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The World BankTECHNOLOGY CENTER SYSTEMS PROJECT (TCSP) (P145502)

REPORT NO.: RES30302

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

TECHNOLOGY CENTER SYSTEMS PROJECT (TCSP)

APPROVED ON APRIL 25, 2014

TO

DEPT. OF ECONOMIC AFFAIRS, MINISTRY OF FINANCE, GOVERNMENT OF INDIA

TRADE & COMPETITIVENESS

SOUTH ASIA

Regional Vice President: Annette Dixon Country Director: Junaid Kamal Ahmad

Senior Global Practice Director: Ceyla Pazarbasioglu-DutzPractice Manager/Manager: Esperanza Lasagabaster

Task Team Leader: Michael Olavi Engman, Shihab Ansari Azhar

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ABBREVIATIONS AND ACRONYMS

EA Environmental AssessmentERR Economic Rate of ReturnGIZ Deutsche Gesellschaft für Internationale Zusammenarbeit IBRD International Bank for Reconstruction and DevelopmentITP Information Technology PlatformMoMSME Ministry of Micro, Small and Medium EnterprisesMSME Micro, Small and Medium EnterprisesNPV Net Present ValuePDO Project Development ObjectivePMU Project Management UnitTCSP Technology Center Systems Program


BASIC DATA

Product Information

Project ID Financing Instrument

P145502 Investment Project Financing

Original EA Category Current EA Category

Partial Assessment (B) Partial Assessment (B)

Approval Date Current Closing Date

25-Apr-2014 30-Jun-2020

Organizations

Borrower Responsible AgencyDept. of Economic Affairs, Ministry of Finance, Government of India MSME Ministry

Project Development Objective (PDO)

Original PDOThe Program’s Development Objective (PDO) is to enhance the productivity of MSMEs by improving their access to technology and business advisory services as well as skilled workers through systems of financially sustainable Technology Centers (TCs).OPS_TABLE_PDO_CURRENTPDOSummary Status of Financing

Ln/Cr/Tf Approval Signing Effectiveness ClosingNet

Commitment Disbursed Undisbursed

IBRD-83300 25-Apr-2014 10-Nov-2014 19-Dec-2014 30-Jun-2020 200.00 23.82 176.18

Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)?No


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I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING

A. Project status

1. Implementation Progress is rated moderately satisfactory. Implementation progress accelerated significantly during FY17 following a slow start in FY15-16. However, several activities under Component 1 are not progressing as originally planned for the following reasons. First, the Project Management Unit (PMU) has experienced significant challenges in the procurement of large technical assistance packages, which has led to delays in project implementation and adjustments to planned activities. Second, a grant provided by the Ministry of Micro, Small and Medium Enterprises’ (MoMSME) long-term partner the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH has financed some of the technical assistance activities that could not be procured under the IBRD loan, and are envisaged to be dropped from the Project. Because of these developments, the PMU and the World Bank task team believe a reduced scope of the project financed technical assistance activities under Component 1 and a somewhat different bundling of the activities are essential to achieve the project development objectives.

2. Activities under Component 2 (works and equipment) and Component 3 (technical assistance for project implementation) are progressing well and more than half the budget allocation for Components 2-3 has been committed. Market prices for works contracts have generally been higher than originally estimated during the design phase. The higher cost of building new and expanding and rehabilitating old technology centers has been factored in under the proposed project restructuring. Likewise, the total cost of equipment and machinery has also been higher than originally anticipated. The budget cost overruns due to costlier than anticipated works and machinery have been balanced by lower than anticipated spending on technical assistance and operating expenditures.

3. The prospects of achieving project objectives are rated moderately unsatisfactory under the current conditions. Several indicators in the Result Framework are directly tied to the technical assistance activities originally planned under Component 1 and which will not be financed under the IBRD loan anymore. Other indicators cannot be achieved under the original timeframe given the slow start in project implementation. The proposed revised Results Framework reflects the adjustments in project-financed activities and the commensurate adjustment in result targets.

4. An Implementation Status & Results Report will be filed upon the approval of the restructuring of the project. The revised PDO is likely to be attained and the rating of the Achievement of Development Objectives will therefore be upgraded to satisfactory.

5. The MoMSME complies with all covenants included in the Financing Agreement.

B. Rationale for restructuring

6. The rationale for the restructuring is to take corrective action based on the conclusions from the project mid-term review and to ensure that the project delivers the desired development outcomes. The PMU is fully staffed and its work has led to significant implementation progress in the last year and a half. The procurement of works and equipment have either been completed or are at an advanced stage. Only two technical assistance packages remain in the procurement pipeline under the proposed revised project. The proposed changes will set the project on the right track to successfully expand and modernize the existing technology centers and nearly double the total number of technology


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centers in India. The proposed restructuring will allow for the DO rating for this project to be upgraded based on the proposed revisions to the Results Framework.

II. DESCRIPTION OF PROPOSED CHANGES

C. Change in Project's Development Objectives

7. The original PDO is unnecessarily complex and includes linked activities. The main objective ('enhance productivity') is ill-defined and very difficult to measure. In addition, the proposed changes to the technical assistance activities under Component 1 would lead to the removal of the focus on 'business advisory services'. The proposed new PDO will focus on the intended outcomes (increase access to technology and skilled workers) and not on the means of achieving the intended outcomes. The proposed project restructuring keeps the broad integrity of the project largely intact. The means to achieve the PDO is still to increase the number of technology centers and strengthen the activities of the existing technology centers. The long-term effort to strengthen the institutional capacity and financial sustainability of existing and new TCs will continue throughout the project. The time required to turn an operating profit for the many new TCs will be longer than the 0-2 years they are expected to be in operation as per the revised timeline. Hence, financial sustainability is measured as an intermediate results indicator rather than a PDO outcome indicator.

D. Change in disbursement projection

8. The proposed changes in the disbursement projection adjusts to the disbursements made until date and takes into consideration the expected payment schedule over the remaining time of the project.

E. Change in Results Framework

9. The Results Framework is revised to: (i) reflect fewer activities financed under Component 1 (Technical Assistance); (ii) adjust targets that cannot be attained due to delays of project implementation; (iii) provide clarity regarding the definition of some indicators, including by making use of the Indian Financial Year (April 1 - March 31) throughout in the Results Framework, with the exception of the last quarter of the project (April 1, 2020, - June 30, 2020), and distinguishing clearly between annual and cumulative targets; (iv) and better support the interpretation of the revised PDO. See Annex 1 for detailed changes.

F. Change to Components and Cost

10. The mid-term review of the project concluded that the budget for Component 1 (technical assistance) was higher than needed and required a revision downward. This revision is partly due to the separate and long-term partnership between MoMSME and the GIZ, which resulted in technical assistance provided on a grant basis. The budget for Component 1 is reduced from US$34 million to US$17 million. The ‘Technology Partners’ and ‘Cluster Network Managers’ that were included in the original Project Appraisal Document have been replaced with a Technology Cluster Manager. In addition, the Information Technology Platform (ITP) Service Provider will now focus on providing an enterprise resource planning solution for the TCs to help manage information, strengthen reporting systems, and provide skills development training. The initial delays in project implementation means that some of these long-term technical assistance contracts will be shorter than anticipated and has led to lower than anticipated budget allocations.

11. The project has procured most of the works and the market rates revealed in competitive bidding processes have led to higher than estimated costs for the building and upgrading of technology centers (works, machinery). A higher budget allocation is hence required to keep up with the planned expansion plans. In addition, the Government of India’s


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parallel financing for ongoing operational costs have been