bear the associated foreignexchange risks except those passed on the PFIs as discussed below. Assurances were be obtained duringnegotiations that the Government would make the loan/credit proceeds available to the municipalities onterms described above.

5.8 Each municipal government will make a part of the loan/credit proceeds available to its ownbureaus and offices to finance expenditures on TA for developing social security, property rights andHMC systems. The rest of the proceeds will be re-lent to PFIs in each city partly for technicalassistance, and mostly, on a first-come, first-served basis, to finance part of the eligible housing mortgageloans. Assurances were obtained from each of thefour municipalities that it would relend part of the loanand credit proceeds to PFIs satisfactory to the Bank Group, on terms and conditions satisfactory to theBank Group, forfinancing of eligible housing mortgage loans and TA. As a condition of participatingin the project, PFIs will be required to adopt satisfactory policies for their lending to final borrowers,as discussed in Section 3.D. PFIs' mortgage loans to final borrowers will be in RMB. Agreements werereached during negotiations that as a condition of disbursement of the loan/credit proceeds allocated toeach municipality for mortgage loans, the municipality concerned would enter into relending agreements,satisfactory to the Bank Group, with at least two PFIs.

5.9 Two different sets of terms and conditions will apply to re-lending of the loan/credit proceedsfrom the municipal governments to different PFIs. In most cases, the municipal government will bearthe foreign exchange risks and provide the PFI with RMB funds equivalent to the proceeds. The annualinterest rate will be variable and at least 1.0% greater than the annual compound rate equivalent of two-year fixed term deposit rate, as published by PBC. The maturity will be 20 years including 5 yearsgrace. In other cases, to be applied in relending from Yantai municipal government to ICBC and YHSB,the proceeds will be re-lent to and repayable by PFIs in U.S. dollars. The maturity will be the same asabove. In these cases, the interest rates will be negotiated between the municipality and the PFI so asto provide a margin that will adequately cover credit and foreign exchange risks borne by the PFI. Topreclude subsidization by municipalities, assurances were be obtained during negotiations that the ratewould in no case be less than 0.5% above the rate for the loan/credit proceeds charged by theGovernment to the municipalities.

5.10 These relending arrangements reflect the current difficulties in, and willingness to experimentwith, foreign exchange management within the banking systems. Currently, municipal governments havesubstantial control over enterprises in their jurisdictions and therefore considerable experience andcapacity in matching foreign exchange demand and supplies among them. Further, their tax bases areelastic to domestic inflation and hence provide a measure of protection against the foreign exchange risks.On the other hand, at present there is no capital market instrument for PFIs to use to manage such risks.It is also difficult to manage the foreign exchange demand and supply within each national bank partlydue to the difficulty of inter-regional capital transactions. PFIs' assumption of foreign exchange risksin the small city of Yantai represents an experiment for such risk management. Understanding wasreached during negotiations that the terms of relending as well as the final lending would be reviewedannually, whenever PBC revises the general interest structure, and when the municipality, PFI, or BankGroup requests. The purpose would be to evaluate whether the terms adequately provide for market-based housing systems development and market resource mobilization by PFIs, consistent with projectand financial sector development, and to agree on appropriate modifications to the terms if necessary(para 7.3).

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D. DISBURSEMENT

5.11 Although a standard disbursement profile has not yet been established for housing financeoperations supported by the Bank Group, disbursement under financial intermediary lending in generalhas taken five and a half years to complete in the East Asia and Pacific Region and six years world-wide.On the other hand, the comparable period for industrial development and finance projects in China standsat eight years. The reform actions that are required for the mortgage lending operation by PFIs underthe project could constrain the disbursement speed. In view of these considerations, the project isprojected to be completed by December 31, 2000 and the loan and credit accounts will be closed on June30, 2001. The projected disbursement profile is shown in Annex 11.

5.12 Special Accounts. Five separate Special Accounts will be maintained -- one for the centralTA expenditures, to be managed by MOF, and one for each of the four municipalities. An authorizedadvance of US$400,000 will be initially deposited for the central Special Account, US$9.0 million forBeijing, US$4.0 million for Chengdu, US$3.3 million for Ningbo, and US$2.8 million for Yantai, fora total of US$19.5 million. These advances to the municipal Special Accounts are equivalent to averageprojected disbursements for about four months. The authorized deposit for the central account is largerthan the four months' disbursement for central TA in order to facilitate disbursement for TA andequipment procurement, contracts for which are small in aggregate but are expected to be relativelylumpy. These arrangements were confirmed during negotiations. Application for replenishment wouldbe submitted to the Bank Group each month or whenever each Account is drawn down below 50% ofits initial deposit.

5.13 The proposed disbursement arrangements are shown in Table 5.1, and allocation by city inAnnex 12. Eligibility criteria of the mortgage loans are described in Section 3.D, including additionallimitations on Bank Group financing of the mortgage loans (para 3.20).

TABLE 5.1 DISBURSEMENT ARRANGEMENTS

AmountCategorv (US$ million) % of Expenditures to be Financed

(1) Goods 8.7 100% of foreign expenditures;100% of local expenditures (ex-factory costs); and70% of local expenditures for other items procured locally

(2) Consultancy 15.8 100% of eligible expendituresand Training

(3) Housing 325.5 65% of amounts paid under mortgage loans until December 31, 1996;Loans 50% of amounts paid under mortgage loans after December 31, 1996

until December 31, 1998; and40% of amounts paid under mortgage loans after December 31, 1998.

Total 350.0

5.14 Documentation of Expenditures. Full documentation will be required for withdrawalapplications for goods supply contracts valued at US$200,000 or more, consultant firm contracts valuedat US$100,000 or more, individual consultant contracts valued at US$50,000 or more, and mortgageloans financing civil works contracts valued at US$7.5 million or more. Expenditures for others may

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be disbursed the basis of Statements of Expenditures. PFIs will be primarily responsible for verifyingand documenting compliance of mortgage loans they make with agreed conditions. PMOs (and CCG forthe central Account) will verify that expenditures are made for the purposes of the project, maintain thedocuments supporting the Statements of Expenditures, and make them available for review by the BankGroup on request. The municipal Finance Bureaus (and MOF) will certify the statements, prepare andsubmit withdrawal applications to the Bank Group, and manage the Special Accounts.

5.15 Retroactive Financing. Reform actions started in substance in the middle of 1993 to lay theground for the project. To support early implementation to follow up these reform actions, paymentsmade after October 25, 1993 for technical assistance expenditures and under housing mortgage loans andagreed upon by the Bank Group will be retroactively financed, up to a total of US$35 million equivalent.

E. PROCUREMENT

5.16 Housing Procurement. In most part, the project will finance part of the eligible mortgageloans made by 8 or more PFIs for more than 20 HMCs to build or purchase new housing for rentalpurposes, mostly walk-up or high-rise apartment buildings. As for-profit entities, HMCs are expectedto seek the best available procurement through prudent evaluation of both market demand and supply.For development of new housing or rehabilitation of existing housing, HMCs will award civil workscontracts through local competitive bidding (LCB) procedures acceptable to the Bank Group. A reviewof completed housing construction projects in Chengdu shows that most of them range in size from about30,000 m2 to 80,000 m2 of floor area, or about 600 to 1,500 apartment units. Some of these projectswere constructed as parts of larger development schemes implemented over many phases. This size rangealso coincides with the scope of investment that can be financed annually by a typical HMC, that wouldhave between 250,000 m2 and 800,000 m2 of existing housing assets. Construction costs of these typicalprojects, in today's prices, would range from about US$3 million to US$10 million, depending on sizeand city. Any civil works procurement package estimated to cost US$7.5 million or more will be subjectto the Bank Group's prior review. In addition, bidding documents and procedures will be reviewed aspart of the Bank Group's prior review of mortgage loan packages (para 3.20). These loan or workspackages are expected to include about 40 largest civil works contracts with a total value of about US$270million, or about 75% of all civil works procurement value.

5.17 HMCs may choose to procure new housing from real estate developers, in order to focus ondelivery of housing to users rather than on developing it, or to take advantage of cyclical marketconditions. For such purchases, the HMC will obtain quotations for apartment buildings suitable for itstarget market and compare them against expected rental income estimated on the basis of detailedevaluation of apartments offered for sale. Financing under the project will be limited to purchase ofresidential buildings that are under construction or newly finished and have never been occupied (para3.20). These purchases are likely to be small in size, probably less than US$2 million each, for anestimated aggregate of about US$200 million. The rest of the project financing will be for eligiblehomeownership loans made by PFIs for individuals' purchase of new housing offered by HMCs. ThePFI will be responsible for ensuring the appropriateness of the housing procurement and efficacy ofselection, contracting and supervision of the development, as well as verifying compliance with localbuilding and environmental regulations. The documents to be submitted for prior review by the BankGroup are listed in Annex 5.

5.18 Goods. Computers, peripherals, and training equipment will be procured for TA componentsof the project at a total estimated cost of about US$9.3 million. Of these, equipment worth approximatelyUS$7.2 million would be procured through International Competitive Bidding (ICB) procedures.Equipment that has common specifications wanted by most of the four municipalities and centralparticipating ministries will be packaged together and procured by CCG and distributed to user units.

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Other equipment that the user requests CCG's assistance in procuring will also be combined with theformer type of packages. CCG and each of the municipalities will retain a qualified importer-tenderingcompany as the procurement agent. Qualified domestic suppliers would receive a preference in evaluationof ICB bids, equal to 15% of the c.i.f. prices or the applicable customs duties and import taxes,whichever is smaller. LCB procedures will be used for contracts not exceeding US$200,000 for anaggregate up to US$1.0 million. Local and international shopping procedures would be used forprocuring equipment needed in small quantities or highly specialized software or equipment, that costsno more than US$50,000 per contract, up to an aggregate of US$1.1 million. All equipment procurementpackages costing US$200,000 or higher will be subject to prior review by the Bank Group. Theaggregate value of such packages is estimated to account for about 80% of total value of equipmentprocurement. Standard bidding documents prepared by MOF and the Bank will be used in all equipmentprocurement through ICB and LCB. Foreign suppliers or contractors will be allowed to bid let underLCB procedures.

TABLE 5.2 PROCUREMENT ARRANGEMENTS

(US$ Million)

Category Procurement MethodICB LCB Other Total

Equipment 7.2 1.0 1.1 9.3(7.1) (0.7) (0.9) (8.7)

Consultancy andTraining 15.8 15.8

(15.8) (15.8)

Housing 545.0 380.0 925.0(223.3) (102.2) (325.5)

TOTAL 7.2 546.0 396.8 950.0(7.1) (224.0) (118.9) (350.0)

Notes: Figures in parentheses are amounts financed by the Bank Group.Other procurement methods include prudent shopping for equipmentand housing acquisition, and procedures for consultant selection.Figures may not add up due to rounding.

5.19 Consultancy and Training. The project requires about 195 person-months of foreignconsultant services and about 600 person-months of local consultant services, at a total estimated cost ofabout US$8.1 million. The project will also support a large array of training at a total additional costof about US$7.7 million. Some of the training will be incorporated in consultancy contracts. Otherexpenditures will be incurred in such direct expenses as those for overseas fellowships and managementobservation tours, which will be arranged with consultant assistance. The consultants will be hired,mostly as teams but several individually, in accordance with the "Guidelines on the Use of Consultantsby the World Bank and its Borrowers". Bidding and contract award for all consultant firm contractsvalued at US$100,000 or more and individual consultant contracts that are valued at US$50,000 or morewill be subject to the Bank Group's prior review. The Bank Group will review the terms of referencefor all other consultancy and training, individually or as part of the annual implementation plan. Theplanned procurement arrangements are summarized in Table 5.2.

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F. MONITORING AND SUPERVISION

5.20 Monitoring and Evaluation. Systematic monitoring and evaluation of project progress andimpacts will be critical in view of the nature and purpose of the project. Due to the novelty andcomplexity of the project, implementation of investment components and policy reform actions is likelyto give rise to issues that would require frequent coordination and timely response. Further, as theproject is being carried out in four cities as an experiment to establish an effective model for reform inChina as a whole, it is essential to draw lessons for possible adjustment of the model and fordissemination to other cities. Therefore, monitoring and evaluation will cover not only theimplementation progress of investment components but also progress in policy reform actions;performance and development of HMCs, PFIs, social security management institutions, and related legalinstruments; development of relevant overall policy frameworks of the project municipalities and theGovernment; and the impacts of the project and policy changes on housing, social security and enterprisesystems inside and outside the project. Monitoring indicators and methods to help measure the progressand impacts are discussed in detail in Annex 13.

5.21 Most of the information on project implementation will be generated by the HMCs, PFIs andsocial security agencies and reported to the PMO on a monthly or quarterly basis. The PMO willcoi,solidate and analyze these data and summarize them in the progress reports to be submitted to theBank Group and CCG by February 15 and July 15 each year. In addition, the PMO will compile andanalyze relevant annual city-wide data supplemented by sample surveys of project impacts on participatingenterprises and their workers and on the city-wide housing market. This information will also be reportedin the progress reports. The CCG will provide the Bank Group with semi-annual progress reportssummarizing the TA implementation progress, and policy actions responding to implementation issuesfaced by the municipalities. In-depth analysis of the regularly monitored information, supplemented bynecessary sample surveys, will be carried out for a mid-term review to be held during 1997. The CCGwill take the leading role in the mid-term review. Project completion reports will be prepared by eachmunicipality and provided to the Bank Group within six months of the loan/credit closing date.Assurances were obtained during negotiations that CCG and the municipalities would monitor andevaluate the project progress and other relevant developments and provide the Bank Group semi-annualprogress reports according to plans and schedules satisfactory to the Bank Group.

5.22 Supervision. Factors discussed in para 5.20 above, coupled with the number of project cities,indicate a heavy supervision requirement by the Bank Group. The focus of the supervision will be onmonitoring and evaluation of project and policy reform progress as elaborated above, and on helping todevelop appropriate responses to unanticipated implementation or policy issues. The project design assignsmost of the responsibility for detailed review and supervision to PMOs and PFIs, reducing much of theroutine supervision tasks of the Bank Group. It is still estimated that the project will require supervisioninput of about 20 staff-weeks in a year normally, but about 30 staff-weeks for the Bank Group fiscal year1995 for start-up assistance and in fiscal 1997 for mid-term review. The supervision missions, whichnormally will visit China twice a year, will be joined by members of CCG (refer to Annex 13).

5.23 Audits. Assurances were obtained during negotiations that the Government and theparticipating municipalities would submit annual audit reports by independent auditors acceptable to theBank Group within six months of the end of each fiscal year on: the Special Accounts; consolidatedproject accounts maintained by the PMO and CCG; Statements of Expenditures; and financial statementsof HMCs and PFIs. According to the established practice in China, the audit will be performed bymunicipal or provincial audit bureaus under the direction of the State Audit Administration.

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6. BENEFITS AND RISKS

A. EcONOMIc BENEFITS

6.1 The project is expected to yield significant long-term benefits which affect a wide range ofChina's agenda for economic development, but most of which are difficult to quantify. Even the mosttangible of the benefits, resulting from the creation of housing assets, cannot be estimated reliably dueto the absence of broad markets for housing or labor. Very high prices observed in the emerging, butstill marginal, markets for housing for non-state sector workers give a positive indication, but not a broadmeasure, of high economic returns to housing investment. Beyond an immediate physical increase inassets, however, the project will raise efficiency in the delivery and management of housing and socialwelfare services. The efficiency gain is expected from functional specialization, as delivery andmanagement responsibilities are transferred from the enterprises to specialized institutions -- HMCs,municipal social security management agencies, and PFIs. The efficiency gain in the delivery mechanismwill be reinforced by TA components for management systems development. Important improvementsthat would lead to long-term efficiency include improved housing maintenance and consolidation ofduplicate social welfare benefit responsibilities. Significant efficiency and welfare gains are expected alsoon the demand side, thanks to expanded consumer choice in housing and health care. Further,commercial levels of housing prices and increased beneficiary contribution requirements for socialsecurity benefits would introduce consumer budget constraints that will lead to a more rational householdbudget allocation, and reduced burden on enterprises and the economy as a whole. It will also inducean increase in household savings which, along with the long-term mortgage lending, will help increasestability and depth of the financial systems.

6.2 The project will help increase economic efficiency not only in housing and social securitysystems, but in broader labor, enterprise and financial systems. The project would establish a new systemof labor benefits, easing constraints to labor and enterprise reform. Converting lumpy in-kind benefitstied to specific employment into cash wages would allow enterprises increased flexibility to add or reduceemployment, to use the compensation system for labor management, and to allocate investment resources.It would also ease entry and exit of enterprises, as well as increasing labor mobility. Such increasedflexibility, along with clearer accounting of enterprise performance and liabilities that the new systemwould help establish, would ease obstacles to enterprise restructuring, that is critical to further economicdevelopment of China. Further, the benefits will not be limited to the project cities. The success of theproject will prompt other cities of China to adopt the model established and benefit from other types ofefficiency and welfare gains. This will have enormous implications for the national economy, as morethan 70% of the manufacturing and service sector outputs are produced by enterprises that could gainfrom the new systems, and expenditures for housing, social security and health alone account for around15% of urban GDP.

B. EQuffY ASPECTS

6.3 A main aim of the social security systems reform supported by the project is to distribute thecosts of social protection more evenly across the economy. This will prevent the large number of retireesfrom being left without minimum support in the case of inevitable and necessary scale down of someSOEs and COEs. Under the project, pooling will be also extended to non-state sector workers who havehad uncertain or no retirement provisions or health care insurance. Health care cost containmentmeasures to be developed with the help of the project will increase the efficiency and reach of the formal

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health care system so as to include many who are now forced to go without or rely on inferioralternatives. Further, some aspects of the revision of benefit and contribution formula would enhancethe equity of the social security system. For example, Chengdu has proposed to introduce pooling ofmaternity benefits across enterprises; this will not only reduce the burden on the enterprises whichtraditionally have a large female work force, but also remove the disincentive for employers to hirefemale workers of child-bearing age.

6.4 The housing reform will have more ambiguous equity implications. In Chinese cities, cashwages are relatively even, at least in the state-controlled sector. The main difference in living standardsconsists in different access to housing and other benefits which is determined primarily by the financialand other status of different employers. The gaps in benefit levels are large and few alternatives areavailable other than housing and health care at artificially high standards or substandard services or none.Thus, arbitrary rationing is inevitable. Under the new housing delivery system, this inequity will beginto be alleviated significantly over time without requiring the excessive investment that would have beenneeded under the current system. The new system will represent a large improvement in equity to thosewho have to wait long for housing under the current system. The benefits will be realized in a relativelyshort period of time by those working for the participating enterprises, but in the medium to long termby those working in other enterprises. The wage compensation will also alleviate the inequity presentin the compensation system due to the large and inflexible in-kind component.

6.5 Housing reform, on the other hand, could threaten the welfare of a small number of peoplewho live in housing to be taken over by HMCs, but who would not be eligible for fully compensatingwage or pension adjustment. In order to operate as commercial entities, HMCs and PFIs will have toenforce their property rights and evict or foreclose on non-payers. Most of the affected households wouldbe able to avoid such an extreme situation by adjusting their housing by a relatively modest extent. Inorder not to force sudden adjustment, the affected workers will be paid an excess housing allowance forthree years (para 3.11) and the first priority in allocation of vacant units. Despite these measures, therecould be persons who would not be able or willing to make the adjustments. In order to protect suchpersons while safeguarding property rights, the municipal governments have reserved older housingdesignated for eventual redevelopment to be used as temporary shelter for those who might be evictedfrom their homes.

C. ENVIRONMENT AND RESETTLEMENT

6.6 Enviromnent. The project will primarily finance housing development schemes in the fourcities. Details of the schemes are not available at this time as they will be developed by newly createdHMCs and appraised by local financial intermediaries during the course of project implementation.However, it is projected that the total number of housing units developed under the project will be in theorder of 150,000 units. Most of the schemes will involve construction of blocks of several apartmentbuildings in suburban locations. Potential environmental issues for such construction includeencroachment on farm land and natural areas, sewerage and solid wastes generated by the residents,pollution of water bodies, and proximity to polluting industries.

6.7 Current regulations in force in all the five cities, in accordance with national regulations,require that an environmental impact assessment report be prepared for all construction projects, atdifferent levels of detail depending upon the project size. A new additional regulation, applicable toprojects financed with multilateral aid, classifies most residential development projects in a categorysimilar to the Bank Group's environmental category B, requiring at least a summary environmental impactassessment (EIA) report. The procedures and criteria used in an EIA of residential developments are thesame as those used for other types of capital investment projects, which have been found satisfactory tothe Bank Group, and which address the potential environmental risks listed above, among others. These

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regulations are enforced by local Environmental Protection Bureaus (EPBs), from site selection and designthrough completion of the construction. Assurances were obtained during negotiations that, as acondition of borrowing mortgage loans under the project, HMCs would carry out EIA and necessarymitigating measures, satisfactory to the Bank Group, for housing development schemes. In order to doso, the relending agreement between the municipality and the PFIs would specify that the latter wouldrequire, as a condition of lending for housing development, certification by EPBs of compliance with EIAand mitigation requirements.

6.8 Resettlement. Most of the housing development financed under the project is likely to belocated on suburban, vacant lots and involve encroachment of farmland and some farm houses.Displacement of urban residents is likely to be required only in a minority of housing developmentschemes. National regulations governing compensation and resettlement of the population affected bydevelopments of this nature have been extensively reviewed by the Bank Group and have been foundequitable and generous. Local implementing rules in the project cities have also been reviewed by theBank Group and found satisfactory. These regulations mandate compensation of lost farm lands by acombination of alternative farm land, cash compensation and employment guarantees, compensation ofdemolished farm housing by newly built replacements usually for a whole village. In the case ofresettlement of urban residents, the compensation is provided in the form of new housing superior to thedemolished units either on the original site or in comparable locations and moving allowances. In orderto receive building permits, units that implement projects that involve resettlement are required to prepareand implement resettlement plans, with approval from municipal bureaus of real estate and housingmanagement and affected neighborhood committees.

6.9 Special attention needs to be paid, in urban resettlement cases, to the fact that new housingdeveloped and managed by HMCs will carry rents that are much higher than rents elsewhere. In mostcases, redevelopment of old urban housing will involve units already owned by the HMC, because of thehigh cost of doing otherwise. In these cases, the residents are also likely to be tenants of the HMC.They will be allowed the right to move to any vacant apartments owned by the HMC, including newlybuilt units, and provided compensation for the move. In the rare cases involving residents who are notHMC tenants, the resettlement would follow the general procedures for urban resettlement, that allowthe affected households to pay rents prevailing elsewhere in the city. Assurances were obtained duringnegotiations that HMCs would be required to resettle and compensate persons affected by housingdevelopment schemes according to policies and plans satisfactory to the Bank Group. To this effect,relending agreements between the municipality and PFIs will specify that PFIs will require, as a conditionof mortgage loan for such schemes, the resettlement plan and evidence of relevant municipal authorities'approval, and, in the case of resettlement involving more than 200 persons, the Bank Group's priorreview and approval.

D. POLICY AND IMPLEMENTATION RISKS

6.10 For urban housing reform, though the Government has set commercialization as the main goal,consensus has not be reached on an effective and sustainable strategy to achieve the goal. While thereis wide agreement on individual elements of the housing reform model pursued under the project, theproject combines them in far bolder and more comprehensive action programs than the past and existingapproaches tried in China's cities. In view of the political challenges involved, the participatingmunicipalities have been selected primarily on the basis of the municipal leaders' demonstratedunderstanding of the reform model and willingness to undertake the necessary steps. The will andcapacity to reform will have been demonstrated by the completion of critical reform steps by the time ofnegotiations, including the transfer of enterprise housing, rent increases, wage adjustment, andestablishment of strengthened foreclosure and eviction rules.

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6.11 The financial and political challenges will continue: to keep the rent and wage levels currentby continued adjustment, and to extend the reform beyond the enterprises joining the initial HMCs.Managing these tasks requires strong public education, political commitment, and continued liberalizationof economic systems -- most of which are difficult to predict or influence. To help manage this process,the project includes a strong monitoring and evaluation component. The agreed mortgage financing ruleswould prevent new housing mortgage loan commitments if HMCs do not meet agreed creditworthinesscriteria. This would happen if HMCs fail to charge or collect rents at levels sufficient to cover costs.Any large differences in reform progress among cities could call for reallocation of the loan and credit.During the project, a systematic evaluation of implementation and reform progress, including acomprehensive mid-term review, will be carried out in order to allow adequate adjustment wherenecessary and to draw useful lessons for other cities of China.

6.12 Relatively little risk is foreseen in the social security reform component, since it supportsmeasures that are consistent with and complementary to the Government's reform programs which are,at least in outline, coherently formulated and well accepted. Initial reform actions have already beencompleted as part of project preparation.

6.13 Another set of challenges, of a technical nature, are present in both the social security andhousing reform components as they involve establishing and managing a wide range of institutions andpractices, many of which are novel in today's China. To minimize the difficulties, a large amount oftechnical assistance has been provided during project preparation to establish necessary institutional, legaland technical foundations. Substantial additional technical assistance will be provided duringimplementation for further development of policies, institutions, and techniques. However, the difficultiesare likely to be overcome only gradually. Technical assistance during the early years of the project willfocus on installing elements essential to operations of the new systems along with procedures forevaluating and refining them.

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7. AGREEMENTS REACHED AND RECOMMENDATION

7.1 Assurances were obtained during negotiations that the Government would:

(a) maintain the Central Coordinating Group (CCG) with functions and staffing satisfactory to theBank Group (para 5.5);

(b) provide, through CCG, assistance to project municipalities and PFIs for managing TAactivities (para 5.6);

(c) onlend the loan and credit proceeds, except those used for TA for its own agencies, to Beijing,Chengdu, Ningbo and Yantai municipalities on terms satisfactory to the Bank Group (para5.7);

(d) establish and maintain Special Accounts in a manner satisfactory to the Bank Group (para5.12);

(e) submit audit reports of the Special Accounts and the Statements of Expenditures by anindependent auditor acceptable to the Bank Group within six months after the end of eachfinancial year (para 5.23).

7.2 Assurances were obtained during negotiations that each of the Beijing, Chengdu, Ningbo, andYantai municipalities would:

(a) carry out its housing systems reform program and associated TA programs according to atime-bound action plan satisfactory to the Bank Group (para 3.8);

(b) carry out social security systems reform program, with associated TA programs, according toa time-bound action plan acceptable to the Bank Group (para 3.13);

(c) cause the PFIs, as part of the conditions of relending to the latter, to make housing mortgageloans on terms and conditions and according to appraisal criteria satisfactory to the BankGroup (para 3.21), including that borrowing HMCs shall submit to the Bank Group financialprojections according a format and a schedule satisfactory to the Bank Group, and maintaindebt service ratios above 1.5 (para 4.21);

(d) maintain the Project Leading Group and the Project Management Office with functions andstaff satisfactory to the Bank Group (para 5.5);

(e) re-lend the loan/credit proceeds to the participating financial institutions (PFIs), on terms andconditions satisfactory to the Bank Group, to partly finance eligible housing mortgage loansand to finance TA programs (paras 5.8 and 5.9);

(f) cause HMCs to carry out environmental impact assessment and necessary mitigating measures,satisfactory to the Bank Group, for housing development schemes (para 6.7);

(g) cause HMCs to resettle and compensate persons affected by housing development schemesaccording to policies and plans satisfactory to the Bank Group (para 6.9);

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(h) carry out monitoring and evaluation of the project and relevant developments according to aplan and schedule satisfactory to the Bank Group; and furnish the Bank Group with semi-annual progress reports whose formats and contents shall be satisfactory to the Bank Group(para 5.21);

(i) submit audit reports of financial statements of HMCs and PFIs, by an independent auditoracceptable to the Bank Group within six months after the end of each financial year (para5.23).

7.3 An understanding was reached during negotiations and entered into the minutes that relendingand mortgage lending terms would be reviewed at least annually and as interest rate structure changes,so as to evaluate whether the terms adequately reflect developments in the financial sector and adequatelyprovide for market-based housing systems development and for market resource mobilization by PFIs,and to modify the terms accordingly, subject to agreement by the parties concerned (paras 3.16 and 5.10).

7.4 Agreements were reached during negotiations that as a condition of disbursement for mortgageloans under each municipality's part of the project, the municipality concerned would enter into re-lendingagreements with two PFIs, satisfactory to the Bank Group, on terms and conditions satisfactory to theBank Group that include the PFIs' adoption of financial and operating policies (paras 4.27 and 5.8), termsand conditions and appraisal criteria and procedures of the housing mortgage loans, satisfactory to theBank Group (para 3.21).

7.5 Agreement was reached during negotiations that a condition of effectiveness will be staffing ofCCG in satisfactory to the Bank Group (para 5.5).

7.6 With the above assurances and agreements, the proposed project would be suitable for a Loanof US$275.0 million equivalent, at the standard variable interest rate and a maturity of 20 years includingfive years grace, and a Development Credit of SDR 53.1 million (US$75.0 million equivalent) onstandard terms with 35 years maturity including 10 years grace, to the People's Republic of China.

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PROJECT CITIES AND THEIR REFORM PROGRAMS

1. The four cities selected to participate in the project reflect the diversity of the urbandevelopment spectrum in China. They are all quite different in terms of size, regional location, andeconomic or political function. They are similar only in a shared common commitment to accelerate theenterprise reform and the associated restructuring of the welfare system.

BEUIING

2. Beijing Municipality, center of the Tianjin-Beijing-Tangshan economic region, is a giant in anyyardstick. As the capital of the People's Republic, it has both a highly visible role to play and a uniqueset of handicaps to overcome. It has a total population over 10 million; the city proper itself contains6.4 million residents and over 4.4 million workers. Close to half of these work directly for the centralgovernment, its affiliated institutions, and other institutions and enterprises controlled directly by thecentral government. As a result, the municipal government's influence and tax base are considerablyconstrained, though large compared with other municipal governments in China or elsewhere.

3. Enterprise Reform: In Beijing, implementation regulations required to accelerate enterprisemanagement reform have been issued. These stipulate, inter alia, that (a) direct government bureaumanagement over economic enterprises must cease and be replaced by hands-off regulation; (b) loss-making enterprises will have to transform themselves into profitable ventures, or face bankruptcyproceedings and; (c) the right to dismiss workers is now lodged with enterprise management, subject toregulations on employment fair practices; unemployed workers will be covered by relevant insurancepolicies and be entitled to job retraining and access to re-employment service agencies' assistance.

4. Housing Reform: There are more than 2 million residential units in Beijing, covering an areaof 100 million square meters of constructed space. This housing stock is growing at 5 percent per year.Evidence that central authorities play a very significant role in Beijing's economy is reflected in the factthat 60% of that urban housing stock is controlled by national-level Ministries and institutions. Beijing'spilot program under this project, ultimately covering 7.2 million m2 of existing enterprise housing space,is very considerable if measured against the citywide local enterprise housing stock of 30 million squaremeters. The team assembled by Beijing to work on the Project has already utilized the experiencedgained to help influence the content of the national housing policy drafted in 1993. This proves the valueof having a Project "presence" in the capital itself. In housing reform citywide, Beijing is committed toa program of rent reforms that will allow the rents on existing housing inside and outside the project toconverge over the next 6 years. Wage adjustments for workers outside the Project will also graduallybe adjusted upward. Homeownership promotion programs will avoid the use of "deep discount" salestechniques.

5. Social Security Reform: The municipality plans to unify, by 1998, the currently separatepension pools for permanent, contract, and temporary workers in SOEs, urban collectives and otherownership-type enterprises. All workers have started to contribute to their old-age pension funds.Transfer of management functions from enterprises to the municipal social insurance agency (SIA) has

- 48 - ANNEX 1

begun and would be completed by 1997. A new benefit formula consistent with MOL guidelines wouldbe introduced in 1994. By end 1994, all workers (with the exception of private entrepreneurs) in urbanenterprises will have unemployment insurance coverage. All types of non-voluntary terminations are,technically, eligible for claims. The municipal employment and training division is committed toimproving the effectiveness of placement and retraining services over the next few years. Beijing hasintroduced, as an experiment, pooling of major medical expenditures of work units in a few districts.It is intended to extend this type of pooling to cover much of the municipality by 1996. An effort isunderway to set up a health information network with the help of the MOPH. Alternative systems ofpaying providers are under consideration.

CHENGDU

6. Chengdu, with an urban population of 2.5 million and a labor force of 1.2 million, is thecapital of Sichuan Province. That inland province, with over 100 million residents, would -- ifindependent -- be one of the largest countries in the world. Chengdu is situated on the agriculturallyprosperous Chengdu Plain, linked to the coast by an ever-improving transportation network, wellendowed with a critical mass of universities and science/technology institutes, and proactive business,technical and administrative organizations. As a consequence, Chengdu is one of a handful of inlandurban centers tapped by domestic and foreign direct investors for rapid growth in the 1990s.

7. Enterprise Reform: The Systems Reform Commission has selected Chengdu to be one of themunicipalities to participate in a new Comprehensive Pilot Reform Program (CPRP). To be selected,a municipality must meet the following criteria:

(a) have a local government strongly committed to overall reform;

(b) demonstrate considerable economic development potential; and

(c) possess a set of well-articulated comprehensive reform proposals.

8. Chengdu municipality is committed to transforming its SOEs into truly independent economicentities operating in a competitive market environment; and only indirectly regulated by governmentagencies. To achieve these objectives, the local government will use a variety of tools. Among themare: (a) corporatization of SOEs; (b) creation of SOE-foreign joint ventures; (c) encouraging SOEs tomerge or otherwise join economic groups or holding companies; (d) leasing, selling or otherwiserestructuring smaller SOEs; (e) allowing insolvent SOEs to go bankrupt; and (f) forcing all newenterprises to incorporate or otherwise clearly define ownership and management prerogatives andresponsibilities.

9. Housing Reform: Among large cities, Chengdu has few if any peers in housing reform. Asearly as 1984, the city introduced the concept of "commercial" housing sales to individuals and employeecontributions to new housing construction. Some households with low priority for housing allocation,young couples for example, were offered apartments for a deposit of Y10,000 and a monthly rent ofY1/m2, which allowed for recovery of housing construction costs. In 1988, Chengdu explicitly linkedenterprise and housing reform by allowing 142 enterprises to raise rents (averaging only 8 fen/m2

citywide) to Y1.3-1.4/m2 , and adjust wages by 25 % of the applicable standard wage. In 1990, Chengdudecided on a two-stage reform plan: first, all enterprises owning housing were encouraged to set

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subsidiaries to manage the housing stock; second, those subsidiaries were encouraged to gradually transfertheir stock to citywide companies, and do so by the year 2000. Chengdu also stood out among cities infirmly opposing "deep discount" sales of houses to individuals. Today 46 percent of existing housing(which totals approximately 39 million m2 and is expanding at 5% per annum) is rented out at Y1.3/m2

or higher. New housing rents are higher and range from Y2/m2 to market clearing levels. These home-grown housing reform initiatives made Chengdu receptive to the development of even more innovativemodels.

10. Social Security Reforn: Citywide pooling of old-age pension funds and a new benefitformula for pensions were put into effect in 1993. The municipality is now working towards theobjective of centralizing the administration and delivery of benefits by 1996. Computerization ofmanagement tasks is well underway. For unemployment insurance, much progress has been made inexpanding the coverage and extending eligibility criteria for claims. Although effort has been make todevelop a labor exchange, there is need and intention to strengthen the municipality's institutional capacityfor implementing active labor market policies. For health care system reform, a fee-for-service systemfor paying providers, backed by strong demand-side controls, has been developed. The municipality aimsto achieve comprehensive pooling for all illnesses by 1996. Computerization of the administrative systemis a major element of the health care reform program.

NINGBO

11. Ningbo is located on the south central coast of China, in Zhejiang Province. The municipalityhas a population of 600,000 of whom 390,000 live in the three central districts, and others in the portareas and surrounding rural areas. The project will cover the central urban districts. The city has ahousing stock of 6.5 million square meters, growing at 4-5 percent per annum. Ningbo has historicallybeen a major port on China's eastern coast, and was one of the so-called "treaty ports" open tointemational commerce and investment. After the end of the Civil War in 1949, however, Ningbosuffered a relative decline for lack of investment due to various factors. In 1984, in recognition of itspioneering role in the past economic development of China, Ningbo was one of a small number of citiesto be declared "open" to foreign trade and investment. In the decade that followed, significantinvestments by domestic and overseas investors have led to rapid economic growth. The World BankGroup has been actively assisting efforts to upgrade the municipality's vital infrastructure, most notablyin the ports and highway sectors to improve the city's ties with the hinterland and the world, and morerecently supporting the urban water supply and sanitation improvement.

12. Enterprise Reform: Like Chengdu, Ningbo has been designated as one of the municipalitiesthat will participate in the CPRP program. Nearly 1000 enterprises have already been transformed intojoint stock companies, limited liability companies, or joint stock cooperatives. All new enterprises must,in principle, be incorporated as joint stock companies, with a well-defined separation of ownership andmanagement rights and obligations. Efforts have been made to create enterprise holding companies orrelated group organizations; to date 45 conglomerates have been formed. Loss-making enterprises arebeing reorganized either through merger with other enterprises or through auction to new owners. overtime, debt-burdened enterprises will be allowed to slip into bankruptcy. Ningbo has also adopted a labormarket system that (a) allows enterprise managers the right to hire and fire workers, subject only tominimum employee protection measures; (b) provides govermment assistance and employers and; (c)provides the unemployed with unemployment compensation, subsidized medical care, and re-employmentassistance.

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13. Housing Reform: Ningbo's municipal leaders have also been among the first to understandthe need for radically restructured housing and social security delivery system as an essential requirementfor economic development and modernization, probably due to the city's strong emphasis on fastmodernization and on attracting foreign investment. Forcing employers to provide workers with housingcreates a poor business climate when Ningbo has to compete for investment with other Chinese or foreigncities; and the rigidities of labor system imposed by the current wage and welfare system inhibitsenterprise growth and management efficiency. Municipal and business leaders see the project as a meansby which to free the city of these rigidities.

14. The rent reform program in Ningbo is indicative of a commitment to change. While wageadjustment strategies for workers outside the project remain, as elsewhere, hostage to national guidelinesyet to come, Ningbo has decided to push forward with reforms that allow for the convergence of rentsfor existing housing inside and outside the Project; and will require all newly-built housing, whether in-oroutside the Project, to charge cost-recovery rents. Like Chengdu, Ningbo authorities understand thatinstitutional reforms are necessary to allow autonomous providers to dominate the rental housing market.Housing management companies or subsidiaries are being set up independent of the Project so that thewhole city can soon be covered.

15. Social Security Reform: Since 1992, the municipality has put old-age pension reform firston its agenda for social security reform. In 1993, all urban workers began to make personal contributionsto the pension fund. A new benefit formula will be implemented in 1994. Comprehensive pooling ofpension funds will be achieved by 1996, and by 1997, all management tasks will be centralized in themunicipal SIA. Although the municipality will extend coverage of the unemployment insurance schemeto all urban workers by 1994, the focus of reform is on expansion of labor market services to helpredeploy workers, who will become redundant as a result of enterprise restructuring that the municipalityexpects to be carried out in the next few years, to new employment job that are expected to grow fast.For health care reform, Ningbo has no definite plans aside from the introduction of some demand-sidecost containment measures. The TA program is therefore essential for helping the concerned authoritiesmake decisions on reform actions. There is interest in implementing, on an experimental basis, pooling(within counties) for major illnesses in 1995.

YANTAI

16. Yantai is a small coastal city in Shandong Province, with only 360,000 inhabitants and halfas many jobs. Its housing stock, with 3.8 million m2 , though expanding at 4.5 percent per year, couldeasily fit into only one district of one of China's large cities. Shandong Province as a whole, andparticularly its port cities, has been attracting a strong flow of foreign investment and developing a strongindustrial sector, augmenting its traditionally robust agricultural and fishery bases.

17. Enterprise Reform: Though hardly a known quantity a decade ago as far as internationalobservers were concerned, Yantai is not without its strengths. Like the Chengdu plain, Yantai is situatedin rich agricultural and aquacultural production center and has a well-trained and disciplined workforce.For these reasons, Yantai is already much sought after by foreign (particularly North Asian) investors.Yantai, along with Chengdu and Ningbo, has been selected to be one of the CPRP centers, chosen byGovernment to take the lead in enterprise reform.

- 51- ANNEX 1

18. Housing Reform: In 1986, Yantai volunteered and was selected by the State Council as a pilotcity to experiment with housing reform. The reform experiment begun in late 1987 increased averagemonthly rents from 16.7 fen/m2 of rented area to Y1.28/m2 . All SOE and government workers weregiven wage increases, partly with housing vouchers, equivalent to 23.5 % of the applicable standard wage,and financed out of enterprise housing funds. Although this represented the first dramatic break with theprevailing system of housing delivery, the new rent was still a fraction of levels needed to recoverinvestment costs, which were Y450/m2 in total then. This modest reform had some noteworthy effects.Nor was it sufficient to make homeownership attractive. Therefore, although a special local banks,Yantai Housing Savings Bank (YHSB), was created to help finance home mortgage loans at low interestrates, only 2,500 housing units have been sold to date under the program. The low interest rates alsohampered resource mobilization.

19. Overall, this first reform program did not achieve the intended reform goals but providedvarious important lessons. For example, the rents increase reduced the average size of new housingwanted by enterprises and their workers, showing the effect of consumer budget constraints, thoughmodest. The experiment also showed the limitations of a gradual strategy, though much more radicalcompared with programs adopted elsewhere in China. Through the experiment, local officials gainedvaluable insights and experiences; the YHSB, though limited in business scope, exhibits a strongcompetitive market behaviour and understanding of housing market, and established several innovativeand effective mortgage lending practices. Along with these lessons and expertise gained through theexperiment, Yantai's small size gives it a definite advantage for housing reform. It can introducewholesale reform on an accelerated schedule without eliciting the fears of social instability and unrestalways present among leaders of major metropolitan areas. Thus, Yantai has decided the project willeventually cover the whole city, as far as rental housing is concerned. This commitment to full-scalechange means the process of wage restructuring will also cover the whole city in short order. Therefore,there will be no need to create discount price incentives in efforts to facilitate homeownership. Yantaiwill also be able to build on past efforts to introduce homeownership mortgage financing on a large scale.In order to ensure sustainable market resource mobilization for housing finance, the YHSB will have tobe freed of its business restrictions -- market area, product range, banking correspondence, etc. -- thatconstrain its ability to compete effectively with other financial institutions.

20. Social Security Reform: The municipality will be able to achieve comprehensive pooling ofold-age pension funds by 1994. Workers began contributing to their pension fund in 1992 and a newbenefit formula endorsed by the MOL, will be put into effect, in 1994. Computerization of manymanagement tasks has begun and the SIA plans to takeover most management tasks (with the exceptionof retiree services) by 1996. All workers with the exception of temporary workers and privateentrepreneurs will have unemployment insurance coverage by 1995; coverage of all urban workers willbe achieved by 2000. In respect of active labor market policies, the city's Employment and TrainingDivision is making a major effort to improve labor market services for redundant workers. Given itspioneering role in China's push towards integrated reforms, Yantai is working on an implementation planfor health insurance reform. This involves setting up of individual accounts for medical expenditure,which are then financed by an enterprise payroll tax as well as personal contributions. In addition, therewill be a pooled fund for major illnesses.

- 52 - ANNEX 2

HOUSING RENTS AND PRICES, AND WAGE REFORM

BACKGROUND

1. In most cities in China, virtually all apartments are owned by the municipal government orenterprises and currently available at rents that are uniformly very low, covering less than the costs ofmaintenance and management. The Government's housing reform program established in 1987 andmodified in 1991 requires all cities to raise rents to "commercial levels." This rent reform program isdefined in terms of 8 "factors" of rent. By 1995, rents are to be raised to cover "3 factors" -management, maintenance, and depreciation; with further increases to cover "5 factors" - additionallycovering return on investment and property taxes by the year 2000. At a later date, rents will be adjustedto cover "8 factors", including land use fees, insurance premia, and profits. At present, only a few cities,such as Yantai, have rent levels in place that even cover maintenance, management, and some portionof depreciation. It is also true in some housing stock in Chengdu, restricted to housing stock of specificgroups of enterprises undergoing experiments.

2. While there is considerable confusion in determining actual rents using the 8 factors, the factorsare clearly intended to indicate benchmark for different rent levels in terms of costs to be recovered:current costs (2 factors), full cost (5 factors), and commercial levels (8 factors). The rent factor systemis, at least conceptually, well understood as such in cities in China. Minimum rents to be charged byHMCs take, as a starting point, these standard rent calculation system factors, and will begin with 5 or8 factors, depending on the city, as described below.

3. There is a large gap between the current rents and 5- or 8-factor rents. The latter representsin general about 20 times the current rents; and the gap for an apartment amounts to up to a third ofmedian wages of two-wage earner households. As the latter represents in-kind wage good provided byemployers, this may be converted into cash wages within the resources of the enterprises that have beenproviding housing. The cashing-in of housing benefit in the form of wage adjustments needs to take heedof the current structure of wage scale and housing allocation, as described in the later part of this Annex.

RENT REFORM

4. Each participating city has agreed to a rent reform program that covers rental units within andoutside the project (Table 1). Calculation of minimum rent for an apartment unit is determined on thebasis of three elements: capital cost of a reference unit; rent factors; and individual characteristics thatdifferentiate the housing unit in question from the reference unit. The method agreed to calculate theminimum rents are set out below:

5. Each year, actual investment costs for acquiring or constructing a unit quantity (m2 ) of newrental housing will be determined for a "reference" housing unit with given locational, structural, andneighborhood attributes. The investment costs will be expressed in two components: land and structure.They are distinguished mainly in terms of different schedules of depreciation and maintenance needs.The cost of land will include value of land lease, cost of compensation and resettlement of originalresidents, and other related costs that have to be depreciated completely over the life of land lease. Thesereference valueh are relatively easy to determine because of the current relatively uniform design and

- 53 - ANNEX 2

standards of housing. However, as diversity increases with increased consumer choice, investment costsper unit space of housing is also expected to diverge. Currently, significant differences relate mainly tothe age of housing, which determines not only structural deterioration but also standard facilities providedand structural material used. This difference in capital value is determined by property valuation at thetime of transfer of housing from enterprises to HMCs. Completed valuation for housing stock transferredby the end of February 1994 indicates the value per m2 of housing stock to be about 75% of new housingon average. These capital values will be automatically adjusted each year along with the new costs ofland lease and construction, adjusted only for structural depreciation of 3 % or less.

6. To this capital value are applied the following rent factors:

(a) Maintenance and Management fees will be set to reflect actual expenses. However, formaking initial projections, the traditional benchmark are used: namely, maintenance estimatedat 1.0% of construction cost and management at 0.40% of construction costs (except in Beijingwhere 0.7% and 0.1% are applied, respectively.)

(b) Depreciation charges will be set at a straight-line depreciation of land lease and structure: landlease depreciation at a percentage equivalent to the reciprocal of the terms of the land leases,65 years in the project cities, except 50 years in Beijing, plus 3% of structural value perannum.

(c) The rate of return on total investment costs will be established as 5 % per annum, as net realreturn, for opportunity cost of capital.

(d) Property taxes will be computed according to the applicable formula approved by the StateCouncil: currently, taxes will equal 12% of the preceding four factors. However, the localitieshave the option to exempt HMCs from collecting and paying property taxes until such taxesare made applicable to all other residential housing in that city.

(e) Land fees, at rates set through local regulations, are compulsory only in cases where theresidential land involved is "allocated" land assigned to the users, who then have limited rightsover its use and disposal. Since under the project, all land will acquired from the state in theforrn of paid leaseholds, no additional land use fees need to be automatically collected.

(f) Insurance fees will reflect locally-determined premia set by the current sole provider,equivalent to 0.2% of the value of structure.

(g) Profit will be calculated and included in the rent. That minimum is currently set at 4 % of thesum total of maintenance, management, depreciation, and return on investment.

7. In evaluating the appropriateness of rent calculation, the critical value to be monitored will bethe total rent level per square meter rather than individual factors of rent. The adequacy of thataggregate level will have to be judged by the degree to which it allows the HMCs to maintain and operateexisting stocks, while satisfying shareholder demands for dividends and the fulfillment of investmentplans. The above rent calculation yields the annual rent at about 10% of the investment value; and thefinancial projections for HMCs show that the rent would be sufficient for HMCs to operate on asustainable basis.

- 54 - ANNEX 2

8. For existing housing units, "5-factor" rents will be charged in Chengdu and Yantai for limitedtime periods (See Table 1). The 5-factor rent differs from the 8-factor rent only marginally, by about5 %, not including the insurance and profit factors. Finally, "three factor" rents cover only maintenance,management, and depreciation; these rents are only applicable to the initial rents set for housing outsidethe scope of the project. By the year 2000, all cities will raise rent levels for all rent-controlled housingto "five factor" levels.

TABLE 1 RENT REFORM TIMETABLE

Beijing Chengdu Ningbo YantaiCitywide Reform

3 factors 1994 1994 1994 19945 factors 2000 1994 2000 2000

For Housing Managed by HMCs Under the Project

Existing Housing5 factors - 1994 - 19948 factors 1994 2000 1994 1995

New Housing8 factors 1994 1994 1994 1994

Amount of Existing Housing Brought under the Proiect (1000 in2)

by mid-1994 550 650 480 550by end 1997 5000 2500 1800 1200by end 2000 7000 3500 3000 2500

Minimum Number of HMCs to be Established

by end 1993 1 1 2 1by end 1997 7 4 3 2by end 2000 10 6 4 4

HOUSING SALES PROGRAM

9. Homeownership should be a voluntary decision for households within and outside the scopeof the project. For most urban enterprise workers, homeownership is not an attractive option, given thepresent set of price/income ratios, and given the relative prices prevailing in the residential sector (asbetween renting a unit provided by the enterprise and owning a unit). Promoting homeownership underthese circumstances therefore have involved heavy subsidies or coercion or both, without serving a clearpublic interest. However, homeownership can become popular options once several conditions areestablished: a near parity between housing purchase prices and capitalized rental rates; availability ofdiverse housing choices and of mortgage financing; wages that are multiples of mortgage payments; andcapital gains opportunities, usually a major incentive for homeownership. The current Government

- 55 - ANNEX 2

program to offer housing without the right to capital gains, as a justification for low prices, is thereforelikely to result in either lack of buyers or wide-spread circumvention of the restriction. Under theproject, the cost of homeownership mortgages will be close to rental costs and wages will be raised tolevels that are about three times the likely borrowing (assuming about 40% downpayment). Therefore,with visible rise in housing prices and reduction of deeply discounted housing rental or sales within thesame city, homeownership could gain popularity rapidly.

10. In view of these opportunities and pitfalls, the following ground rules for housing sales willbe observed, under the project:

(a) any housing unit sold under the project will be priced at no less than full cost recovery,including land lease charges, plus a minimum margin for profit, defined as in the rent formuladiscussed above;

(b) the definition of full cost recovery will exclude any locally or nationally mandated taxes andfees not currently collected from investors (mainly, state-owned enterprises) who purchase thebulk of new housing; fees will only be collected when all or most other investors in residentialproperty are required to pay them; in the case of national taxes, exemptions granted under theproject will be reviewed after the first two years and may not necessarily be extended; and

(c) any housing sales program developed outside the scope of the project will follow the guidelinesdecreed by the State Council in May 1991 and December 1993, restricting the use of pricediscounts.

WAGE REFORM

11. In each city, wage rationalization systems have been developed, adjusting the wages of eachcategory of covered workers according to transparent criteria once wages are rationalized, no additionalhousing commitments of an in-kind nature need be made. In principle, each active or retired worker willbe given a wage or pension supplement equivalent to one half of the applicable average rent increase fora "typical" housing occupied by the category of workers that the person belong to, or a person of thesimilar skills, rank, and seniority. To these factors of differentiation may be added a small factor relatedto family characteristics. For a category where a large number of workers belong, it can be calculatedsimply as: (Sum of new rents for housing occupied by the workers in a category) less (sum of old rentson the same housing) divided by (the number of workers in the category). This adjustments would resultin widening the range of cash wages, compared with the wage structure within Chinese state-controlledenterprises that is unusually compressed compared with international practices.

12. There are acceptable variations on the wage rationalization scheme, devised to make theadjustment simpler, and easier to be understood and accepted by the workers. One alternative is to adjustall wages in an enterprise by a certain percentage of income defined comprehensively to include basicwages, bonuses, cash subsidies, and other such items. A second alternative would provide for a smallper capita amount to all workers; and then allowing for all additional adjustments to be made accordingto rank, seniority, and merit. Yet a third alternative would calculate wage adjustments in a manner thatwould minimize the variation of adjustments around the expected mean. While this incorporates feweraspects of the thorough-going wage rationalization than other options cited, it nevertheless avoids the keypitfall of apparent or real arbitrariness.

- 56 - ANNEX 2

13. For wage rationalization, which will determine the basis upon which future wage increases willbe calculated, it would not be appropriate to compensate an individual worker exactly according to thehousing space actually occupied by that particular worker. There are two main reasons. The first reasonis that the current distribution of housing is a result of the old allocation system and contains substantialdegrees of arbitrariness. While the allocation relates to some measure of merit-based compensationbroadly, specific housing allocation depends upon when it was allocated, for example. The resultinginequity need not be made permanent. The second, more fundamental reason is that compensating forwhatever housing unit a person happens to live in would defeat the purpose of introducing rationalconsumer choice and consumer budget constraints, and hence perpetuate or worsen the current problemof increasing consumer demand on enterprise resources.

14. By providing wage supplements on the basis of average housing occupancy rather thanindividual occupancy would result in gaps between individual increases in rent burden and wagesupplements. In the case where a particular category of workers is relatively underpaid given rank andseniority, the adjustments may exceed both actual rents paid at project inception and the enterpriseaverage adjustment. However, there will be cases where individuals will have to draw on additional ownresources to fully fund rent increases. This would happen if a household happens to be living in a unitthat is disproportionately large. In those cases, cities have the option to allow temporary excessallowances to bridge the gap that would phase out in less than three years: for example, starting fromabout 80% of the "gap" between increased rents and adjustment pay in the first year; 50% in the secondyear; and 30% in the third year. Thereafter, any household unhappy with the resulting financialoutcomes would have only one option: to move to a smaller unit. Conversely, however, any worker orhousehold whose wage adjustment income exceeds the increase in rents at the initiation of the project willbe allowed to spend the residual income as they see fit.

15. Wage Adjustments for Family Members of Participating Workers. Problems ofunaffordable rent increases will arise most often for households one of whose member works for theparticipating enterprise and live in the housing provided by that employer, while family members workfor an enterprise which does not participate in a HMC system ("excluded enterprise"). The latterenterprise, in effect, had been a free rider and would likely resist paying wage supplement to its employeeto enable the family to make up for the rent increases. It is also possible that present residents have noaffiliation with the enterprise that own the housing unit, as sometimes happen due to informal "rights"for the original resident to assign their housing unit to relatives. In cities where the project will rapidlyexpand to cover most of the cities' housing stock, this problem will accordingly be quickly eased. InBeijing and Chengdu, where the project is planned to cover only a small part of the city, this problemadds further constraints for the project.

16. As the first option, the municipalities are recommending the "excluded" enterprises to paywage supplements for employees living in the housing units transferred to a HMC. However,enforcement has proven difficult for the apparent lack of incentives for the excluded enterprises to do so,and sometimes their inability. In the face of this reality, a variety of arrangements are accepted, mostcommonly to have the two (or three) enterprises negotiate to share the gap during a limited time period.In some cases, participating enterprise are having to pay the wage supplements matching the fullapartment rent increases. These cases are analogous to the case discussed in para 15 above, and theparticipating worker is considered to have a disproportionately large housing unit and give the transitionalhousing allowance. While provision of the wage adjustments for persons other than their own employeesare unjustified financial burden to the participating enterprise, it is affordable as it does impose no morefinancial burden than the past when the enterprise provided the housing without compensation fromemployers of family members living in the housing. Further, as all cities have agreed to allow rents

- 57 - ANNEX 2

inside and outside the project to converge; any sharing of the burden of compensating a worker (betweentwo enterprises) will be transitional.

17. Participating Workers who Live in or Relocate to Housing Outside the Project. There willbe households who leave the rental housing managed by an HMC. They may opt to buy a unit insideor outside the project, or they may seek private (and, therefore, market priced) rental housing options.Their wage adjustment would not be jeopardized in these cases. If, however, a worker who has receiveda wage adjustment moves into the stock of rent-controlled public housing, measures may be taken to raiserents on the apartments involved to levels equivalent to those within the project. Similarly, there areworkers who will not experience a dramatic increase in rents at the timne of project implementationbecause they live in housing units (private, enterprise, or institutional in ownership) not covered by theproject scope. These workers will be eventually provided wage supplements corresponding to thosereceived by their counterparts who benefit from HMC-managed housing, particularly for those who havesolved their housing problems on their own buying or renting private housing. Funds for wageadjustment for these workers would become available as transitional excess housing allowances arewithdrawn. Any delay in providing workers outside the project with a wage adjustment comparable toother workers would not exceed the project time span.

18. Personal Income Taxation. Individuals will not be liable to tax payments on the wageadjustment that an individual receives as a direct result of the project. It will be deductible for taxpurposes. According to the tax code introduced on January 1, 1994, personal income taxes apply onlyto income in excess of Yuan 800 per month, after allowable deductions.

- 58 - ANNEX 3

TECHNICAL ASSISTANCE PROGRAMS FORHOUSING MANAGEMENT COMPANIES

AND HOUSING MARKET DEVELOPMENT

A. BACKGROUND AND OVERVEEW

1. At present, four types of organizations are involved in housing delivery in Chinese cities: (i)real estate development companies (REDCs), that develop and sell housing in a competitive basis; (ii)enterprises (and other types of work units) that buy, and also often manage, most of the housing and rentit, or sell a small number of units, to their own employees; (iii) real estate credit departments of localbanks that collects housing funds from enterprises and their workers and finance part of constructionexpenditures; and (iv) housing maintenance companies that manage housing owned by the municipalgovernment and some owned by enterprises on commission. The first of these, REDCs, function mostlike their counterparts in market economies, aggressively competing for profit. While new housing usedto be "sold" on the basis of administrative allocation, increasingly they have to market their productsaggressively. While the input factors used to be allocated by the government, now they are mostly madeavailable through competitive bidding processes, including not only construction materials but also land,labor, and financing. The third category of function, housing maintenance services, is also increasinglycommercialized although not to the same extent.

2. The second category of functions, delivering housing to the consumers, is commercialized onlyin marginal, extremely small segments catering to consumers who do not have access to housing throughtheir employers - those working for themselves, for foreign joint-venture firms, or employers otherwiseunable to provide housing. The system of employer-provided housing, with its lack of market prices orincentives, governs the vast majority of housing consumption and supply behavior. In most cities, withsome exceptions including Shanghai, municipal governments are no longer directly involved in housingsupply and finance. They, specifically the municipal real estate administration bureaus (REBs) still areresponsible for financing and allocation of housing for their own employees, management of a smallnumber of old housing units not transferred to enterprises, and control of most housing managementcompanies. Nevertheless, municipal governments retain an extraordinarily strong influence in housingsupply. Their intervention includes not only regulations that are commonly exercised by publicauthorities elsewhere, but also directives on mobilization and management of housing funds, annualhousing delivery plans that identify housing supply priorities and credit allocation that guide actions byall four types of organizations identified above. Standards of housing units as well as average housingconsumption targets for the city as a whole are also determined by official norms. In a sense, thesevarious actions of the government can be understood as a substitute for the market signals which wouldbe generated from consumer choice and consumer budget constraints that are lacking under the currentsystem.

3. The joint-stock housing management companies (HMCs), being established under the project,will take over housing stock owned and operated by enterprises for their employees, and manage it ona commercial basis. They would also provide additional housing to workers of these enterprises as wellas others for rental or sale. In doing so, HMCs will carry out market intermediation functions betweensuppliers and consumers in response to market signals, that are now carried out by enterprises andhousing organizations in response to government plans and norms. HMCs therefore have to developmanagement systems to take over functions performed by others now but also new market-oriented

- 59 - ANNEX 3

functions and skills that are not familiar in the curreit system. Creation of commercial housing market,which started recently with the "commodity housing" sector catering to a small minority that can affordextremely high prices, will proceed in a large scale of growth and multiplication of HMCs. Suchdevelopment will bring about changes in the responsibilities of the government, from those of directinghousing production and delivery to those of providing a framework to enable fair transactions amongvarious actors.

4. The project will support technical assistance (TA), comprising consultant services, training andequipment procurement, in order to help the process of market-based housing delivery system. Themajor part of the TA program will be to help HMCs develop management systems necessary in meetingthe large challenges. A small TA program is also included to help municipal government authorities todevelop skills and systems that are called for to ensure proper functioning and development of commercialhousing delivery and finance systems. These are outlined in turn below. These TA programs will benefitnot only the HMCs currently in place but also new ones that are expected to be created later during theproject. Further, some elements of the TA for HMCs will be of use to municipal managers and staff whoneed to develop their capacity to guide and regulate different housing service providers in the rapidlychanging economic and financial systems. Likewise, some of the TA carried out primarily for the benefitof municipal authorities will be of benefit to HMC managers.

B. TECHNICAL ASSISTANCE TO HOUSING MANAGEMENT COMPANIES

5. HMCs face a large technical and management challenge. Each HMC is expected to take over,from the outset, 5,000 - 12,000 apartment units from its shareholding enterprises, and acquire or developup to half as many in the course of the project. To do so, HMCs will carry out much of the maintenanceand development functions or at least the responsibilities for procuring such services. While some largeenterprises turning over their housing stock may have systematic housing management systems, they arenot likely to serve the full range of purposes for HMC operation. Records for housing stock fromdifferent enterprises are incomplete and incompatible. Large enterprises also have some staff to manageworker housing full-time, but more often such tasks have been performed by production workers part-time. Therefore, HMCs have a limited possibility to recruit experienced staff from the enterprises.Further, they will also have to carry out functions less familiar in the current system - settingcommercially viable rents and sales prices, collecting them, obtaining long-term financing, and otherfinancial management functions. The commercial pricing will make it necessary that HMCs provide awide range of housing choices to serve the diverse consumers better. These newer types of functionsrequire expertise that is in short supply in China overall.

6. Technical assistance to help HMCs develop systems to meet these challenges can be organizedand described in three overlapping groups of activities, called Modules:

Module 1, to help develop management control and information structure and procedures - in otherwords, formal structure of HMC management;

Module 2, to help develop analytical, management and planning skills and procedures for housingdevelopment and maintenance - in other words, substantive skills to improve housing delivery andprofitability; and

Module 3, to help establish programs of continued training of all levels of HMC staff in the use ofthe skills and procedures developed in Modules 1 and 2.

- 60 - ANNEX 3

7. Module 1 - Establishment of Accounting and Management Information Systems. Thepurpose of Module 1 will be to develop HMC's corporate management and control structure, around thecore of a computerized accounting system, integrated with subsidiary records and managementinformation and reporting systems. Foreign consultant service of a total of about 38 person-months willbe required to design and start implement systems, prepare manuals, and train local consultants and HMCcounterparts. The systems will be developed for computerized operation to the extent feasible, and theequipment will be procured to implement initial computerization. They will work with a small team ofnational-level consultants who will be the main repository of transferred expertise and provide acontinuing assistance to HMC staff and consultants based in each project city. System design andimplementation efforts will be carried out in three phases focussing on different but related aspects of themanagement information system, with intervals for implementation and consolidation by local efforts.

8. The focus of Phase 1 work will be to quickly establish an accounting system and associatedrecords to meet minimum functional requirements of the new HMCs. At the end of phase 1, functionalmanagement systems will provide international standard accrual accounting outputs with reports on cashflows, rents, operational costs, and other statutory and internal management reports. Specifically, a chartof accounts, general ledger, shares register, asset and customer registers, accounts receivables andpayable, bank account and basic control procedures will be established, largely in a manual system butin the form that can be readily computerized. This will involve choice and adaptation of accountingsoftware, design of basic accounting and reporting standards and procedures, evaluation ofimplementation resources including existing data and personnel, preparation of manuals, initialimplementation, and planning of further development and training tasks. A team of foreign consultantsfinanced by a grant of the Government of Australia is expected to lead the Phase 1 work during theperiod from about June 1994 to January 1995.

9. The focus of Phases 2 and 3 will be to add details and supplementary management informationsystems to the basic accounting and reporting systems developed in Phase 1, as well as designingcomplete management information and planning systems and expanding computerization. Advancedinvestment and financial management techniques will be developed. Technical procedures andinformation for property development and maintenance operation developed under Module 2 describedbelow will be incorporated with the financial and accounting framework. At the end of phase 2, astructure of a complete financial and housing management system will be established to provide monthlybudget reports, cost control information, asset management and customer services information system,various levels of reporting procedures and formats, financial and operational projections, capital projectplanning and control. During phase 3, these systems will be consolidated and necessary modificationsmade. Depending upon the progress of Module 1 - Phase 1 and Module 2, the Phase 2 will be carriedout from about June 1995 to December 1995, and Phase 3 from about June to November 1996.

10. Module 2 - Development of Property Development and Maintenance ManagementSystems. Under this Module, HMCs will utilize consultant services to develop analytical tools andefficient procedures to evaluate, plan and carry out development and maintenance activities. While basicskills for construction and maintenance management exist at present, they are geared neither to customerdemands or long-term efficiency and profitability of housing asset operation. Consultant services willbe provided to develop techniques and organizational capacity for market analysis, property assessment,development and maintenance operational programming and budgeting, and quality control. Specificissues dealt with will include: procurement, development, redevelopment, contract management, design,construction, marketing, maintenance planning, management practice, life cycle budget scheduling andprogramming, and operational procedures. The consultants will compile relevant technical materials,develop case studies in all project cities, hold workshops, and preparation of improved operational

- 61- ANNEX 3

manuals. It is expected that the work will require about 21 person-months of foreign consultant servicesand 47 person-months of local expert services. The main part of the work will be carried out during theperiod from about November 1994 to about May 1995, with a short follow-up activities about a year laterto provide help in developing procedures, managing new arrangements, assessing success andshortcomings, and furthering program development.

11. Module 3 - Training Programs. Under this module, professional services will be providedby training specialists and corporate management specialists to design and establish continuing trainingprograms, to be conducted at a central location and in-house, for various levels of managers and staff.Part 1 will be concerned with providing extensive training to senior management on all aspects of HMCmanagement and will include an overseas training component; part 2 will provide an extensive course onday-to-day operations for middle management; and part 3 will provide in-house training to HMCoperational staff on basic operations, customer management, maintenance procedures, financialmanagement, and computer systems. Initially, toward the end of 1994, a training specialist will berecruited to work for about two months with consultants working on Modules 1 and 2 to advise the latteron preparation of training materials and conducting training workshops in their respective areas, whilethey are carrying out their respective consultant assignments, and to prepare plans for the main part ofthe work under Module 3. Consultant services of a further 9 person-months will be provided from aboutMay 1995 to about December 1996 to design and establish permanent training programs. About twelvemonths after this, a short follow-up visit will be made to assess the program success and shortcomings,and help further program development.

12. The training programs will be in the following three parts, and the consultants are expectedto design each and help implement initial training programs of each part:

Part 1: training programs for senior HMC executives in essential management principles,strategic and corporate planning, information value and technologies, financial analysis,marketing, principles of maintenance planning, redevelopment and development decision-making. The training programs are expected to be short (two to four weeks) coursesestablished at, or in conjunction with, a national university's business faculty. These trainingwill be followed up for some managers by three week overseas training, when they will reviewinternational housing management practices and customer services, private sector construction,and financial management. A foreign consultant will develop and manage this program;

part 2: centralized training programs to train middle managers in basic management practices,rental housing stock management, property construction, management information systems,and decision-making. An overseas training fellowships may also be offered to about 12 middlemanagers for approximately 3-6 months of formal or on-the-job training in propertydevelopment and management;

part 3: continuing program of training for mid-level managers and operational staff in basicoperations, customer management, maintenance procedures, financial management, andcomputer systems. Some of these will be offered in-house, some at local universities andspecialized training institutes. Structured on-the-job training programs will also form animportant part of the training. This module will also establish a centralized program to traintrainers to ensure continuous training and development. The consultant services will focuslargely in developing this part of the Module.

- 62 - ANNEX 3

C. TECHNICAL ASSISTANCE FOR HOUSING MARKET DEVELOPMENT

13. A set of TA modules is planned to provide assistance in areas that are closely related to HMCTA modules but more specifically needed by municipal agencies - mainly the Real Estate Bureau (REB),Housing Systems Reform Office (HRO), and the Project Management Office (PMO). For overall housingmarket reform as well as success of HMCs and the project, it is essential to create a framework underwhich market-oriented HMCs could be expanded, and urban housing market could be further developed.The establishment of such a framework requires improving city wide property registration process,enhancing property appraisal and valuation, and strengthening institutional capacity for project monitoringand evaluation. Three municipal TA modules of moderate scales will, therefore, be provided in theserespective areas.

14. MODULE 4 - Project Monitoring and Evaluation and Housing Market Development. Theobjective of the Module is to assist the project management office and housing systems reform office withfinancial and technical assistance to carry out the project monitoring and evaluation program, and developinstitutional capacity for facilitating housing market development. A detailed monitoring programconcerning the development and performance of HMCs and the broader housing market would require,as discussed in Annex 13 of this Staff Appraisal Report, collecting relevant statistics and conductingsample surveys and interviews among participating enterprises and individuals. Consultants will berequired to design and conduct sample surveys as well as interviews among participating enterprises andindividuals. A set of personal computers with necessary software will be installed in the project officesto be used for project monitoring and evaluation purposes. In addition, a technical training program,including in-house lectures and overseas study tour, will be organized by an international consultant,which will provide technical skills for senior project staff to carry out economic analysis and policyresearches on real estate market development in China.

15. MODULE 5 - Property Valuation Methodology and Training. This TA module will be tohelp improve property appraisal process and facilitate the housing market development in the projectcities. In order to enhance the technical ability of municipal real estate appraisal teams, the moduleinclude: a study to design an efficient system of valuation exercise as well as staffing and training plans,training workshops and focused overseas study tours. The emphasis of the training will includeintroducing the cities the theories and practices of property appraisal in the developed countries, andestablishing professional contacts between the local appraisal institutes and international real estateappraisal institutions. One or two foreign consultants may be required to help design improved systemsand conduct a short workshop for advanced appraisal professionals. Local consultants will participatein these efforts and also take major responsibility for providing basic training on appraisal theories andmethods, according to different needs of municipal appraisal teams, and preparing a draft model manual.

16. MODULE 6 - Property Registration Systems Improvement. The current propertyregistration system in Chinese cities are based on use-right allocation system, and the procedures, fromcadastral mapping to records processing, are cumbersome and carried out manually. This system isbecoming increasingly inadequate to accommodate the emerging real estate market development.Modernizing the property rights definition and enforcement mechanism, formats and processes ofrecording physical and legal attributes will provide a necessary condition for adequate functioning anddevelopment of the housing market and housing finance. This technical assistance module wouldaccommnodate a range of items concerning clarification of property rights, registration formats andprocesses. According to needs of different cities, it would include: review and modification of propertyrights definition and recording, with assistance of consultants; purchasing relevant computer equipmentsto facilitate map production, data processing, and data recording; and conducting necessary technical

- 63 - ANNEX 3

training to operate new systems. Overseas study tours will be provided for legal and real estate officersto observe international systems of registering and enforcing property rights including condominiums andmortgages.

D. ADMINISTRATION AND SCHEDULE

17. Schedule and Administration. There is considerable complementarity between differentModules. The schedules indicated under each Module are proposed to maximize the complementarity.As these tentative schedules are likely to be subjected to modification, it would be important thatschedules of different Modules are adjusted in view of progress under other Modules. As most of thestudies and consultancy address issues common to all project cities, they will be managed in combinedcontracts by national Housing Systems Reform Office, supported by MOF. The costs will be sharedamong municipalities as described in the paragraph below. In each city only a few of HMCs that are tobe established during the project would have been established during the time when the TA would becarried out. To ensure that others benefit from the TA, the Project Management Office would managethe TA activities in each city and assign costs to HMCs equitably.

18. Input and Cost. The HMC technical assistance modules are estimated to requireapproximately 260 person-months of consultant input as shown in Table 1. An Australian DevelopmentAssistance Grant of A$500,000 is planned to be used to obtain foreign consultant services for the firstphase of Module 1, about 17 person-months. Excluding this input, other local and foreign consultantservices are estimated to cost about US$1,601,000 in end-1993 prices in fees, travel, subsistence andother expenses. The modules for municipal agencies are estimated to require about 18 person-monthsof consultancy, at an estimated cost of about $156,000. These costs will be shared among municipalitiesin the same proportion as the loan/credit allocated. Training programs associated with the HMCModules, especially Module 3, are estimated to cost about US$1,164,000 in subsistence, travel, andtraining materials. Similar programs under the municipal TA modules would include about 20 person-trips and workshops involving about 100 persons, at a total estimated cost of about $356,000. Of these,costs directly attributable to individual trainees would be paid by each municipality and HMC; but othercosts will be shared in proportion to the loan/credit by city. The TA program will also supportprocurement of about 15 sets of micro-computers, a workstation, and associated peripherals for each of12 HMCs expected to be established by the end of 1995, for an aggregate cost of US$955,000.Computer equipment procurement for municipal modules would provide for about 45 sets of computersand associated equipment at a total base cost of about $167,000. Total costs for HMC TA modules withphysical and price contingencies are expected to be about US$4,778,000; for municipal TA modules about$660,000. These cost estimates are shown in Table 2. They are likely to be modified during projectpreparation, particularly after completion of the Module 1, Phase 1.

-64- ANNEX 3

TABLE 1. CONSULTANT INPUTS: PERSON-MONTHS BY MODULE

Module Foreign Local Total

Module 1 38* 86 124Module 2 21 47 68Module 3 11 55 66

SubTotal 70 188 258

Module 4 1 4 5Module 5 3 4 7Module 6 2 4 6

Subtotal 6 12 18

Note: Of these about 17 person-months arelikely to be provided under consultancyfinanced by an Australian Grant.

TABLE 2. ESTIMATED COSTS(US$000)

Item HMC MuniciRal(Modules 1,2,3) (Modules 4,5,6)

ConsultancyLocal 500 31Foreign 1,101* 125

TrainingDomestic 180 50Domestic (part 3) 325Overseas 649 150

Equipment 955 167

Total Base Cost 3,711 523

ContingenciesPhysical 371 52Price 896 88

Total 4,778 663

Note: * Not including the cost of the 17 person-monthsof foreign consultancy expected to be financedby a grant.

- 65 - ANNEX 4

HOUSING MANAGEMENT COMPANIES: FINANCIAL PROJECTIONS

OVERVIEW

1. This Annex presents three different financial projections. The most detailed is Table 1,which presents operational and financial projections (Balance Sheets, Income Statements, andStatements of Fund Flows) of a typical HMC for the period 1994-2000. The projection shown isbased on actual data and the current operating plan of a HMC which started its operation (namewithdrawn on request). The model has been developed during project preparation as a Lotus 1-2-3template. Assumptions used and the relationships among accounts and statements in both operationaland financial projections are summarized below starting from para 4. Page 4 of the Table 1 showsfour major indicators of the HMC finance under different assumptions regarding capital asset base,new development, rent and interest rate levels. This sensitivity analysis illustrates the importance ofan appropriate balance between the existing housing asset (capital) and new housing investment, andthe importance of maintaining the rent levels in real terms. Overall, however, it indicatesconsiderable robustness of the HMC's financial health in the face of several external or managementrisks.

2. Table 2 presents aggregates of projected summary statistics for all HMCs in each of thefour project cities. The statistics represent HMCs now existing as well as those planned to beestablished during the project period, based on the action plan agreed by each municipality thatspecifies eventual coverage of the new system in terms of total existing housing stock to betransferred from enterprises to HMCs. The aggregation is achieved by projection using the sameprojection model used for individual HMCs, and making projections of all the HMCs in a city as ifit is a HMC with the larger and more gradual transfer of enterprise housing stock than would be thecase for individual HMCs.

3. Table 3 compares a projection housing acquisition and expenditures incurred byparticipating enterprises under the current system a projection of housing stock addition by the HMCand the wage adjustment required of the same enterprises under the new system. Stock additionunder the current system is assumed to be 8 % a year, an average seen in the last decade for a typicalcity. Although this rate of housing development is not likely to be maintained in the future for theurban area as a whole, profitable enterprises are projected to continue adding to their housing stockat this pace in the near future. It is also assumed that the enterprises will increase their employmentby 4% a year. The assumptions used in HMC projections (Tables 1 and 2), with somesimplifications, are then used to project the level of housing investment that HMC can afford, andthe maximum wage adjustment that enterprises can be asked to provide for the larger number ofemployees to be housed. The comparison shows that, during the projection period, the new systemis capable of increasing housing supply faster even while requiring enterprises pay wage supplementsnot more than expenditures that they would have made for a smaller stock addition if the currentsystem continued. This is possible primarily due to long-term financing, which is shown to besustainable in this projection as well as in Tables 1 and 2.

- 66 - ANNEX 4

DESCRIMON OF THE PROJECTION MODEL: STRUCTURE AND ASSUMPrIONS

4. The model consists of the following five parts:

(a) Operational Summary: quantity of housing transferred, built, sold, etc.;(b) Costs and Prices: costs of investment, rent factors, loan terms, etc.;(c) Statement of Income and Expenses;(d) Statement of Flow of Funds; and(e) Balance Sheet.

5. OPERATIONAL SUMMARY is mostly based on actual figures and plans available by January1994 and plans. For the process of new housing acquisition, the model assumes that 25% of newhousing started in a given year would be brought to use (rental or sale) in that year and the rest thefollowing year; but one third of the cost of the uncompleted housing would be incurred in the yearstarted. This averages and simplifies the actual process which combines: construction which takesan average of two years; and purchase. Of new housing purchased or finished, 20% is assumed tobe sold. The quality index is a measure of value per unit space of housing units, especially theexisting ones, compared with a "standard" new unit. The index for existing housing is derived fromvaluation. Of the total existing stock on hand, 5% would be rehabilitated in the current year, 5%would be sold and 0.5% would be demolished in the following year. Rehabilitation costs will beadded to the cost of existing stock. Demolition costs will be a component of new housing' cost.

6. COST AND PRICES. The cost (or value) of development or purchase is determined by theprevailing construction cost and land lease cost. These costs are assumed to increase by 12% for1994, 10% in 1995, and 8% p.a. thereafter. Value of old housing is derived from valuation, andequals the new housing cost multiplied by quality index. The rents charged are according to theformula described in detail in Annex 2, and will be adjusted annually along with new housingconstruction cost. The operation and maintenance costs were assumed at levels considered necessaryfor optimal upkeep, much higher than levels reflected in rent factors. Projected future rates areshown in this section.

INCOME AND EXPENSES

7. SALES INCOME AND COST OF SALES: Price of new housing is based on its cost of salesplus a profit margin of 4-8%. Same as the cost determination, the selling price of existing stock isa function of the prevailing costs of new housing (construction and land lease costs) and the qualityand quantity of the existing housing units. Cost of sales is equal to 5 % of the cumulated existinghousing cost on the balance sheets at the time of sales.

8. RENTAL INCOME: New completions in each year are assumed to generate rental revenuefor an average of 4-months. Rents for existing housing will include five or eight factors of cost,depending upon the year and city. Property tax and insurance will not be retained by HMC. Anassumed vacancy rate of 2% is applied to calculate rental income. The third category of income isother income, from lease of shops, etc., and it is assumed to be 5% of total rental income.

9. DEPRECIATION AND INTEREST: Depreciation expenses are calculated based on a baseamount and a combined depreciation rate. Given the assumptions that sales will take place at thebeginning of a year but acquisition and rehabilitation will occur at middle of a year, the base amountwill be: the beginning balance of existing stock - the current year's cost of sales + 1/2 incrementalexisting stock costs, where incremental costs include cost of acquired existing stock and rehabilitation

- 67 - ANNEX 4

costs. A combined depreciation rate is a factor of amortization of both construction and land leasecosts. Interest expenses shown on the income statements are net amount after deducting capitalizedinterests during construction as mentioned below.

FUNDS FLOW STATEMENTS

10. EQUITY CAPITAL represents the total value of existing housing stock and cash sharescontributed by participating enterprises in each year. Among which, cash contribution is assumedto be equivalent to 5 % of cost of existing stock acquired in that year.

11. BORROWING is determined to be funding necessary after other cash flow items areconsidered. Of the necessary borrowing amount, 20% is assumed to be 2-year bridge loans and 80%is 20-year mortgage loans. Average grace period for 20-year mortgage loans is assumed to be 1.5years.

12. INVESTMENT IN NEW HOUSING: Investment in new housing, or current investment,includes 1) construction costs, 2) land lease cost, 3) demolition costs, and 4) interests duringconstruction. It is assumed that all land lease costs will be paid at the time the development schemeis started, and 50% of the construction cost will be incurred in the first year and the remaining 50%in the second year. Domestic inflation rates described above for determining existing stock's costare applied here to calculate the construction cost, the land lease cost, and the demolition cost.

13. INTERESTS DURING CONSTRUCTION: In accordance with new accounting standardseffective since July 1, 1993, interest expenses during construction period should be capitalized as partof housing construction costs, but this capitalized amount cannot exceed current year's interestexpenses calculated under the accrual accounting basis.

14. DIVIDEND is proposed to be the lesser of 80% of income or 80% of internal source offunds after amortization of loans.

BALANCE SHEETS

15. WORK-IN-PROGRESS: It is assumed that 25 % of the housing started in a year is put to use(either for sale or rent) within that year, and 75 % by the end of the following year. In other words,75 % of current investment is presented as work-in-progress on the balance sheets at year end. Thecost of new housing on the balance sheets at the first year end would be 80% of new completionscost, or 20% (80% * 25%) of current investment cost due to the work-in-progress assumptions. Inthe following years, new completions would include previous year's work-in-progress and 25% ofnewly started housing. Therefore, the ending balance of new housing cost on the balance sheetswould be its beginning balance plus 80% of the cost of new completions.

16. CURRENT ASSETS: One month's rental income and 1/24 of annual sales income aredeemed not received at year end. Cash/bank is planned to cover one month's operating expenses and15 days' payment for new housing investment and existing housing rehabilitation costs. Reserves,or retained earnings, are cumulative balance of net income after distribution and declaration ofdividends.

- 68 -

Annex 4Table 1

A JOINT-STOCK HOUSING MANAGEMENT COMPANY Page 2OPERATION AND FINANCIAL PROJECTIONS (1994 - 2000)

1994 1995 1996 1997 1998 1999 2000OPERATIONAL SUMMARY

Housing Stock Changes (1,000 m2 floor space)

Existing Stock:Acquired 600 250 50 50 50 0 0

Cumulative 600 850 900 950 1000 1000 1000Sold Old 5.0% 0 30 41 41 41 42 39Rehabilitated 5.0% 30 41 41 41 42 39 37Demolished 0.5% 0 3 4 4 4 4 4

New Housing:Started%Bought 120 100 90 80 60 50 30Put to use 30 115 98 88 75 58 45

Cumulative 30 145 243 330 405 463 508Sold, New 10.0% 3 12 10 9 8 6 5

Rental Stock:Pre-Reform Exisiting Stock 600 817 822 827 831 786 742New Housing Since Reform 27 131 218 297 365 416 457Total 627 948 1040 1124 1196 1202 1199Vacancy, % 2% 2% 2% 2% 2% 2% 2%

Number of Workers, 1000 40 10 5 5 5 4 3Cumulative 40 50 55 60 65 69 72

m2/worker(rent or own) 16 20 21 21 22 21 21

Quality Indicator Base=100 Detr. 98.5% Rehab to 90Pre-reform Existing Stock 75 75 74 74 74 73 73New Units 100 101 102 103 104 105 106Others Since Reform 100 100 100 99 99 98

Average 76 78 80 81 82 82 83

COST FACTORS

Capital Costs, Yuan/m2/yrPrice Increase, % 12.0 12.0 10.0 8.0 8.0 8.0 8.0Land lease 300 336 373 407 439 474 512Construction 750 840 932 1016 1098 1185 1280

Rent FactorsMaintenance 1.0% 8 9 10 10 11 12 13Management 0.4% 3 3 4 4 4 5 5Depreciation, land lease 1.5% 5 5 6 6 7 7 8Depreciation building 3.0% 23 25 28 30 33 36 38

Subtotal (3 factors) 38 42 47 51 55 59 64

Return on Investment 5.0% 53 59 65 71 77 83 90Housing Tax 12.0% 0 0 15 17 18 19 21

Subtotal (5 factors) 90 101 127 139 150 162 175

Land Charge 1 1 1 2 2 2 2Insurance 0.2% 2 2 2 2 2 2 3Profit 4.0% 4 4 4 5 5 6 6

Total (8 factors) 96 108 135 147 159 172 185

Budgeted Costs, Y/m2Routine O & M 2.0% 15 17 19 20 22 24 26Major Repairs 3.5% 26 29 33 36 38 41 45Rehabilitation 40.0% 300 336 373 407 439 474 512Demolition 15 17 19 20 22 24 26

Loan Interests, %20 years 13.5 13.5 11.5 11.5 11.5 11.5 11.52 years 11.0 10.0 10.0 10.0 10.0 10.0 10.0

less than 1 year 9.4 8.5 8.5 8.5 8.5 8.5 8.5

- 69 -

Annex 4Table 1Page 2

A JOINT-STOCK HOUSING MANAGEMENT COMPANY(Yuan million)

INCOME STATEMENTS 1994 1995 1996 1997 1998 1999 2000

INCOMERental Revenue

Pre-reform Existin Stock 40 60 76 83 90 91 93New Housing Since Reform 0 3 17 31 46 60 74Current Year Completions 1 4 4 4 4 3 3

Total Rental Revenue 41 67 97 118 139 155 170Sales Revenue

Pre-reform Existing Stock 0 26 40 43 47 51 51New Housing Since Reform 2 11 15 15 14 12 10

Total Sales Revenue 2 37 55 58 61 63 62

Other Income 2 3 5 6 7 8 8

TOTAL INCOME 45 107 157 183 207 226 240

EXPENDITURESCost ot Sales, Old 0 24 33 34 35 36 34Cost of Sales, New 2 10 14 14 13 11 9Routine 0 & M 9 13 19 22 25 28 31Major Repairs 4 6 7 8 8 9 9Depreciat ion - old stock 6 15 18 18 19 20 19Depreciation - new building 0 2 4 8 11 13 16Sales Taxes & Insurance 0 0 13 16 19 22 24

Total Operating Costs 22 70 108 119 131 139 143

Non-operating Expenditures 1 2 3 4 4 5 5Interest Expense (net of 0 3 8 17 25 32 37interest during construction)

NET INCOME 22 33 38 42 47 50 55

FUNDS FLOW STATEMENTS 1994 1995 1996 1997 1998 1999 2000

SOURCES OF FUNDSInternal Sources of Funds

Net Income 22 33 38 42 47 50 55Depreciation 6 16 22 26 30 33 35

Total Internal Soruces 28 49 60 68 77 83 90

Equity Capital 483 230 51 55 59 0 0LT Borrowings (20-yr loan) 66 81 77 73 57 49 29Bridge Loan (2-yr) 7 9 9 8 6 5 3

TOTAL SOURCES 584 369 196 204 199 137 122

APPLICATIONSAcqisition of Existing Stock 473 219 48 53 57 0 0Investment in New Building 81 126 122 119 103 89 67Interest During Construction 5 14 15 14 13 10 8

Less: Cost of Sales (2) (34) (47) (48) (48) (47) (43)Rehabilitation 9 14 15 17 18 19 19Other Investment 2 1 1 1 1 1 1

Total Capital Expenditures 567 340 154 156 144 72 51

In(de)crease in Net Liquid Asset (1) 3 3 2 0 2 1Amortization 0 0 11 17 21 24 25Dividend Paid 17 26 28 30 35 39 44

TOTAL APPLICATIONS 584 369 196 204 199 137 122

- 70 -

Annex 4Table 1Page 3

A JOINT-STOCK HOUSING MANAGEMENT COMPANYBALANCE SHEETS (1994 -2000)

(Yuan million)

1994 1995 1996 1997 1998 1999 2000ASSETS

Current AssetsCash/Bank 6 12 15 16 17 17 16Receivables 3 7 10 12 14 16 17Investment/Other 1 1 2 2 2 3 3

Total Current Assets 10 20 28 30 33 35 35

Fixed AssetsPre-Reform Housing Stock 482 691 720 753 790 770 750New Housing Since Reform 19 109 234 356 472 572 656

Gross Fixed Asset 501 799 954 1109 1262 1342 1406Less: Accumulated Depreciation

Pre-Reform Housing 6 21 37 54 71 87 101New Housing 0 2 6 14 25 38 54

Net Fixed Assets in Service 494 777 910 1042 1167 1217 1251

Work-in-Progress 64 105 103 100 87 74 56

Other Fixed Assets 2 3 4 5 6 7 8

TOTAL ASSETS 571 905 1044 1177 1293 1334 1351

LIABILITIES AND EQUITY

Current LiabilitiesAccounts Payable 6 12 15 16 17 17 16Short-Term Debts 4 5 5 5 6 6 6Other 1 1 2 2 3 3 3

Current Liabilities 11 18 22 23 26 26 25

Long-Term Debts (20-year) 66 147 220 284 329 362 371Bridge Loan (2-year) 7 16 17 17 14 12 9

Total liabilities 84 181 259 324 369 399 405

Equity Capital 483 713 764 819 878 878 878Retained Earnings 4 11 21 34 46 57 68

487 724 785 853 924 935 946

TOTAL LIABILITIES AND EQUITY 571 905 1044 1177 1293 1334 1351

Key,,Ratios:CurrenrtRatio 0.95 1.12 1.24 1.31 1.28 1.37 1.43

LT Debt as % of Debt and Equity 13 18 23 26 27 28 28Return on Assets (1) 9 5 5 6 6 7 7Operating Ratio (%) 51 67 71 68 65 64 62Debt Service Coverage Ratio 5.66 3.16 2.03 1.78 1.75 1.73 1.80Loan/Construction (1) 77 58 56 54 47 46 34

- 71 -

Annex 4Table 1Page 4

JOINT-STOCK HOUSING MANAGEMENT COMPANYKEY RATIOS AND SENSITIVITY ANALYSIS

1994 1995 1996 1997 1998 1999 2000BASE CASE1. Net Income (Yuan million) 22 33 38 42 47 50 552. Debt Service Coverage 1/ 5.66 3.16 2.03 1.78 1.75 1.73 1.803. Operational Surplus/Equity 2/ 5% 6% 5% 5% 5% 6% 6%4. Long-term Debt/Equity Ratio 15% 27% 31% 37% 39% 40% 40%

SENSITIVITY ANALYSIS:A. With 20% Larger Cumulative Existing Stock1. Net Income 22 35 40 47 54 60 662. Debt Service Coverage 5.66 3.34 2.13 1.95 1.97 2.03 2.163. Operational Surplus/Equity 5% 6% 5% 5% 6% 6% 7%4. Long-term Debt/Equity Ratio 15% 26% 29% 33% 32% 31% 29%

B. With 20% More New Construction Started1. Net Income 22 33 39 42 45 48 532. Debt Service Coverage 4.77 2.63 1.69 1.49 1.47 1.47 1.533. Operational Surplus/Equity 5% 6% 4% 4% 4% 4% 5%4. Long-term Debt/Equity Ratio 18% 34% 40% 46% 49% 51% 51%

C. With 10% Lower Rent1. Net Income 18 26 28 30 32 33 372. Debt Service Coverage 4.84 2.73 1.72 1.51 1.48 1.46 1.513. Operational Surplus/Equity 4% 5% 3% 3% 3% 4% 4%4. Long-term Debt/Equity Ratio 15% 27% 32% 38% 40% 42% 43%

D. With 3% Higher Interest Rate1. Net Income 22 32 36 38 40 41 452. Debt Service Coverage 4.73 2.61 1.72 1.52 1.48 1.47 1.523. Operational Surplus/Equity 5% 5% 4% 4% 4% 4% 5%4. Long-term Debt/Equity Ratio 15% 28% 32% 37% 39% 41% 41%

Note to Table 1:1/ Debt Service Coverage is defined as (income before interest and depreciation) devided by(interests and principal repayment of long-term loans). Among which, interests include bothinterest expenses and interest during construction.

2/ Operational Surplus is the portion of internal source of funds availabe for investment anddividend distribution, after debts and interests are paid off. It is calculated as follows:(net income + depreciation - interest during construction - repayment of long-term loans).

- 72 -

Annex 4

Summaxy of Aggregate Operation and Financial Projections Table 2

of All HMCs by City

Beijing Chengdu

Items \ Year 1994 1997 2000 1994 1997 2000

HOUSING (cumulative by yea cnd)Existing Stock (million m2) 1.20 4.50 6.80 0.70 2.50 3.60NewHousingCompleted(millionm2) 0.0S 1.16 2.65 0.05 0.66 1.35

FINANCIAL SUMMARY (Yuan million)Income and ExuensesTotal Rental Revenuc 109 575 1,122 48 293 561Total Sales Revenue 13 353 657 4 130 227Total Sales & Operating Costs 59 675 1,280 26 286 513NetIncome 65 218 381 26 114 197

Fund FlowsCash from Operations before Interest 95 721 1,355 36 319 585

Investment in New Building 220 691 1,135 122 327 367

Long-Term Borrowing 165 301 489 104 198 177

Debt Service 14 181 384 8 95 193

Balan"c SheetFixed Assets in Service 1,275 6,021 10,573 583 2,767 4,666

Total Ascts 1,479 6,744 11,785 695 3,115 5,098

Long-Term Debt 165 923 1,98S 104 608 1,090Equity Capital 1,239 5,464 9,097 561 2,357 3,733

Ningbo Yantai Four Cities Total

Items \ Year 1994 1997 2000 1994 1997 2000 1994 1997 2000

HOUSING (cumulative by ear end)Existing Stock (million m2) 0.50 2.30 3.30 0.60 2.30 3.50 3.00 11.60 17.2New Housing Compicted (million m2) 0.05 0.66 1.25 0.04 0.53 1.05 0.21 3.01 6.3

FINANCIAL SUMMARY (Yuan million)Income and Expm

Total Rental Revenue 37 287 526 33 251 480 232 1,406 2,63Total Sales Revenuc 2 93 179 5 126 222 24 702 1,285Total Sales & Operating Cost IS 241 450 24 258 472 127 1,460 2,715

Net Income 21 113 137 19 105 195 131 550 96

Fund FlowsCashfroniOpertions beforeInterest 29 284 519 31 236 522 191 1,610 2,981

Investmcnt in New Building 115 254 314 86 224 263 543 1,496 2,07

Long-Term Borrowing 103 160 153 62 93 51 434 752 87

DcbtServicc 3 86 154 5 68 103 35 430 83

Balanoc ShoctFixedAsset inService 411 2,554 4,117 449 2,191 3,735 2,718 13,533 23,091

Total Asset 516 2,836 4,489 530 2,439 4,057 3,220 15,134 25,42

Long-Term Debt 103 587 938 62 321 474 434 2,439 4,490Equity Capital 390 2,131 3,317 438 1,980 3,339 2,623 11,932 19,48

- 73 - Annex 4Table 3

Comparison of Enterprise Expenditures and Employee Housing Provisionunder the Current and HMC Systems

Year 1994 1995 1996 1997 1998 1999 2000A. Under the Old System

(by Enterprises)al Acquisition m2 8800 9504 10264 11085 11972 12930 13964

@ UnitCost(Y/m2) 1050 1260 1411 1524 1646 1778 1920Housing Stock m2 110000 118800 128304 138568 149654 161626 174556

Asset Value Y million 86.6 112.3 136.0 159.2 186.6 218.9 257.0NumberofWorkers 9167 9533 9915 10311 10724 11153 11599

provided Housing Number 4400 4752 5132 5543 5986 6465 6982% 48% 50% 52% 54% 56% 58% 60%

Expenditures Yuan 10000Acquisition 924 1198 1449 1690 1971 2299 2681Oper & Maint 2.0% 231 299 362 422 493 575 670Less Rent, @YIm2 0.50 66 71 77 83 90 97 105

a2 Total Expenditures 1089 1426 1734 2029 2374 2776 3247

B. Under the New System(by HMCs)

bl Acquisition m2 17600 19008 20529 22171 17958 19395 20947(b1/al) 200% 200% 200% 200% 150% 150% 150%Housing Stock m2 110000 127600 146608 167137 189308 207266 226661

- Asset Value Y million 86.6 123.4 161.9 202.8 251.9 300.0 357.0Workers Housed No. 4400 5104 5864 6685 7572 8291 9066

% 48% 54% 59% 65% 71% 74% 78%Rental Income Yuan 10,000

Rents, Old Housing 878 1053 1180 1274 1376 1486 1605Rents, New Housing 59 287 583 934 1334 1752 2255Less O&M 231 322 414 509 623 737 870Gross Income 705 1018 1348 1699 2087 2501 2990

Funds FlowAcquisition Cost 1848 2395 2897 3379 2956 3448 4022

New Loans 1478 1901 2287 2652 2291 2642 3048Loan Balance 1478 3352 5575 8123 10261 12684 15439

Self Financing 370 494 610 727 665 806 974Principal Payment 0 28 63 105 153 218 293Interest Payment 109 326 513 753 965 1205 1476@ Interest p.a. % 14.8 13.5 11.5 11.0 10.5 10.5 10.5

Debt Service + Financing 479 848 1187 1585 1783 2229 2743

Net Cash + Reserve 226 216 255 267 525 621 755Dividend 181 173 204 214 420 497 604Retained Earnings 45 93 153 222 349 508 710

C. Wage Adiustment by Enteprises(given to 100% of residents regardless of employer)

Total WageSupplement 870 1263 1674 2108 2596 3114 3724cl Net of DMdend 689 1091 1470 1894 2176 2616 3120

Cost Savings for Enterprise(a2 - c1) 400 335 263 134 198 160 127

Note: * Percentages shown are rents as % of capital cost of new housing

-74 - ANNEX 5

SUMMARY OF CRITERIA AND PROCEDURES FORAPPRAISING AND SERVICING HOUSING MORTGAGE LOANS

I. LOANS TO HIMCS FOR ACQUISITION OR CONSTRUCTION OF RENTAL HOUSING

A. Basic Terms and Criteria for Loans to HMCs

Loans may not exceed 80% of cost of new construction or acquisition. Up to 90% can befinanced for projects approved in the first year of new HMCs which incur heavy start-upexpenditures, if it can be shown that: the cash flow constraints will be eased soon, forexample by imminent addition of existing stock, and that available cash is not diverted outsideof the core business of housing rental.

The World Bank loan/credit should not exceed the cost of construction incurred after April 1,1993 and never been financed by the loan/credit before.

-Collateral properties should have projected net rental income (rent receipt minus expenses)that are more than 150% of the repayment of the request loan, both calculated for the firstyear of loan repayment. This requirement may be replaced with a requirement that thecollateral properties generate current cash flow equivalent to 120% of the loan payment ormore if the conditions stated above apply and the World Bank does not object.

Term of the loan will be 20 years. Grace period equal to the construction period or twoyears, whichever is shorter, may be granted during which principal payment would not berequired.

Borrower (HMC) qualification criteria would include:

- Sound financial status and prospect (debt-service coverage over 1.5, for example);

- Proven track record of profitability, sound property management, marketing, rent collection,and cost control;

- No large investment for speculative activities - housing for sale, etc. (relative to actual recordof sales) especially to non-project participants;

- Not more than 70% of total borrowing during the past 3 years from this bank;

- No history of loan rescheduling of longer than one year for more than 10% of the loan in thepast two years.

Default:When any of the approval conditions have been violated during any time before fullrepayment, the loan will be accelerated, i.e., full balance of the loan will be due. In addition,fine will be assessed in cases the property financed is used for purposes other than agreed,payment is late, etc. Failing the full payment, the collateral would be foreclosed and rentcollection will be taken over.

-75- ANNEX 5

B. Appraisal and Servicing Procedures

Information to be submitted by HMC upon Application

a. On the (new) property to be rinanced:

Physical specifications of the property (A site plan, plans of housing unit types anddescription of structural types will suffice as submission for prior review by the World Bank);

Evidence of proper permits such as land lease, planning permit, building permit, environmentpermit and other certificates; environmental impact assessment; and resettlement plans (forsubmission to the World Bank prior review, summaries of the above will suffice, except thatfull resettlement plans, according to the agreed format, will be subject to World Bank priorreview and approval if resettlement involves 200 persons or more);

Projected rental revenues by type, supported by demand indication such as the waiting list ofparticipating enterprise workers and the enterprises' ability to provide wage supplements;

Projected operation and maintenance expenses (comparison with similar properties, ifavailable, and past experience);

Purchase contract or a schedule of construction cost estimates, detailed breakdown of costs byland, resettlement, construction, and other items;

Schedule of estimated disbursement (based on the estimated progress of construction andcontractual arrangements) along with statement of HMC's own expenditures for the property;

Contractual arrangements including description of selection process of the contractor;

b. On the collateral (existing) properties:

IDescription of the properties including age, structural types, typical unit plans, facilities, etc;

Rental revenues and expenses for the past three years. Projected rental revenues and expensesfor the next three years;

Copy of ownership and land lease certificates;

Tenant roll, and waiting list.

C. On the HMC:

Corporate structure and key personnel;

Audited detailed financial statements including supplemental detailed statements of assets,investments and borrowing for the past three years;

Financial projection for the next five years.

- 76 - ANNEX 5

2. Appraisal and Recommendation Procedures

The following steps will be undertaken provided that the previous steps are satisfactory.

- Screening of information submitted, by loan officers to check completeness and compliancewith basic terms;

- Verification and evaluation of the information supplied, with the help of independentspecialists in architecture, finance, engineering, law, etc.;

- Pre-construction (or Pre-Purchase) joint review meeting among lender, HMC, designers andcontractors.

- Recommendations by loan officer of loan amount, collateral requirements, loan terms,insurance requirements and other requirements and conditions.

- Approval by Loan Committee, subject to no objection listed below.

- Submittal of appraisal report to the Project Management Office (for all loans) and to theWorld Bank (for the first two loans and any loan larger than $7.5 million equivalent, andother loans for which the World Bank requests documents before the bank's appraisal).

- Final approval or confirmation letter.

3. Contract Signing

- Signing and notarization of mortgage loan contract, land lease and housing certificates.

4. Disbursement

- Loans for Construction: According to progress of construction (invoice or receiptaccompanying adequate evidence of completion or delivery certified by supervising engineer).Undisbursed balance of a loan will be canceled and excess amount needs new authorization.Part of the funds that would be financed by the World Bank can be withdrawn from theSpecial Account to be managed by the Finance Bureau.

- Loans for Acquisition: On closing.

5. Information to be provided annually by EIMC during repayment period

- Revenues and expenses of collateral and financed properties.

- Rent roll, and waiting list

- Audited financial statements of HMCs

- Other information needed for lien adjustment (every three years)

- 77 - ANNEX 5

II. LOANS TO INDIVIDUALS FOR PURCHASE OF NEW HOUSING FOR OWN USE

A. Basic Criteria for Loans to Individual Homeowners

Loan amount not to exceed 70% of housing price or appraised value, whichever is lower(World Bank loan/credit amount is subject to the same limitation specified under HMC loans);

Borrower qualification would include: Income more than 2.5 times all debt payments; recordof stable employment and income; at least one of the borrowers employed by participatingenterprises (at the time of application); no personal debts larger than annual income; nohistory of loan default or arrears in the past two years.

Collateral and Guaranty: Housing being purchased. Authorization to attach personalbelongings, bank accounts, insurance proceeds, and wages in the even of default. Personalreferences.

B. Appraisal and Servicing Procedures

Information to be submitted by individuals purchasing house

Application form showing: personal and financial (income and debt) information of all co-borrowers, address of the new housing, and amount of loan applied for;

Supplemental evidence for the above, including employment certificates, salary slips, evidenceof other income, copy of bank accounts showing sufficient balance for downpayment andother expenses; and if necessary, copy of life insurance policy, credit reference and personalreference letters;

Draft purchase contract along with a copy of the condominium certificate supplied by theseller.

2. Appraisal and Recommendations

Evaluation of information after verification;

Appraisal of the property;

Determination of repayment reschedule, escrow of insurance and taxes, and any otherrequirements and conditions;

Approval by the loan officer or loan committee.

4. Contract Signing and Disbursement

Signing and notarization of mortgage loan contract, land lease and housing certificates.

Simultaneous deposit of downpayment into an escrow account;

Disbursement of full price to the seller after three days' wait.

- 78 - ANNEX 6

HOUSING FINANCE TECHNICAL ASSISTANCE PROGRAM: OUTLINE

MODULE 1: HANDS-ON ASSSTANCE.

An Advisor with knowledge and experience in housing mortgage lending practices inmarket economies will be retained by the Central Coordinating Group (CCG) for a total of about13 months over four years starting from September 1994. The main tasks will be to:

Assist the participating banks in appraising a few initial loans and making appraisal reportssubmitted to the Bank Group;

Help evaluate experience of the mortgage lending during the initial years; and

Help prepare detailed terms of reference or training plan for the modules described below,help recruit and manage the consultants, and participate to a limited extent.

MODULE 2: DEVELOPMENT OF MORTGAGE LOAN APPRAIsAL AND SERVICING MANUAL

Objective: to develop a technical manual for housing mortgage loan appraisal and loanmanagement, that supplements formal rules and will be used for training and reference of loanofficers.

Scope: detailed procedures and methodologies for loan application, appraisal, loan servicing andmonitoring, modification and closing.

Schedule and Method:Phase 1: Prepare the first draft based on U.S. and U.K. practices, hold a training seminar

(completed by January 1994), revise and finalize the first version (by June 1994);

Phase 2: Collect comments on the first version after about a year of experience (starting fromabout May 1995), prepare modifications in consultation with participating banks,adding more details; finalize with foreign consultant help (by about November 1995);and hold a training seminar (by about December 1995).

1NPUT:Phase 1: 2 person-months of foreign consultant services (funded with JGF), 3 person-months

(PM) of local consultant services;

Phase 2: Consultant person-months: 2 foreign, 6 local, not including the Advisor's input.

MODULE 3: STUDY FOR HOUSING FINANCE SYSTEM DEVELOPMENT IN CHINA

Objective: to help develop lending and borrowing instruments and management techniques forhousing finance, and examine policy options to develop enabling environment.

- 79 - ANNEX 6

Scope: analytical and operational techniques for asset/liability management; design anddeployment of borrowing and lending instruments; recommendation of further technicalassistance and training; legal instruments; prudential regulation; examination of capital marketdevelopment in China.

Method: interviews, data collection and analysis focusing on demand for housing finance andfor long-term savings; comparative review of international experience; and projection of impactsof recommended measures on participating banks, housing and capital markets.

Schedule and Input: The study would start from about June 1995 and take about eight months.Before finalization of the report, a seminar will be held with participation of senior officers ofthe participating banks and relevant policy authorities. The study would require about 25person-months of local consultant input and 12 person-months of foreign consultant assistance,about 10 of which in China.

MODULE 4: COMPUTERIZATION AND BASIC SKILLS DEVELOPMENT

Objective: to strengthen capacity of the participating banks by computerizing the operations andby upgrading staff's ability in the use of computers, new accounting system, and otherfundamental skills of finance operations.

Scope: All staff of participating banks will be trained at least in some part in: basic accounting,financial analysis and projection, use of computers, capital markets analysis, legal instruments,banking procedures.

Schedule and Input: Basic skills training programs will start from about October 1993 and lastabout four years, under a plan finalized with the help of the Advisor. The training will beconducted in local teaching/research institutions, supplemented with in-house workshops andcourses arranged centrally by CCG.

Computerization plans will be drafted by December 1994 with the help of local consultants(about 8 person-months) and finalized with the help of a foreign consultant (about 2 person-months). The project will finance procurement of about 120 sets of microcomputers and 10 setsof workstations.

MODULE 5: TRAING OVERSEAS

Starting from about October 1994, according to a plan to be finalized with the assistance ofthe Advisor, about thirty senior managers of the participating banks will conduct short-term tours(about 3-4 weeks) of countries where real estate finance is well developed. The focuses ofobservation will include: operation of housing markets; various capital market instruments;comparison of different models of housing finance; housing finance instruments; and managementsystems and techniques. In addition, 5-10 middle-level managers of the participating banks willattend longer training programs in teaching or banking institutions overseas for a period of three tosix months.

-80- ANNEX 6

COSTS AND ADMINISTION

Cost estimates are summarized as follows:

US$ '000 Yuan millionConsultants

(Fees, Travel, Subsistence)Foreign* 565 4.91 (30 person-months)Domestic 140 1.22 (62 person-months)

Training and SeminarsDomestic 233 2.02Overseas 360 3.13

Computers and Peripherals664 5.79

Total Base Cost 1,962 17.07

ContingenciesPhysical 196 1.71Price 345 8.13

Total 2,503 26.91

Note: This does not include the first phase of Module 2.

Adminibtration and Cost Sharing. A task group of CCG -- consisting of representatives ofheadquarters of PBC, ICBC, PCBC and of MOF -- will coordinate the TA program. In particular,the consultancy and studies will be managed by CCG and the costs shared among participating citieson the basis of World Bank loan/credit allocations. Within each city, costs will be shared evenlybetween two banks. Other expenditures will be the responsibility of each participating bank, althoughit is assumed that they, too, will be approximately proportional to loan/credit allocation. Part of thetraining programs in each city would be coordinated by PBC local branch and PMO. Most of thecomputer equipment would be procured as part of the large international procurement packages forcomputers needed for the project as a whole.

- 81- ANNEX 7

FINANCIAL PROJECTIONS OF PARTICIPATING FINANCIAL INTERMEDLARIES

1 Eight banking units will participate in the Project. These are the Industry and CommerceBank of China (ICBC) in all four cities; the People's Construction Bank of China (PCBC) in citiesexcluding Yantai; and the Yantai Housing Savings Bank (YHSB). PCBC became the first specializedbank to engage in housing finance operations and established Real Estate Credit Departments (RECD)at headquarters and most local branches. The RECDs keep independent accounts and pay taxes tolocal government. ICBC's housing finance activities are relatively new and are a part of the portfolioof branch businesses.

2 Therefore, two standard financial projection models have been constructed. One model isfor an independent unit and is used for YHSB and RECDs of PCBC branches as well as the RECD ofBeijing ICBC which has an independent accounting status and has been conducting substantial housingfinance business for about two years. Another model, to be used by other ICBC branches treatshousing finance operation as a profit center within a local branch.

3 The models, their description, and projections for all eight banking units have beendeveloped during project preparation and are available in the Project File. Due to space constraints,standard sets of financial statements for one PCBC RECD and one ICBC branch are shown assamples in Tables 2 and 3 (names withdrawn on request). Table 1 shows selected indicators offinancial status of all 8 banking units in 1992 and as projected for year 2000.

4 The financial statements are derived from detailed and voluminous worksheets, whichmodel relationships between various accounts in a complex but conventional manner. A fewcomputational simplifications and features of interest are noted below:

Current Assets and Current Liabilities are projected by simple extrapolation of their balancesat the end of 1992, assuming the samne growth rates estimated from past trends and adjusted byeach unit for various reasons.

Non-Interest Expenses are estimated on the basis of the amount of long-term loans andhistorical expense rates relative to such loans.

Long-Term Assets and Liabilities. The World Bank loan/credits are as projected independentlyby two PFIs in each city, and therefore do not add up to the total loan/credit allocated to eachcity. Long-term bond issues are subject to People's Bank approval and also to large marketuncertainty, as a relatively new and instrument. Plans for long-term mortgage loans are tiedwith these long-term resources, and hence are subject to the high degree of indeterminacy.

Equities. The specialized banks (ICBC and PCBC) are owned by the State and most after-taxearnings are remitted. Therefore, capital, general reserves, and dividends have only limitedpractical significance at present. YHSB is the only exception in this case. Nevertheless, capitaland reserves of the specialized banks have begun to be at least notionally allocated by branchand some amounts are retained at branches under a few reserve categories such as staff welfarefunds, in a move to increase branch-level accountability and incentives.

- 82 -

Annex 7Table 1

Selected Financial Data of Participating Banks(Yuan million)

1992

Housino Loans NetTotal Long- Term Interest

City Bank Assets Term Other Deposits Income

Beijing PCBC RECD 1,500 0 1,082 236 25

ICBC RECD 1,023 0 120 373 ?

Chengdu PCBC RECD 679 0 129 25 ??

ICBC Branch 15,648 0 0 4,984 ??RECD 0 0 0 0

Ningbo PCBC RECD 189 11 109 42 3

ICBC Branch 5,645 0 0 1,782 ??RECD 0 0 0 0

Yantai YHSB 850 7 334 38 25

ICBC Branch 7,059 0 0 1,733 206RECD 0 0 0 0

2000

Housing Loans IBRD NetTotal Long- Term Loan Interest

City Bank Assets Term Other Deposits Balance Income

Beijing PCBC RECD 8,317 2,273 2,389 592 932 556

ICBC RECD 4,663 1,796 611 1,080 932 189

Chengdu PCBC RECD 2,267 666 244 121 373 103

ICBC Branch 36,558 1,594 188 8,903 373 1,765RECD 1,594 188 242 373 144

Ningbo PCBC RECD 1,902 1,333 360 245 373 73

ICBC Branch 15,152 824 55 4,380 303 1,081RECD 824 55 140 303 68

Yantai YHSB 2,630 993 942 317 251 162

ICBC Branch 16,966 1,263 159 4,522 234 1,173RECD 1,263 159 99 234 148

- 83 -

Ansnex 7Table 2

PCBC Real Estate Credit Departnent Page IProjected Financial Statemnents, 1993-2000

(Yuan milhion)

L BALANCE SHEET

(as of December 31)

I!l! im ' im 1225i 12 291 im l

Current AsetsCash and reserves 40.93 341.15 444.01 443.14 471.13 579.70 732.19 878.14 1073.28

Workingcapit tloans 1081.58 1,199.74 1.35.71 1.494.58 1.64404 1.80845 1.989.29 2,.18.22 2,407.04

Other current assets 200.24 241.68 247.30 335.58 344.79 370.86 467.65 607.07 712.17

Current maturity of LT loans 59.41 0.00 0.70 13.26 34.09 59.28 82.09 100.75 117.90-- -- --- - -- - - --- - - - - - - - -- - - - -- - - - --- - - - - - - - --- - - - - - I- - -- - -- - -- - - - --- - - - - - - - -- -- - -- - -- - ------------------.

1,382.15 1772.56 2.050.72 2.286.56 2494.05 2.818.28 3.271.22 3,774.17 4.310.39

Long-term Loans (net of provisionfor doubtful accounts)

Individual mortgag loan 0.00 0.00 54.15 115.63 201.101 276.15 333.99 383.96 432.18

Housing managementoempany 0.00 0.00 207.90 543.54 936.28 1,263.13 1,492.55 1.674.54 1,841.27

Odierlong-term loans 106.05 262.62 341.41 443.83 576.98 750.08 975.10 1.267.63 1,647.92..- - - - .... ... . . - --- - - - - - ..-.- --- - - - - - - - --- - - - - I- - - --- - - - - - - - --- - - - - - - - --- - - - - - - - -- - - - -- - - - -- - - - -- - - -

106.05 262.62 603.46 1,103.01 1,714.27 2,289.35 2,801.64 3.326.12 3.921.37

Fixed Assets (net of accu. depr.) 12.00 20.52 28.39 40.28 51.20 61.14 7(0.11 78.10 85.12

Total Assets 1.500.20 2,055.71 2,682.56 3,429.85 4,259.51 5.168,78 6,142.98 7.178.39 8316.388

Current LiabilitiesCurmnt deposits 1,017.85 1,430.99 1,726.78 2.068.78 2.478.67 2,969.97 3,558.85 4,264.74 5.110.93

Othercurrentliabilities 135.34 210.17 253.99 300.99 362.53 426.33 491.17 559.24 645.45

Cunrnt maturity of LT liability 3.00) 01.1) (.0n0 (1(X) o0.) )(.x) 71.67 71.67 71.67

Term deposits 268.01 302.17 338.59 379.41 425.17 476.47 533.98 598.46 670.75

Bonds payable 0o.0 0.1) 0.0, (1.00 11.00 ((.1) , 1.18) 11.00 0.00

IBRD loans 0.00 (1.o 200.00 430.00 670.(o) 855s.0 9(13.33 931.67 860.00

Total liabilities 1,424.20 1.943.33 2,519.37 3.199.18 3,936.38 4.727.77 5,559.18) 6,425.77 7,358.80

Equity

Capital 76.00 76.00 76.00 76.00 76.00 76.00 76.0) 76.00 76.00

Retained easnings 0.00 36.38 87.19 154.66 247.14 365.01 517.98 676.62 s82.09

76.00 112.38 163.19 230.66 323.14 441.01 583.98 752.62 958.09

Total Liabilities& Equity 150).20 2.055.71 2,682.56 3,429.85 4,259.51 5,168.78 6,142.98 7,178.39 8,316.88

Current Ratio 12(1) 1(18 104 0.96 (.88 (.83 (179 1.77 0.74

CapitalAdequacyRaiso 5.21% 6.55% 7.29% 7.72% 8.53% 9.61% 10.79% 11.95% 13.23%

Long-term Debt/Equity 3.53 2.69 3.30 3.60 3.39 3.02 2.46 2.103 1.60

Loan PortfolicVAssts 7.07% 12.78% 22.50% 32.16% 40.25% 44.29% 45.61% 46.34% 47.15%

RetumnonAswts 2.05% 2.14% 2.21% 2.41% 2.501% 2.53% 2.53% 2.65%

Retum on Equity 38.62% 36.88% 34.26% 33.40% 30.85% 27.90% 25.23% 24.02%

Net Interest Margin 5.48% 5.91% 6.12% 6.63% 6.84% 6.88% 6.87% 7.17%

- 84 -

Annex 7Table 2

PCBC Real Estate Credit Department Page 2

Projected Financial Statemnents, 1993-2000

(Yuan million)

11. INCOME STATEMENT

(forttheyeanendedDecember31) i)3 122A 19 n2f 122i 2 Q

Inteest income- Mortgae loans 0.00 37.44 95.77 168.48 232.09 279.66 318.46 354.05

-Short-termi loans 128.42 143.61 160.32 177.18 194.90 214.39 235.83 259.41-Other 38.50 68.95 86.70 109.67 138.81 176.27 224.39 286.03

Other income 0.63 (I.(8) 0.(0 0.00 ().00 ().(X) ().0) 0.0(

Total income 167.54 249.99 342.79 455.33 565.8(0 670.31 778.67 899.49

Inteest expenses-Currentdeposits 38.57 49.73 59.78 71.62 85.82 1()2.83 123.22 147.67

- Term deposits 3(.9( 34.72 38.91 43.60 48.86 54.76 61.37 68.79-Loans & bonds (.00 25.40 57.15 85.09 1()8.59 123.83 136.53 127.42

69.47 109.86 155.84 20().32 243.26 281.41 321.12 343.88

Otherexpense 7.13 9.84 13.95 17.91 20.31 22.31 25.14 28.77

Totalexpenses 76.6(0 119.69 169.79 218.22 263.57 3113.72 346.25 372.65

Income beforenome Lax 90.94 130.30 173.(X) 237.11 302.23 366.59 432.42 526.84Income tax 54.57 79.48 1()5.53 144.64 184.36 223.62 263.77 321.37

Net Income 36.38 50.82 67.47 92.47 117.87 142.97 168.64 205.47

HIt. STATEMENT OF CASH FLOWS

(for the years ended December 3 1)3 19 1224 1996 12 9 14 21

Net income 36.38 5(1.82 67.47 92.47 117.87 142.97 168.64 2)5.47Add: depreciation 1.48 2.13 3.11 4.0)8 5.(6 6.()3 7.()1 7.98

baddebtpeovision 2.59 3.44 5.()5 6.17 5.81 5.17 5.3( 6.01

40.45 56.39 75.62 102.73 128.74 154.18 18(.95 219.46

Proceeds from issuance of bonds ().(KI 1()0 1.) (.(X0 ()) ()(. .) .(X) ().00

Proceeds from IBRD loan disbur3ements 1).(18 2(X0.00 2511.00 220.(#) 185.0( 120).tX) ).0) ().tX)

Repayment of mortgage loams 0.00 ().61 1.40 14.24 34.97 59.99 82.73 1111.38

Netincreaseintenmdeposits 34.16 36.42 40.82 45.76 51.30 57.51 64.48 72.29Netincse incurrentrdeposits 413.14 295.80 342.(X) 409.89 491.29 588.88 7()5.89 846.19Chanpsinothercurrent assets&liabilityitems 30.39 38.19 (41.28) 52.34 37.73 (31.95) (71.35) (18.89)

Tont wurces of cash 518.14 627.41 668.56 844.96 929.0(3 948.60 1,(62.7( 1,220.44

lncreuAeinmorn&aeloam ().(X) 266.00 415.10 518.01 466.21 372.97 335.67 335.67

Incae in wottingcapitai loanm 108.16 168.97 135.87 149.46 164.4) 18().84 198.93 218.82

Net incre ein other long-etem loam 99.76 79.58 103.46 134.49 174.84 227.3() 295.48 3S4.13

Prinaipal epayment on bonds 0.0) 0.00 (1.01 0.00 0.00 ().1X) 1).1) 0.00Principal repaymentonlBRDh kn ().X1) ().00 0A( 0.(1) ().tX (RN)8 71.67 71.67Capital invesanent 10.00 10.00 15.(18 15.00 15.0#) 5(8 15.0#) 15.00

Net in(de)crease incashAraerves 318.22 1012.86 (0.87) 27.99 108.57 (52.49 145.94 195.14

Total applications of cash 518.14 627.41 668.56 844.96 929.03 948.6t) 1.)(62.7(0 1,220.44

- 85 -

Annex 7Table 3

ICBC: Projected Financial Statements, 1993-2000 Page 1(Yuan mnillion)

1. BALANCE SHEET

(us of December 31)

Current AssetsCash & reserves 1,135.66 1,047.48 999.24 1,223.64 1,478.42 1,577.93 1,776.87 1.981.08 2.293.31Working capital loans 3.865.30 4,065.90 4,441.84 4762.06 5,060.34 5,317.17 5.603.56 5,904.58 6,268.73OthercurrentLssets 781.69 497.62 644.49 552.92 670.55 813.91 814.29 907.18 995.66Current maturity of long-Lem loans 241.94 193.55 383.61 576.31 821.65 767.52 I.t91.(1l 1.382.93 1,678.19

6,(24.58 5.804.56 6,469.18 7,114.94 8,03t).95 8,476.53 9.285.72 1(),175.77 11,235.89Long-term Loans (net of provisions

for doubtful accounts)Individual morSage loans 0.00 0.(X) 5.05 11.03 18.13 26.55 35.67 44.59 53.2SHMC loans 0.00 0(00 46.51 136.95 294.40 514.67 782.01 1,003.08 1,209.28Bmtnch'sotherlong-termtloans 961.66 1,332.61 1,516.41 1,709.76 1,932.45 2,851.20 3,286.80 3,861.00 4,455.00

961.66 1.332.61 1,567.97 1.Y57.74 2.244.98 3,392.42 4.104.48 4,908.67 5,717.56

Fixed assets (net of accum. depr.) 72.81 78.14 70.57 62.41 53.67 44.34 34.43 23.93 12.85

Total Assets 7.059.06 7.215.30 8,107.71 9,035.09 10,329.60 11,913.29 13,424.64 15,108.37 16,966.29

Current LiabilisesShort-term deposits 3.203.67 4,285.19 4,812.41 5.399.97 6,1059.45 6,799.72 7.489.73 8.249.91 9,t)87.45Other curent liabilities 1,(052.31 684.47 511.46 353.38 406.95 497.(6 559 34 643.04 734.63CurrentmaturityofLTliabilities 757.16 0.00 34.06 60.00 ((1.0 0.00 18.0( 18.00 18.00

Longtnemndeposuts 1.732.65 1,818.63 2,127.68 2,444.63 2,809.02 3,225.83 3.611.87 4,041.48 4,522.43Bonds payable - Real Estate Department 0.00 0.00 0.00 (1.00 0.00 (1(X) ((.11 0.00 o00

-Other activities 34.06 34.06 60.00 0.00 0.00 0.00 ((.00 0.0 0.00

IBRDloams 0.00 0.00 32.25 75.25 139.75 193.50 218.50 234.00 216.00

6,779.85 6,822.35 7,577.86 8,333.23 9,415.18 10,716.11 11,897.44 13,186.43 14,578.51

EquityCapital 234.24 234.24 234.24 234.24 234.24 234.24 234.24 234.24 234.24Retaunedearninps 44.96 158.70 295.61 467.62 680.18 962.94 1,292.95 1,687.701 2.153.54

279.21 392.95 529.85 701.86 914.42 1,197.18 1,527.19 1,921.94 2,387.78

TotalLLabilities&Equaty 7,059.06 7,215.30 8,107.71 9,1)35.09 10,329.60 11,913.29 13.424.64 15.108.37 16,966.29

Current Ratio 1.20 1.17 1.21 1.22 1.24 1.16 1.15 1.14 1.14CapitalAdequacyRatio 4.71% 6.37% 7.45% 8.98% 1(0.33% 11.58% 13.11% 14.64% 16.27%Long-term Debt/Equity 6.33 4.71 4.19 3.59 3.22 2.86 2.51 2.22 1.98Loan Portfolio/Total Asets 13.62% 18.47% 19.34% 20.56% 21.73% 28.48% 3(1.57% 32.49% 33.70%ReturnonAsseut 1.59% 1.79% 2.01% 2.20% 2.54% 2.60% 2.77% 2.90%Retum on Equity 33.84% 29.67% 27.93% 26.30% 26.78% 24.23% 22.89% 21.62%

Net Interest Marin- Branch 4.34% 4.87% 5.34% 5.75% 6.62% 6.68% 7.03% 7.31%Net Interest Margin - RECD 0.00% 0.04% 0.06% (1.19% ().37% 0.58% 0.78% 0.93%

- 86 -Annex 7

ICBC: Projected Financial Statenients, 1993-2000 Table 3(Yuan nillhon) Page 2

1.a INCOME STATEMENT: Bratch as a whole

(for the years ended December 31) i4 12 2 lJf 1 2S 2=Interest Income

- mortgage loans 0.00 7.35 21.44 45.97 80.56 123.09 164.29 201.47other long-term loans 243.22 315.06 394.51 494.25 667.55 777.44 935.97 1,105.91

- short-t.em loans 449.41 467.26 505.48 539.44 569.91 599.73 631.98 668.50-others 72.87 96.29 105.53 115.03 137.19 153.34 167.19 186.50

Tots] interest income 765.51 885.95 1,026.96 1,194.69 1.455.20 1.653.6) 1,899.43 2,162.39

Interes Expenses- Short-tecm deposits 223.00 270.81 303.68 340.46 381.70 423.83 466.55 513.58-Long-term deposits 185.30 205.91 238.57 274.12 314.88 356.77 399.33 446.84- Loans & bonds 3.41 14.31 19.26 23.27 22.25 27.20 31.015 28.98*Others 44.21 22.11 7.37 0.00 ((.(x) Ri.x) ().(lt) 0.0')

Total interestexpenses 455.91 513.14 568.88 637.85 718.83 8(17.8(1 896.93 989.40Otherexpenss 56.84 68.57 75.85 84.48 108.01 112.42 125.27 137.79

Totalexpenses 512.75 581.72 644.73 722.33 826.85 92().23 1,022.201 1,127.19

Income befo Mncome tax 252.75 304.24 382.24 472.35 628.36 733.37 877.22 1.035.19Income las 139.02 167.33 210.23 259.79 345.60 4t)3.35 482.47 569.36

Net income 113.74 136.91 172.01 212.56 282.76 330.()2 394.75 465.84

lI.b. Real Estate Dept's Housini Finance Operation Analys

Interest income 0.00 7.90 23.09 48.92 84.57 128.63 172.38 214.9(l

Interest expenwses direct 0(x) 5.86 13.39 21.75 28.94 34.96 39.92 38.97- indirect n 0.00 (.07) 4.35 8.42 14.00 211.52 21.44 27.49

Odherexpenxss- direct 0.00 0.68 1.42 2.61 3.95 5.27 5.50 6.00- indirect * 0.35 0.42 11.58 0.63 0.73 (.81 0.89 0.98

Total expenses 0.35 5.89 19.74 33.40 47.62 61.56 67.74 73.43

Incomebeforeincome tx (0.35) 2.00 3.35 15.51 36.94 67.07 104.64 141.47Income tax 0.00 1.1( 1.84 8.53 20.32 36.89 57.55 77.81

Net income (0.35) 0.90 1.51 6.98 16.62 3t).18 47.09 63.66

Indirect: expenses charged on branch resources used by Real Estate Credit Department111. Statment of Cash Flows

(for the years ended December 31)

Sou f ashNet income 113.74 136.91 172.01 212.56 282.76 33(0.t)2 394.75 465.84Add: depreciatton 7.68 12.57 13.16 13.74 14.33 14.91 15.5() 16.t)8

Baddebtprovision 1.95 3.17 4.07 5.42 13.56 7.19 8.12 8.17

123.37 152.64 189.24 231.72 31().65 352.12 418.37 490.1(9

Proceeds from issuance of bonds 0.00 60.(X) 0.00 0.0 0.00) t.X) ((.1X) ((.00Proceedsfrom IBRD loondisburwments 0.00 32.25 43.00 64.50 53.75 43.0) 33.50 0.0()Repayment of mortgap loans 0.00 0.06 0.13 2.84 8.19 17.62 46.14 78.06Rcpayment of other long-term loans (324.51) (376.45) (386.45) (466.45) (866.45) (750.tX)) (84(1.00) (88000)Net incres in shon-rterm deposits 1,081.52 527.22 587.56 659.48 740.27 690.t)1 7611.18 837.54Net increa in long-tem deposits 85.99 309.05 316.95 364.39 416.81 386.0)4 429.61 4#().95

Total sources of cash 966.36 704.76 75043 856.49 663.21 738.8(0 847.80 1.006.65

Increase in mortgage loans 0.0O 52.20 100.22 174.39 248.62 310.38 31(0.38 3111.38Increawein working cpital loans 200.61 375.93 320.23 298.27 256.83 286.39 301.t)1 364.15Principal tepaynmetonbonds&otherLTliability 757.16 0.00 34.06 60.0') t).tX) (I.I) ((.0x)Principl repayment on IBRD loa 0.00 0.0 0 0.00 0((.10 0.0() 18.08) 18.00Capital invesnes 13.00 5.00 5.00 5.00 5.(1) 500 5.(X) 5.00Changes inoAhercurrentasseu & lIbiaity items 83.77 319.88 66.52 64.04 53.26 (61.91) 9.20 (3.10)Incrase incash& teserves (88.18) (48.24) 224.40 254.78 99.51 198.93 204.22 312.22

Toutl applications of cash 966.36 704.76 750.43 856.49 663.21 738.80 #47.80 1,006.65

- 87 - ANNEX 8

PROPERTY RIGHTS AND OTHER LEGAL FRAMEWORK

1. The project will support the divestiture by state enterprises of their housing stock andassociated responsibilities through the creation of housing management companies (HMCs) to whichenterprises would contribute their housing stock in exchange for shares in the HMC. The loan andcredit will finance, through the provision of mortgage loans by participating local banks, theconstruction or acquisition by the HMCs of newly constructed residential buildings for rentalpurposes. Initially, HMCs will rent to the shareholders' employees; later on, they will rent or sell tothe general public. The loan and credit will also help finance mortgage loans to individuals for thepurchase of apartment units. The following summarizes the legal framework governing the followingaspects of the Project: a) structure of HMCs; b) ownership, transfer and mortgage of real propertyrights; c) mortgage financing; d) landlord-tenant relations; and e) relations among co-owners ofresidential buildings.

A. HMCs

2. The HMCs have been established as joint stock companies (JSC) pursuant to the StateCouncil "Opinion on the Norms for JSCs," and the "Companies Law" of 1994 that formalized theformer. Their charters outline the responsibilities of directors and management, as well asshareholder representation on the board and elections to be followed. Under the oversight of boardselected at general stockholders meetings, management will be entrusted with the responsibility to rentand sell housing; while maintaining and managing the stock; and acquiring, and disposing of,properties. The Boards will approve budgets and associated operating plans, key managementpersonnel, and the level of annual dividends. Annex 3 provides further details of HMCorganizational structure.

B. REAL PROPERTY RIGHTS

Land-use Rights

3. There is a national legislative framework, supplemented by local regulations, which allowsfor the ownership and transfer of certain rights in residential property. While individuals and firmsare precluded under this framework from owning land, they may obtain an assignable right to useland (leasehold) for residential purposes for a fixed period of up to 70 years. The leasehold isgranted by the Land Administration Bureau to the leaseholder pursuant to a grant contract between thetwo parties, for a specified fee and duration. The leasehold may be transferred, leased or mortgaged,by contract between the leaseholder and the beneficiary. Individual provinces and localities arerequired to issue regulations to implement this leasehold system; all of the provinces and localitiesinvolved in this Project have issued such regulations.

Ownership of buildings

4. Individuals and firms may own residential buildings or units within these buildings; theseownership rights may be transferred or mortgaged by contract. Moreover, when the leasehold of theland on which a building is located is transferred, the ownership rights of the building are

-88 - ANNEX 8

simultaneously transferred to the new leaseholder. Similarly, both the leasehold and the buildingmust be mortgaged together.

Conversion of Allocated Land to Leasehold

5. Since the land on which the housing stock of most state enterprises is located was allocatedby the state to the enterprise prior to the introduction of the transferable leasehold system, the nationallaw also provides for the conversion of allocated land use rights to leasehold rights. Thus, it ispossible for enterprises to obtain leaseholds on their property and to transfer them to the HMCs. Ifthe property is simply allocated to an HMC, it is also possible for the HMC to convert its allocatedrights in the property into leasehold rights and then to mortgage the property in order to obtainfinancing. In order to obtain a leasehold, the enterprise or HMC must enter into a contract with theLand Administration Department, as described in para 3 above.'

Property Rights of Owners of Units within Residential Buildings

6. The nature of the property rights held by owners of units in residential buildings is notclearly described in the laws. However, it would appear that owners of the units have an individualownership interest in the unit (with some restrictions on resale rights, as noted below) and anundivided interest in the common elements of the building (see below), as well as in the leasehold.

REGISTRATION

7. In order to be valid, the property rights in land and buildings must be registered; rights inland must be registered with the Land Administration Bureau; while rights in buildings must beregistered with the Real Estate Management Administration2. Each city has issued procedural rulesfor registration of rights in the type of property under its jurisdiction. Initial registration of aleasehold involves an investigation by the Land Administration Bureau of the land use right,publication of the findings, opportunity to contest the findings, and final decision. Subsequentrecording of assignments or mortgages of the leasehold and building rights involve submission of therelevant documents evidencing the change in leasehold rights. The property records are open to thepublic. The fact that two separate administrations have jurisdiction over the registration of realproperty rights could be an impediment to efficient and effective registration, even though in practicethe different records are cross-referenced.

8. Under the project, the various property title certificates covering land and structure will beunified or cross-referenced, and administered, where possible, by one administrative unit.Furthermore, certificates will be modified to provide more space for recording key items, includingdetailed mortgage obligations. On the basis of reference materials discussed during projectpreparation, the participating municipalities have prepared and adopted improved mortgageagreements and registration procedures, and regulations elaborating on the definition of property and

I For acquisition of rental housing, the HMC would normally secure its mortgage loan with amortgage on an existing piece of property which provides a greater revenue base than the property tobe acquired through the loan. Thus, the importance of ensuring that the existing housing ismortgageable.

2 In some jurisdictions, including Beijing, these formalities are handled by the Real EstateAdministration alone.

- 89 - ANNEX 8

the scope of mortgage rights and interest; the mortgagor's obligations; defaults and remedy; andmodification of title certificates to include mortgage and appraisal value, interest rates, and referencesto the mortgage agreement.

C. MORTGAGE FINANCING

What is mortgageable by whom and how is a mortgage created?

9. There is no comprehensive national mortgage financing law, although a draft law is underpreparation and is expected to be enacted by 1995. Thus, one has to look to various national andlocal sources of law to find a legal basis for mortgage financing. As indicated above, under thenational law regarding leaseholds, both individuals and enterprises may mortgage their propertyrights. The leasehold of a piece of land, together with the structures on the land, may be mortgagedby contract between the holder of the leasehold and the mortgagee. In order to be valid, themortgage must be registered both with the Land Administration Bureau (for the leasehold) and theReal Estate Management Administration Bureau (for the building), except in the case of cities wheresuch function are unified under the Real Estate Administration Bureau.

What are a mortgagee's rights in the event of default by the mortgagor?

10. The national law on leaseholds provides that if the mortgagor fails to pay its debts to themortgagee, the latter may "dispose of the property in accordance with the laws and regulations of thestate and the provisions of the mortgage contract" and receives a preferential right to receivecompensation from the income generated from the disposition of the mortgaged property. However,no national law describes how to dispose of the property in such case. The Civil Law generallyrecognizes the right of a property owner to pledge the property in order to secure a debt; failure bythe debtor to discharge his liabilities gives the creditor the right to convert the property into money orto obtain repayment on a priority basis from the proceeds of sale of the property. The SupremeCourt has also issued an opinion on this Law to the effect that the pledgee has priority over othercreditors of the debtor, and that priorities among competing claims on the pledged property are to bedecided in accordance with the sequence in which the pledges were given (i.e., presumably the orderof registration in the case of mortgages of real property).

How may the mortgagee enforce its rights?

11. How the right of the creditor to dispose of the pledged property may be exercised is notspelled out in the Civil Law. Under the Civil Procedure Law, if an obligor fails to perform itsobligations pursuant to a document that has been lawfully rendered enforceable by a notary public, theobligee may apply to the court for an order of execution; the court may sell off property in order torecover the debt. However, the national law provides no guidance on the procedures for foreclosureand disposal of the property, and does not provide for the possibility of statutory foreclosure byexecution of a power of sale contained in the mortgage. The Civil Procedure Law prohibits the courtfrom depriving the person subject to execution and his dependents of daily necessities; thus, a courtmight invoke this prohibition if the mortgagee was seeking to foreclose on the home of the defaultingdebtor. The lack of foreclosure procedures, exacerbated by the courts' reported delays in renderingdecisions and reluctance to issue orders which would have the effect of rendering people homeless,raises the issue of the effectiveness of the current laws to protect lenders' interests as mortgagees ofresidential property. Partly in view of this concern, specification of foreclosure and eviction

- 90 - ANNEX 8

procedures have been improved during project preparation as reviewed below. Further, agreementshave been reached that project municipalities would maintain a small number of old housing, slatedfor eventual demolition or redevelopment, for the purpose of providing temporary housing for thosewho are evicted.

Local Regulations

12. Each of the Project cities have prepared regulations elaborating on mortgage registrationand foreclosure procedures [details to be completed when regulations have been reviewed]3 . Theseregulations have been prepared as administrative rules, rather than as legislative regulations to besubmitted to the local People's Congresses for enactment. This means that the courts could not relyon them as a statutory basis for rendering a decision. In the absence of a national or provinciallegislative framework governing a particular issue, however, a court may rely on the administrativerules of a given city, as long as they are not incompatible with any other legislation, although it willnot cite the rule as the basis for its decision.

13. Given the dearth of legislation on the subject, banks involved in the Project plan to rely asmuch as possible on contractual provisions (e.g., acceleration of debt leading to foreclosure pursuantto a power of sale, assignment of rents in the case of a mortgage on rental property) to protect theirinterests in the mortgaged property. Moreover, all Project cities have indicated that they will providetemporary housing to all persons who lose their housing through foreclosure proceedings.

D. LANDLORD - TENANT RELATIONS

14. There is no national law governing relations between state enterprises, as landlords, andtheir tenants4. Relations between the HMCs and their tenants are therefore largely governed at thenational level by general principles of contract law. The Civil Law generally recognizes the right ofindividuals and enterprises to enter into contractual agreements; failure of one party to fulfill itscontractual obligations gives the other party the right to insist on fulfillment of these obligations or totake remedial measures and claim compensation for its losses. A Supreme Court opinion onimplementation of the Civil Law has several points on landlord/tenant relations: while it does notaddress the problem of failure to comply with the terms of a lease, it provides that if there is no leaseterm, the landlord may reclaim the rented housing when needed for its own use; it also provides forthe possibility of eviction if the tenant has a place to which he can move.

3 Foreclosure procedures will parallel eviction procedures in the rental market. Under theproject, arbitration and litigation will be the ways to resolve disputes. Professional arbitrationcommittees specialized in the settlement of housing disputes already exist in each city. In addition,necessary judicial or statutory foreclosure procedures have been agreed upon. The applicableprinciples are to be found in local regulations; as needed, enabling provisions and rules have beenissued by relevant departments and will be cited in related contracts and agreements.

4 The State Council issued regulations in 1983, relating to rental of private housing in urbanareas, and Project cities (or the provinces in which they are located) have copied these regulations andrendered them applicable both to public and private housing. These regulations require landlords andtenants to enter into rental agreements, impose on the landlord the obligation to repair the housing,and give the landlord the right to terminate the rental agreement if the tenant sublets without thelandlord's consent, conducts illegal activities on the premises, or fails to pay rent for 6 (notnecessarily consecutive) months.

- 91- ANNEX 8

15. Local regulations govern landlord-tenant relations in each Project city; additionalregulations for this Project have been prepared, including model lease agreements. While they varyfrom city to city, they require that the rights and obligations of the landlord (whether a public or aprivate enterprise) and tenant be spelled out in a written lease agreement; the rental amount appear tobe a matter for the parties to negotiate. The landlord is responsible for repair and maintenance of therental housing. The lease may be terminated for non-payment of rent over a period of time,subletting without landlord consent, conduct of illegal activities on the premises, and violation of theother obligations of the tenant under the lease agreement.

Eviction

16. Existing local regulations all provide that if the lease is terminated and the tenant refuses toleave the premises, the landlord may seek a court order of eviction. [Details to be added onprocedures and specific remedies once new regulations are received and reviewed. There are nostreamlined, summary judicial procedures for eviction which would provide the landlord with aspeedy method for enforcing its rights.] Cases in which residents are evicted from their housing arerare. As with eviction under mortgage foreclosure procedures, the absence of specific, speedy,judicial procedures for eviction, and the past unwillingness of courts to issue decisions which wouldresult in homelessness imply that eviction might not be an efficient or effective means for HMCs tolimit their losses in the event their tenants fail to pay their rent or damaged the premises. It is likelythat HMCs will rely instead on their shareholders making automatic payroll deductions to cover therental payments owned by the shareholders' employees to the HMCs. As noted above, the Projectcities intend to provide temporary housing for people evicted from their homes.5

E. RELATIONS AMONG CO-OWNERS OF RESIDENTIAL BUILDINGS

17. The issue of how to manage residential buildings in which the units are owned by differententities would arise if some of the buildings acquired by the HMCs are owned in part by enterpriseswhich do not transfer their interests in the building to the HMC and, later on, if the HMCs sell offindividual units to different owners. The management of residential buildings is governed by nationalregulations, some which apply only to housing owned by enterprises and others which apply only topublic housing sold to individuals under the housing reform. The local Real Estate ManagementAdministrations Bureau are given supervisory authority over both types of housing and theirmanagement. The national regulations are supplemented by local regulations. These regulationsdefine common elements of the building (e.g., structural elements of the building, plumbing, commonstairways, etc.) and specify the respective responsibilities of the owners with respect to thesefacilities. They do not, however, provide a detailed framework for allocation of building managementdecision making authority to a condominium-type association. This deficiency was addressed underthe project by the preparation of local regulations for cities and model contracts for HMCs.

5 Since the plan is for HMCs to charge cost-recovery rents to their tenants, another issuewhich may arise when the shareholding enterprises initially transfer their housing stock to the HMCs,is if the existing tenants have a lease which would protect them from rental increases, or if they mayhave other protected housing benefits as employees which would make it legally difficult for theHMC to increase the rent on their housing. The former possibility is minor, since few, if any,employees have a lease agreement. On the latter issue, any protected benefits would be terminatedonce the housing was transferred to the HMC; moreover, the enterprises would increase theiremployees' wages to cover the average rental increase.

-92 - ANNEX 8

Costs of, and Responsibility for, Repair of Common Areas

18. Generally, the costs of repair of common areas are borne by the owners in the sameproportion which the space which they own individually bears to the overall space of the building.The regulations allow for establishment of a housing management committee and for the creation of amaintenance and repair funds, financed in some cases by a one-time fee charged to each owner at thetime of purchase of the housing, and in other cases by periodic assessments by the managementcommittee. The regulations are silent on the issues of (a) what recourse may be had in the event of afailure by an owner to contribute to the costs of repair; and more generally, (b) whether such acommittee or other association of owners may make decisions which would be binding on all owners.

19. Responsibility for repair and maintenance varies, depending on the regulation. Thenational regulations governing enterprise-owned housing provide that the owners may establish ahousing management organization to assume this responsibility or may entrust the responsibility to amanagement company, but do not specify the procedures for establishing such an organization or foragreeing on a management company.

20. The national regulations governing public housing sold to individuals assign thisresponsibility to the seller or the management company to which this responsibility is entrusted by thepurchaser at the time of sale (presumably, the selling enterprise requires, in the sale contract, that allpurchasers to agree to assigning this responsibility to the selling enterprise or a designatedmanagement company selected by the seller). The funds for repair and maintenance are required tobe deposited in a special account and the management company is required to submit periodic reportsto the owners on the use of funds.

Sales of Units

21. While the national regulations governing enterprise-owned housing do not deal with sales ofunits within the building, those governing public housing sold to individuals specify that an individualapartment owner may not sell his unit without the written consent of the other owners who have apreemptive right to purchase the unit.

- 93 - ANNEX 9

SOCIAL SECURITY POLICY REFORM FRAMEWORK AND SCHEDULE

The municipal governments of the four project cities (Beijing, Yantai, Ningbo, and Chengdu)have agreed to a framework of reform to deal with the problems in the existing social securitysystem. The agreed social security reform actions are intended to further enterprise reform and toencourage labor mobility while assuring that basic social protection needs are met efficiently. Thekey elements of the reform framework are summarized below and the schedule of theirimplementation in Table 1:

A. PENSIONS

Pooling. Although there already is pooling of pension contributions across enterprises, thesystem is still incomplete. Pools are separated by types of enterprise and workers, and thecontribution rate is not uniform across enterprises. The municipalities have agreed to move to aunified pooling system for all urban enterprise workers with uniform contribution rates for allenterprise and worker categories.

Centralized Management. There is agreement that the management tasks for pensions bemoved from enterprises to a centralized municipal agency. The tasks to be centralized includecompiling individual wage records on workers in the central system; collecting contributions fromenterprises; and calculating and making pension payments to retirees.

Worker Contributions. To share the cost of the system, it has been agreed that all workerswill contribute a uniform portion of wages into the pension system in addition to enterprisecontributions.

Benefit Formula Reforms. It has been agreed to establish and revise benefit formulaeconsistent with the Ministry of Labor guidelines calling for a three-tier system, consisting of: basicsocial safety net; enterprise-specific pension; and individual retirement savings.

Prefunding. The municipalities have agreed to develop cost projection models, define theoptimal level of prefunding, and will increase prefunding to reach an appropriate level.

B. UNEMPLOYMENT INSURANCE

Coverage and Eligibility. The municipalities have agreed to expand coverage to all urbanenterprise workers and to extend eligibility for claims to all forms of non-voluntary terminations.Actuarial analyses will be made to evaluate the cost of these expansions and to set appropriatecontribution rates.

Labor Market Services. A portion of unemployment insurance contributions may be used tofinance labor market services. The municipalities will strengthen job referral services, training, andhelp for workers who want to establish their own businesses. These services are now provided largely

- 94 - ANNEX 9

to new entrants, but efforts will be made to expand these services to workers of all ages who aredismissed from jobs.

C. HEALTH INSURANCE

Pooling. Currently, enterprises generally pay for the entire costs of health care of their ownworkers. The municipalities have agreed to pooling health insurance across enterprises in steps: first,to cover major illness of workers of all enterprises; later, to provide comprehensive health carebenefits.

Centralized Management. The municipalities have agreed to transfer managementresponsibilities from enterprises to a municipal agency.

Control of Health Care Costs. The municipalities have agreed to study ways of controllingcosts including demand-side measures, supply-side measures, quality assurance, and controls over theuse of expensive technology.

D. WORK INJURY INSURANCE

It is agreed that contributions for work injury benefits be pooled across enterprises and thatmanagement responsibilities be transferred from enterprises to a municipal agency. This protectionwill be extended to workers in all types of enterprises.

E. INSTITUTIONAL DEVELOPMENT

It is agreed that the municipalities will carry out studies, modify organizational structure ofmunicipal departments and agencies responsible for social security, train their staff, and computerizetheir operations in order to enable them to adequately carry out social security management functionsnow carried out by enterprises.

Agreed target dates for major reform actions are listed in the Table below. Technical assistanceprograms to support studies to help improve benefit-contribution formulae and other policy elements,help develop management capacity, and help train staff in operation of new policies are described inAnnex 10.

- 95 - ANNEX 9

Table 1 AGREED TARGET DATES FOR COMPLETING INDICATED REFORM

Beijing Chengdu Ningbo Yantai

1. PENSIONS

Comprehensive Pooling 1/ 1998 1993* 1994 1994

Centralized Management 2/ 1997 1996 1997 1996

Worker Contributions 1992 1992 1993 1992

Benefit Revision 1994 1993 1994 1994

2.UNEMPLOYMENT INSURANCE

Comprehensive Coverage 3/ 1994 1994 1994 1995

3. HEALTH INSURANCE

Pooling for Major Medical 1996 1993** 1993** 1995**

Cost Control and initial steps for 1995 1993 1995 1993centralized management 4/

Notes to Table 1:

1/ This implies that all types of enterprises in the urban sector would be pooling resources andliabilities for retirement pensions. Enterprises would be contributing to the pension pool at oneunified rate (usually set as a percentage of total payroll).

2/ To shift the work of administering pension benefits out of enterprises and into municipal socialinsurance agencies (SIAs). Although the collection of contributions and calculation of benefits wouldbe done by the SIAs, actual payment of benefits would be in many cases through local banks.

3/ Unemployment insurance would be extended to all workers in urban enterprises excepting theself-employed. Eligibility for benefit claims would be extended to all non-voluntary terminations.

4/ Since there is no national policy framework for health insurance reform yet, the municipalitieshave decided to implement transitional measures aimed primarily to control costs. The municipalhealth bureaus are taking some initial steps to set up an administration system for health insurance.

* Temporary workers will be covered in 2000, but all others in 1993.

** Pooling within districts or counties, not for the whole city.

- 96 - ANNEX 10

SOCIAL SECURITY TECHNICAL ASSISTANCE PROGRAMS

To assist the municipalities and the central authorities in implementing the social securitysystems reform outlined in Annex 9, the project will support studies, consultancy, training, andcomputerization, and procurement of training and other equipment. These technical assistance (TA)activities will proceed in three phases, each for about 1-1.5 year's duration. This Annex describesthese TA activities, organized in a series of modules, each representing a distinct topical area. Unlessspecifically noted, the TA will be for municipal programs. For many issue areas, TA is alsoprovided for central authorities. Though the focuses and levels of detail will be different, the issuesand expertise required will be similar for both municipal and central TA.

A. RETIREMENT PENSIONS

Module 1. Computerized Pension Operations System

OBJEcTIVE: To develop an efficient system for collecting contributions and paying benefits bythe social insurance agency (SIA) while minimizing the administrative burden on enterprises.

SCOPE: To help identify information architecture, hardware, software, operating procedures,organizational requirements, and an implementation strategy and schedule for a computerized pensionsystem to deal with the following three areas:

Collection of Contributions from Enterprisesa. Calculating contribution amounts. Wage base for contributions. Timing.b. Identification and design of data reporting requirements from enterprises to SIA; data

forms; computer data entry;c. Mechanism for enterprise payment of contribution to SIA. Role of banks.d. Enforcement procedures. Monitoring using reported data and other means. Incentives for

enterprises.e. Office systems and staffing requirements of the social insurance agency (SIA) to carry out

above activities.f. Economies in collection of contributions. Possibility of combining contribution collections

across programs: pensions, health, unemployment insurance, etc.

Record System for Individual Workersa. Identification system to keep track of each individual.b. Kinds of data needed to calculate pensions and evaluate system performance. Individual

wage and contributions data and their timing. Other data on individual characteristics.c. Data reporting forms for enterprises and computer data entry by SIA. Staffing needs of

SIA.d. Computer system for storing data and retrieving in network. Security of data. Backup

mechanisms.e. Comparability of data systems across cities.

- 97 - ANNEX 10

Pension Calculation and Paymenta. Refinements in the benefit formula. Age at which pension calculated, and number of years

of data used in calculation. Treatment of spouse and children. Adjustment for inflation.b. Computer programming of benefit formula. Access to individual records through the

computer network.c. Payment mechanisms. Use of banks or other agencies for making payments. Wire

transfers of funds. Individual identification and security.

Schedule. Collection responsibilities of the SIA will increase substantially under the reformsand will be carried out most effectively after SIA operations are computerized. To develop thecomputer system most effectively, it is advisable that computer systems be established in one or twodistrict offices in the first phase. These offices can then serve as prototypes in extending the systemto other offices later. During Phase 1, experts will evaluate the current system and will recommendways to organize procedures and design office systems for prototype offices. In Phases II and III, theprototype systems can be transferred to other district offices.

Expertise: Experts in social security operations management and computerization will beinvolved most heavily; experts in information systems and pension policy will be involved in a lessextent. Foreign experts will be heavily involved in Phase I but involvement of domestic experts willincrease over time, responsible for most tasks in Phase III.

Module 2. Pension Costs and Finance

Objective: To build computer projection models of long-run pension costs, use the projectionsto help revise benefit and contribution formulae and the extent of prefunding. To suggest andevaluate different investment alternatives.

Scope:a. Data Collection: Identification of existing sources of demographic and economic data,

drawing upon data from the individual records as they begin to accumulate in the SIAregister system, and additional data collection requirements if essential. Design of datacollection and updating procedures.

b. Building the model: Identifying a well-established projection model and modifying it sothat it can be run with data accessible to the city on an on-going basis. Estimating thestatistical relationships and combining them in model. It needs to be evaluated of whethermicrosimulation is worthwhile. The collection of individual records will eventually permitthe use of microsimulation techniques to provide more refined estimates of cost projections.It is probably more suitable in larger cities and those with the most severe aging problems.

c. Sensitivity testing. Changing the assumptions of the model to see the consequences forprojections of future costs.

d. Using the model in making projections to suggest implications of various economic anddemographic development trends as well as benefit-contribution formulae. Schedule forrevising and rerunning projection model.

e. Setting the employer and worker contribution rates: Using projection results to makedecisions concerning contribution rates and prefunding.

f. Evaluating investment strategies. Evaluating current arrangements for any surplus funds,risk and return implications of current and alternative strategies. Recommending optimalstrategies and institutional arrangements.

- 98 - ANNEX 10

g. (For central authorities) Developing research and monitoring programs to help formulatenational pension policy.

Schedule: During phase 1, model building and calibration would be the main task. Actualsimulations, examination of policy implications, and evaluation of investment arrangements will becarried out mostly in Phase 11. More data will become available from the individual records overtime. Foreign consultant will spend a reduced amount of time in later phases, giving advice onrevisions in the model.

Expertise Required: Economists and actuarial specialists, familiar with building computermodels of demographic and economic trends; and in investment.

Module 3. Program and Evaluation

Objective: To help SIAs establish pension management systems, evaluate the management ofthe program and its social outcomes in order to identify improvements, and establish a system ofregular evaluation and quality control.

Scope:a. Services. Heiping to determine types and levels of services for retirees, by provision of

international examples and to examine implications.b. Organization. Helping to design organizational structure, staffing, and procedures for

provision of services, premium collection, analysis.C. Performance standards. Establish performance standards for each management task.

Develop mechanism to measure actual performance, compare to standard, and assure thatstandards will be met.

d. Reporting. Develop reports for program participants on performance of program.e. Social indicators. Develop statistical measures of the adequacy of the program and system

to collect these statistics. Develop research to assess adequacy of program.f. (For central authorities) Designing a system for central monitoring of local social security

systems performance and impacts, by identifying summary indicators, reportingrequirements, and central evaluation mechanism. This monitoring system would concernnot only pension but also unemployment and health insurance systems.

Schedule and Expertise: Experts in pension system operations: to help develop organizationalplan, performance standards and reporting system during Phase l; to help organization establishmentand evaluations in a later Phase. A policy expert to help develop social indicators and a researchprogram in Phase 11.

Module 4. Research leading to the Drafting of the Social Security Law

Objective: To help draft a new social security law.

Scope: Current issues of social security in China and international practices and social securitylaws will be reviewed, particularly concerning:

- The levels, structure, and payment levels, and eligibility conditions for the various forms ofsocial insurance.

- The rights and responsibilities of the state, enterprises, and workers in social insurance.

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- The management, supervision, and monitoring mechanism of social insurance funds.- The management system for the social insurance programs.

Schedule: Collection and review of materials, and study tours in Phase I. Review of studiesproduced during Phase I under different modules, and synthesis and drafting of the law in Phase II.

Expertise: Policy experts working on other modules plus domestic and foreign legal specialists.

B. UNEMPLOYMENT INSURANCE AND EMPLOYMENT ASSISTANCE

Consistent with the overall objective of the project, to reduce the welfare burden on enterprisesand to help enterprise restructuring, the project would provide TA to help strengthen municipalprograms of employment assistance needed for employment system transition, rather than supportingenterprise-based programs for their own redundant workers.

Module 1. Analysis of Unemployment Insurance Coverage and Costs

Objective: To help determine the features of unemployment insurance by projecting the costimplications of increasing coverage and greater job mobility.

Scope:a. Developing a model to project unemployment insurance costs, accounting for labor market

behaviour and unemployment insurance features.b. Developing several probable scenarios of labor market evolution.C. Projecting unemployment and insurance costs under varying assumptions of economic

development, unemployment insurance coverage and features.d. Designing a mechanism for adjusting coverage, features, and contribution rate based on the

projection of unemployment insurance costs.e. (for central authorities) Assistance to develop guidelines for implementation of current

programs and to develop proposals for further reform.f. (For central authorities) Assistance to formulate guidelines for implementation of current

policies and proposal for future expansion and modification.

Schedule: Phase I: Development of the projection model; and preliminary projections of costsbased on existing data and a limited set of assumptions. Phase II: a more extensive analysis of thefactors contributing to costs, after examining the behavioral impacts of the unemployment insurancesystem.

Required Expertise: Labor economists experienced with unemployment and cost projections.

Module 2. Computerization of Unemployment Insurance and Employment Assistance Systems

Objective: To help design a computerization program of the unemployment insurance and jobplacement services in order to strengthen their management and coordination, and to help implementthe program.

Scope:a. Design of computerized record keeping system for: recording enterprise contributions;

individual records to keep track of necessary data on job applicants from employmentrecord, benefit payments, and other services; and job listing.

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b. Design of a system for profiling available jobs and job applicants, and matching them;c. Planning and helping the implementation of the computerization program.

Schedule: The initial step would be computerization of unemployment insurance records. Thiscould begin on a prototype basis in just one office, and expand to other offices after the first system isready. Linking unemployment insurance records to those of other services would take longer.

Expertise: A computer expert familiar with unemployment insurance programs, assisted withunemployment operations expert.

Module 3. Employment Assistance, Training and Counselling Services

Objective: To help expansion and improvement of the labor exchange system, job training, andbusiness development services for the unemployed.

Scope: To identify detailed requirements for the tasks listed below, to evaluate currentassistance programs and help design operational procedures and to help plan the necessaryorganizational development for expanded services:

a. Evaluation of jobs, business opportunities, skill requirements, applicant profiles.b. Training Curriculum (including business management) and facilities requirements.C. Developing operational guidelines for job matching.d. Job search advice and assistance; counseling; assistance to access sources of start-up capital

and other business necessities.

Schedule: This module could start in either Phase I or Phase II. Computerization would taketime depending on the situation of the city, and technical assistance on other employment serviceswould take a few days.

Expertise: Experts on employment services, business development, and on training.

C. WORK INJURY INSURANCE

Objective: To help provide examples of work injury insurance systems in other countries,evaluate the existing program and plans for its reform, and recommend improved benefitadministration.

Scope: Provide examples of work injury insurance systems in other countries, evaluate theexisting program and plans for its reform, and recommend improvements in the following areas:

a. Standards for determining disabilityb. Management of the disability evaluation processc. Benefit structures and appropriateness for types of disabilityd. Relation to other disability programse. Appeals proceduresf. Resource pooling and financial controlsg. (For central authorities) Regulations concerning the above.

Schedule: Since planning for work injury insurance is still in an early phase in most cities, thismodule will be offered in Phase II.

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D. HEALTH INSURANCE

All of the health insurance TA modules described below concern both the central and municipallevel reform efforts. They will assist the central agencies in setting some national guidelines onhealth insurance reform. At the municipal level, the TA will lay the foundation for centralizedmanagement of health insurance.

Module 1. Medical Informatics

Objective: To develop an information system on the utilization, cost, and quality of healthservices, not only as an ongoing management tool, but as a basis for making policy decisions.

Scope: Technical assistance in the following areas:a. Define conceptually measures of utilization, cost, and quality; evaluate available data;b. Identify existing software for similar system and adapt it to local circumstances.c. Recommend appropriate computers and accessories necessary and a plan to establish the

system in each city and at the central level.d. Use the system to carry out an initial utilization study.e. Recommend adjustments in the system after it has been tried on a trial basis.

Schedule: Development of the system should begin in Phase I. The system will be used for abaseline survey in Phase I or II. The system should then be modified to meet the needs of the healthcare system, once decisions are made on its design.

Expertise Required: The technical assistance consultant(s) required for this module would bean expert on health information systems with a knowledge of health care systems, computer systems,and quantitative techniques. The consultant should have extensive knowledge on alternative softwareand the ability to adapt it to local circumstances.

Module 2. Provider Reimbursement Systems

Objective: To help design a reimbursement system for health care providers that will alloweffective cost control.

Scope: Review the utilization study produced in Module 1 to identify problems of the currentsystems; identify and evaluate feasibility of the following:

a. Fee-for-service systems. Methods for pricing specific services. Data requirements.Consequences for utilization and quality of care. Nonprice methods for controlling costs.Administrative issues.

b. Capitation systems. Methods for pricing--setting capitation rates. Quality control. Dataand administrative requirements. Implementation issues.

c. Consumer choice under each approach, as a measure of cost and quality control.

Schedule: Phase II, after the initial establishment of the information system and the utilizationsurvey of Module 1 is complete or at least well under way. It should be offered close in time toModule 3. Both Modules 2 and 3 should take place before major decisions are made on programdesign.

Expertise Required: Policy experts familiar with the design of reimbursement systems. Sincea variety of designs are possible, the expert should be familiar with the approaches in a number of

- 102- ANNEX 10

countries. The expert should have data analysis skills suitable for evaluating results from theutilization survey and be able to use them in evaluating the policy options.

Module 3. Pooling, Premiums and Copayments, Coverage

Objective: To make recommendations on appropriate coverage for health insurance and how topay for it.

Scope: Analyze and project health care demand and costs to carry out the following:a. Defining operational criteria for deciding on inclusions and exclusions with respect to types

of service, facilities, location of services, and kind of provider. Defining "major" versus"minor" illness, if these are to play a role in the design of benefits.

b. Criteria for choosing among and combining alternative payment mechanisms: payment inadvance (premiums) vs. payment for services; for premiums, payment by enterprises vs. byworkers; for payment for services, deductible vs. copayment.

c. Taking account of provider reimbursement mechanism (Module 3) in designing premiums,payments, and coverage.

d. Designing a pooling system which will be solvent, applying insurance principles.

Schedule: This module should be undertaken before a city makes major decisions on the designof its coverage, contribution, and copayment systems. There may be differences between cities, butthe main design work should be in Phase II, with preliminary reviews done in Phase I. Since there isan interaction between payment mechanisms and provider reimbursement systems, the timing ofModules 2 and 3 should be close in time.

Expertise: Experts on health policy and insurance planning.

Module 4. Designing Health Care Management System

Objective: To help design a system that can effectively manage new health care system.

Scope: Define the outlines and plans for developing the following:a. Systems for collecting [remiums and copayments; claims review and payment; ongoing

utilization review.b. By-laws and rules for the organization, including those concerning financial management.c. Staffing needs to carry out each of the tasks of the system.d. Developing computerized record-keeping and management system.

Schedule: Phases II and III.Expertise: Mainly experts in operation of health insurance or health management programs,

assisted by health policy experts and informatics experts working on Modules 1, 2 and 3.

E. TRAINING

All the foregoing TA modules involve training activities, to provide policy makers with policyoptions for social security and to train staff in new operational procedures and techniques. Thetraining will include several types: (1) centrally organized training for the trainers from the projectcities; (2) overseas training which may be either study tours or extended training for social securityworkers; and (3) local training programs for staff of the municipal social security agencies.

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Training Type 1. Training of Trainers Program. Centralized training programs will bedeveloped to train trainers from each of the cities who will conduct local training. Training materialswill be developed centrally, with marginal local modifications, in parallel with TA modules discussedin the foregoing. The program development and training of trainers will involve training specialistsand the following steps:

a. Initial site visit. Training specialists will visit each city for up to one week to evaluate theneeds of the city with respect to various modules.

b. Preparation of materials. Drawing on the information from the cities and advice fromtraining specialists, the technical experts will develop training materials for their modules.Training specialists will also develop materials for teaching training methods.

c. Training program for trainers from the cities. Between 3 and 6 trainers will come fromeach city to participate in a two week training program using the materials developed.

d. City trainers hold training sessions for staff in their own cities. At least two trainingsessions will be held in each city using the newly developed materials.

e. Evaluation. City trainers will attend an evaluation session. They will report experiencesusing the materials. The training materials will be revised, to be used in future citytraining programs.

Training Type 2. City Training. Municipalities will use part of the loan resources to cover thecost of local training programs, for the training of SIA and government staff, rather than enterprisestaff. Training specialists will assist the municipalities to design detailed training plans.

Training Type 3. Overseas Training. The project will support:

Study tours for senior officials to observe other social security systems and assess theirsuitability for China, each lasting for about three weeks to visit two or three countries;

Overseas training for middle managers and senior technicians who will study selected aspects ofsocial security in depth, for a duration of 3-10 months.

Foreign consultants working on different modules will assist in identification of suitable trainingprograms and arranging the training.

F. ADMINISTRATION, BUDGET AND SCHEDULE

Administration. Most of the social security reform programs as well as TA activities will be carriedout in the participating municipalities, led by respective labor bureaus and assisted by consultantsrecruited locally. As the range and nature of improvements sought are similar across cities, however,it will be efficient for all participating municipalities and central authorities to share the expertise andfindings of the TA activities. In view of this, the national and international consultant services will bejointly managed under the leadership of the Central Coordinating Group (CCG). Further, most of theequipment needed for computerization and training can also be procured in consolidated packages toincrease the purchasing power and to economize on expenses for bidding and quality assurance.

Joint management of TA as well as monitoring of social security reform process will beundertaken by a CCG subgroup, supported by a team of at least three full-time social security experts.This team of national experts will be assisted by a few international advisors for short periods oftime. The advisory team will consist of three to four experts in social security and health insurance

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policy, operations, and computerization. Their assistance will be drawn for two to six weeks periods,in preparing detailed terms of reference (TOR) for shared consultancy at the outset of the project, andin management and evaluation of the TA implementation at the conclusion of TA Phases.

Budget and Cost Sharing. It is estimated that the social security TA will require a total consultantinput of about 620 person-months (PM) consultant services, for a total cost of about $4.8 millionincluding contingencies. This is expected to consist of international consultant services of about 105PM, and about 515 PM of national and local consultant services. Of these, about 225 PM of localconsultant services will be procured in separate consultant contracts by municipalities. As discussedabove, the CCG will recruit and retain its expert team (about 90 PM) and the international advisoryteam (about 10 PM). The rest (95 PM of international consultancy and 200 PM of nationalconsultancy) will be procured as one or two national consultant contracts. These estimates indicatethe level of necessary consultancy efforts. The budgets will be revised after consultant contracts arefinalized, making adequate provisions for contingencies.

The expenditures incurred for the consultants retained by the CCG and about a half of othershared consultancy will be distributed among the participating municipalities and central authorities inproportion to total World Bank funding received. Cost of planning and arranging for the centralizedprogram for trainers and training materials will be shared in the same basis, although other directexpenses of trainees will be borne by each municipality. The budget is summarized in Table 1.

Table 1. Social Security Technical Assistance Cost by City and Category(US$ million)

Beiiing Chengdu NinQbo Yantai Center TotalConsultants

Foreign 1.04 0.81 0.31 0.41 0.23 2.80Local 0.36 0.29 0.13 0.11 0.13 1.02Subtotal 1.40 1.10 0.44 0.52 0.35 3.82

TRAININGForeign 1.23 0.97 0.24 0.22 0.45 3.11Local 0.44 0.41 0.04 0.04 0.02 0.94Subtotal 1.67 1.38 0.28 0.26 0.47 4.05

EquipmentForeign 2.20 1.40 0.36 0.48 0.32 4.75Local 0.39 0.25 0.06 0.08 0.06 0.84SubTotal 2.58 1.65 0.42 0.56 0.38 5.59

Total Base CostForeign 4.47 3.18 0.91 1.11 1.00 10.66Local 1.18 0.95 0.23 0.24 0.20 2.81Total 5.65 4.13 1.14 1.34 1.20 13.47

(Yuan Million 49.17 35.95 9.89 11.68 10.46 117.16)

Total Costs (including: Physical Contingencies 10.0%; andPrice Contingencies in US$: Foreign Costs 11.3%

Local Costs 30.1%)

Consultancy 1.79 1.41 0.57 0.66 0.46 4.89Training 2.13 1.77 0.35 0.33 0.57 5.15Equipment 3.24 2.07 0.52 0.70 0.48 7.02TOTAL 7.16 5.25 1.44 1.69 1.51 17.06

(Yuan Million 77.00 56.48 15.48 18.19 16.28 183.43)

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Schedule. The TA programs will be carried out in three Phases: Phase I from about July 1994 toDecember 1995; Phase II from January 1996 to March 1997; and Phase III from April 1997 to June1998. Tentative timing of several important steps is indicated in Table 2 below.

Table 2. Indicative Schedule of Major Activities

Activities Target Date

Phase I

- CCG team of national social security experts and international advisory July - Septemberteam visit the cities and identify detailed technical requirements; prepare 1994detailed TOR for the major consultancy, a letter of invitation, and a shortlist; TOR for preliminary activities to be done by municipalities and theirconsultants

- First overseas study tour according to the plans prepared by the above October 1994teams, including up to two persons from each city

- Consultants start work October 1994

- First consultant report due, including outline assessment of current December 1994systems, detailed work plan, specification of the first equipmentprocurement package, plan for senior management study tour, andrecommendation and TOR for local city-specific local consultancy

- First invitation for bids for the equipment for prototype establishment March 1995

- Phase I Interim report due, presenting preliminary work on all modules May 1995including, among others, systems development plans, evaluation of currentsystems, list of alternative options, data analysis, training programdevelopment plan, and preliminary results of projections and modelling

- Start establishment of prototype office and training of personnel July 1995

- Phase I draft final report presenting progress of work reported on in the October 1995interim report, and presenting recommendation on benefit-contributionformulae and organizational structure and staffing

- First series of centralized training of trainers sessions; bid invited for November 1995the second batch of equipment procurement

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Table 2. (continued)

Activities Target Date

Phase II

- Launch of pilot health insurance and capitation systems; Second series February 1996of centralized training programs

- Start first stage implementation of district office computerization and April 1996large scale training in each city

- Phase II interim report discussing, among others, results of projections, August 1996major issues facing the four social security systems, evaluation ofalternatives, detailed designs of procedures and organizations

- Third series of training programs at the center and in cities November 1996

- Phase II final report, discussing evaluation of pilot health insurance March 1997schemes, first stage computerization, operation of new procedures,effectiveness of TA programs, impacts of new systems on social indicators

Phase III

- Implementation of second stage computerization program; Delivery of April - Septemberequipment procured 1997

- Fourth series of training programs September 1997

- Completion of transfer of retiree service functions to SIA December 1997

- Phase III Report presenting, will, among others, revised projections, June 1998recommended refinement in benefit-contribution formulae, evaluation ofSIA performance, recommendation for further strengthening of SIAorganizations

- 107 -

ANNEX I 1

PROJECTED DISBURSEMENTS AND PRICE ESCALATION

CUMULATIVE DISBURSEMENTS

Bank SemesterFY Ending Total Center Beiiing Chengdu Ningbo Yantai

- --------------- US$ Million ---------------

1995 Dec 31, 1994 3% 11 0.0 5.1 2.4 1.7 1.4Jun 30, 1995 8% 28 0.1 13.5 6.4 4.4 3.6

1996 Dec 31, 1995 16% 56 0.3 26.9 12.8 8.8 7.2Jun 30, 1996 28% 98 0.6 47.0 22.4 15.4 12.6

1997 Dec 31, 1996 42% 147 0.9 70.5 33.6 23.1 18.9Jun 30, 1997 54% 189 1.1 90.7 43.2 29.7 24.3

1998 Dec 31, 1997 64% 224 1.3 107.5 51.2 35.2 28.8Jun 30, 1998 72% 252 1.4 121.0 57.6 39.6 32.4

1999 Dec 31, 1998 79% 277 1.4 132.9 63.2 43.5 35.6Jun 30, 1999 85% 298 1.5 143.0 68.0 46.8 38.3

2000 Dec 31, 1999 91% 319 1.5 153.2 72.8 50.1 41.0Jun 30, 2000 96% 336 1.5 161.7 76.8 52.8 43.2

2001 Dec 31, 2000 100% 350 1.5 168.5 80.0 55.0 45.0

PROJECTED ANNUAL PRICE ESCALATION

International DomesticYear in US$ in Yuan

(MUV*) General Construction

1994 3.4% 12.0% 20.0%

1995 2.9% 9.0% 12.0%

1996 3.0% 8.0% 10.0%

1997 2.7% 7.2% 8.0%

1998 2.7% 7.2% 8.0%

1999 2.5% 6.0% 8.0%

2000 2.5% 6.0% 8.0%

WeightedTotal 11.3% 37.8% 56.8%

Note * Manufactured export unit value indexSource: Bank Group projections

ANNEX 12

Project Costs and Loan/Credit Allocation by City(US$ Million in Current Prices)

PROJECT COSTS Center Beijing Chengdu Ningbo Yantai TOTALTECHNICAL ASSISTANCESocial Security

Consultancy 0.46 1.79 1.41 0.57 0.66 4.89Training 0.57 2.13 1.77 0.35 0.33 5.15Equipment 0.48 3.24 2.07 0.52 0.70 7.02Subtotal 1.51 7.16 5.25 1.44 1.69 17.06

Housing and Property (HMC and Municipalities)Consultancy 1.09 0.52 0.36 0.29 2.26Training 0.86 0.41 0.28 0.23 1.77Equipment 0.68 0.32 0.22 0.18 1.41Subtotal 2.63 1.25 0.86 0.70 5.44

Housing Finance (Banks)Consultancy 0.43 0.21 0.14 0.12 0.89Training 0.37 0.18 0.12 0.10 0.77Equipment 0.41 0.19 0.13 0.11 0.84Subtotal 1.21 0.58 0.40 0.32 2.50

All Technical AssistanceConsultancy 0.46 3.31 2.13 1.07 1.07 8.04Training 0.57 3.36 2.36 0.75 0.66 7.70Equipment 0.48 4.33 2.59 0.88 0.99 9.27Total 1.51 11.01 7.08 2.69 2.72 25.00

HOUSINGTotal Housing Investments 448.28 207.65 148.79 120.28 925.00

(Mortgage Loans) 315.53 146.15 104.73 84.66 651.07

TOTAL COSTS 1.51 459.29 214.73 151.49 123.00 950.00(in Yuan Milion) 16.28 4937.34 2308.32 1628.47 1322.25 10212.53

LOAN/CREDIT Center Beijing Chengdu Ningbo Yantai TOTALIBRD LOAN, US$ Million Equivalent(1) Goods 0.36 3.20 1.91 0.65 0.74 6.85(2) Consultancy/Training 0.81 5.24 3.53 1.43 1.36 12.36(3) Housing Loan 123.96 57.42 41.14 33.26 255.78

Total 1.17 132.39 62.86 43.22 35.36 275.00IDA CREDIT, SDR Million(1) Goods 0.07 0.62 0.37 0.13 0.14 1.32

(2) Consultancy/Training 0.16 1.01 0.68 0.28 0.26 2.39(3) Housing Loan 23.92 11.09 7.95 6.43 49.39

Total 0.23 25.55 12.14 8.35 6.83 53.10TOTAL LOAN/CREDIT, US$ Million Equivalent(1) Goods 0.45 4.07 2.43 0.82 0.94 8.72(2) Consultancy/Training 1.03 6.67 4.49 1.82 1.73 15.74(3) Housing Loan 157.76 73.08 52.36 42.33 325.54

Total 1.50 168.50 80.00 55.00 45.00 350.00(Yuan Milon) 1613 1811.38 860.00 591.25 483.75 3762.50

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MONITORING, SUPERVISION, AND EVALUATION

1. Objectives. Significant and systematic monitoring and supervision efforts are requiredfor the project due to several important factors: (i) the wide scope of reform; (ii) the novelty and technicalcomplexity of the new institutions and practices introduced under the project; (iii) difficult socio-economicadjustment by enterprises, government, and workers; (iv) fast pace of change in economic, financial andgovernmental frameworks in urban China; and (v) the fact that the project is a pilot effort to establishan effective reform strategy for possible replication in all cities of China.

2. Scope. These factors suggest that monitoring and supervision efforts should focus on:(i) measuring project progress not only against usual implementation indicators including schedule ofphysical investment and TA, but also broader, longer-term policy objectives and comparators outside theproject; (ii) monitoring and evaluating the project impact against a broad range of related socio-economicindicators; (iii) assisting implementing agencies deal with implementation issues not only to better complywith project designs but also, when necessary, to adjust the project designs in order to improve theeffectiveness of the reform strategy or to adapt to changing circumstances; and (iv) drawing useful lessonsfor adoption in similar reform efforts later or in other localities.

3. Responsibilities. The implementing agencies -- HMCs, PFIs, and social security agencies-- have direct interest in performance of the systems and would generate many of necessary data. Theirconsultants will also generate in-depth analyses. By design, the project requires, and provides incentivesfor the implementing agencies, particularly the PFI, to comply with the agreed operating criteria andsupervise HMCs to do so. The municipal project management offices (PMOs) will be primarilyresponsible for consolidating information generated by the implementing agencies, collecting broader city-wide information, and provide a summary to the Bank Group and CCG semi-annually. The PMO willalso be responsible for first responses to detect implementation problems and dealing with them. TheCCG will be responsible for monitoring project progress in comparison among project cities and withnon-project cities, and providing national policy guidelines to deal with emerging issues.

4. Bank Group Supervision. The Bank Group will field supervision missions normally inApril/May and October/November each year. A project launch workshop will be held in October 1994,a mid-term review in either May or October 1997, and the project completion mission in April 2001.The project design, emphasizing responsible actions by implementing agencies in pursuit of their owninterests, helps reduce the supervision burden for review and assistance of usual investment operationssuch as procurement. On the other hand, the project calls for provision of technical assistance inoperation and development of new institutions, including the review of a considerable number of complexloan documents. The project will also require considerable Bank Group assistance for implementingagencies manage technical assistance and research input to draw useful lessons for future operations inChina or in other transition economies. These considerations suggest that the project will require aminimum of about 20 staff-weeks (sw) of supervision input per year, or more likely about 25 sw, in theareas of: general management (3-5 sw); housing market and housing finance (7-10 sw); labor andenterprise systems (2 sw); financial analysis and management (3-5 sw); social security and healthinsurance (2-3 sw); and other specialties (social scientists, legal experts, computer specialists, as necessaryfor an average of 2 sw a year). However, the launch workshop will require additional 10 sw, and themid-term review another 10 sw.

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MONITORING INDICATORS AND METHODS

5. Throughout project implementation, project performance and impacts will be monitoredby use of indicators listed below. City officials will monitor various aspects of project performance andforward their findings to the Bank at regular intervals. The monitoring indicators will be organized alongthe following lines: development of housing management companies; HMC financial performance;housing consumption patterns; housing finance system; housing supply; legal and regulatory framework;impact on enterprises. Data from HMCs and participating banks will be collected quarterly. All otherdata should be collected annually, if only on a sample basis. Sample survey will be conducted annuallyfor information which is not routinely collected by HMC or city; for some information that requirecomplex cross-tabulation, such as income-housing relationship, sample survey will be done lessfrequently. The first sample survey will be conducted by the end of 1994 to provide a baseline for futurecomparison.

6. Operation and Development of HMCs:

(a) number of HMCs;

(b) number and types of enterprises within HMC system, compared with city;

(c) amount of total existing housing stock and new housing stock acquired by HMCs (m2,apartment units, % of total city); their characteristics (location, size, age, and other)compared with city totals or averages;

(d) number of HMC tenants who are employed by HMC shareholders and those who are not(as % of total workers in the city, and % of total employees of HMC shareholders);

(e) Inventory of current housing stock managed by each HMC (including total number ofdwelling units, total gross floor area, total usable floor area, total land area, usable floorarea/unit, density (units/ha of land, gross floor area ratio), and average actualmaintenance yearly cost per unit; comparison with city totals or averages;

(f) distribution of rent per m2 and per apartment within each HMC and city;

(g) average days of vacancy per each housing unit of HMC in the past 12 months;

(h) average construction cost and sales price per in2 , for HMC and for city;

(i) size distribution of new units acquired or built, by HMC and for the city;

(j) HMC cash flows and dividend distribution compared against equity and debt service; and

(k) Revenues and investments due to rental housing operation, housing sales, and otherbusinesses.

7. Housing Consumption Patterns: Most of the following information will be generated by survey,especially for city-wide information:

(a) number and percent of workers without housing, for HMC shareholders; and for the city;

-111- ANNEX 13

(b) number and percent of employees changing apartments in each HMC in the past 12months, including those who (1) moved into the HMC system from "outside" (dormitory,private, or parents' homes); (2) left HMC system (to private system, etc.); and (3) movedwithin the HMC system;

(c) household income distribution of HMC tenants and of city; relationship between incomeand housing unit size, for HMC and city;

(d) household size and age distribution of HMC tenants and city-wide;

(e) positive or negative gap between rent and wage supplements for HMC tenants;

(f) present and planned homeownership rates among employees of HMC shareholders,compared with the city;

(g) savings rate by employees of HMC shareholders, and city-wide;

8. Development of Housing Finance System

(a) total number and value of new housing mortgage loans to HMCs, by participating bankand HMC;

(b) total number and value of new housing mortgage loans to individuals, by participatingbank;

(c) total number and value of new housing mortgage loans granted outside of the project, byparticipating bank;

(d) interest margin earned on mortgage loans (1 .8% minimum) and other loans, byparticipant bank; and

(e) amount of arrears (less than 3% of portfolio late more than 3 months) and defaults, byparticipating bank.

9. Legal and Regulatorv Indicators:

(a) reported defaults, by participating bank, and reported outcome; and

(b) reported eviction notices, by HMC, and reported outcome.

10. Impact on Enterprises

(a) number and % of staff working on social welfare functions (housing, social security,health insurance) within enterprises in each HMC;

(b) job mobility within the participating enterprises by HMC, reflecting those who joinedenterprises, left enterprises voluntarily, and were dismissed by enterprises, as %beginning period total employment; and

- 112- ANNEX 13

(c) choice of housing mode by employees who received wage adjustments but later left HMChousing, by HMC.

11. Implementation of Social Security Reform Measures. Each municipality agreed to a set of targetdates for achieving key objectives such as city-wide pooling of retirement pension funds, introduction ofpooling for health care expenditures, and transfer of management functions from enterprises to socialsecurity agencies. The progress of reforms would be assessed against the agreed target dates given inAnnex 9, Table 1. Specifically, information would be collected during project implementation on:

(a) number of workers participating in pooling for retirement pensions, (and % of totalenterprises) by city;

(b) number of workers participating in pooling for major medical (% of city);

(c) number of workers covered by unemployment insurance (and % of total urban workers)by city; and

(d) cost and utilization rate of medical services after the implementation of cost-containmentmeasures (number of hospital visits per worker per year, number of drugs prescribed perconsultation, average length of hospital stay).

12. Growth and Performance of Social Security Administration

(a) number of full-time staff (technical and administrative) employed by the social securityagency (% increase over 1993 levels) by city;

(b) number of individual records (of workers and retirees) entered into computerized databasefor management of retirement pensions (% of all participating workers and retirees) bycity;

(c) number of branch offices of the social security agency set up at a district- orneighborhood-levels to deliver retirement pension and/or unemployment insurancebenefits (% increase over 1993 levels); and

(d) number of health insurance management offices set up in the municipality (% increaseover 1993 levels).

13. Impact of Social Security Reform on Enterprises

(a) number of social security management staff of enterprises (% decrease over 1993 levels);

(b) job mobility of workers in the enterprises participating in the unemployment insurance,retirement pension and health insurance pools, defined as (i) the number of workers wholeft voluntarily; % of this group who benefitted from the services of the municipalemployment bureau (specifically, number retrained, number placed in other positions,number assisted in self-employment), and (ii) the number workers dismissed byenterprises.

- 113- ANNEX 14

SELECTED DOCUMENTS AND DATA IN THE PROJECT FILE

1. "Housing and Social Security Systems Reform Programs," Letters of Beijing, Chengdu,Ningbo, and Yantai Municipalities (dated May 13, 1994), forming a part of a SupplementalLetter to the Development Credit Agreement

2. "Resettlement Framework," Letters by Beijing, Chengdu, Ningbo, and Yantai Municipalities(dated May 13, 1994), forming a part of a Supplemental Letter to the Development CreditAgreement

3. State Council Guidelines for Housing Systems Reform (1988, 1991)

4. A List of National and Local Regulations on Environment and Resettlement (November 1993)

5. A Set of National and Local Regulations on Resettlement (various dates, in Chinese)

6. Summary Statistics on Enterprise, Housing and Municipal Finance of Various Cities, 1992

7. Selected Tables of Housing and Land Market Indicators of Chengdu and Ningbo (March1993, February 1994)

8. Models of Charter, Operating Policies, and Lease for Housing Management Companies(March 1993)

9. Charters and Sample Leases of Four Housing Management Companies in the Project Cities(dated between July 1993 and January 1994)

10. Housing Management Companies: Management Proposals (by Messrs. Luckens, Fulton andRedman, May 1993)

11. Projection of Operation and Finances of Housing Management Companies, 1994-2000;Projection of Aggregate Operation and Finances of Housing Management Companies by City,1994-2000; A Comparative Projection of Housing Supply and Finances under the Existing andNew Housing Delivery Systems, 1994-2000. In print and diskette form.

12. Legal Framework for Housing Market and Housing Finance in Chinese Cities: An Overview(Feng Wang, June 1994)

13. Discussion Papers on: Foreclosure, Eviction, and Condominium Instruments (by RobertJosephs, April 1993)

14. Model Condominium Declaration and Bylaw (Federation of Community Associations. October1993)

-114- ANNEX 14

15. Municipal Regulations on Mortgage Lending, Foreclosure, and Eviction of Beijing, Chengdu,Ningbo and Yantai Municipalities (January - May 1994, in Chinese)

16. People's Construction Bank of China, Annual Reports, 1990-1992

17. Industry and Commerce Bank of China, Annual Reports, 1990-1992

18. Financial Statements of Eight Participating Financial Intermediary Units, 1990-1993.

19. Actual and Projected Financial Status of Nine Participating Financial Institutions, 1992-2000.In print and diskette form.

20. Guidelines for Multifamily Mortgage Loan Transactions (Technical guidelines prepared byApril LeClair, October 1993)

21. Tentative Methods for Mortgage Lending (People's Construction Bank of China, September1992)

22. Summary and Evaluation of Computerization Programs for Social Security and HealthInsurance Systems by City (January 1994)

23. China: Reforming Social Security in a Socialist Economy (World Bank Report No. 8074-CHA, 1990)

24. China: Industrial Policies for an Economy in Transition (World Bank Report No. 8312-CHA,i990)

25. China: Urban Housing Reform: Issues and Implementation Options (World Bank Report No.9222-CHA, 1991)

26. China: Reforming the Urban Employment and Wage System (World Bank Report No. 10266-CHA, 1992)

27. China: Industrial Restructuring: A Tale of Three Cities (World Bank Report No. 10479-CHA,1992)

28. China: Urban Land Management: Options for an Emerging Market Economy (World BankReport No. 10962-CHA, 1992)

29. China: Involuntary Resettlement (World Bank Report No. 11641-CHA, 1993)

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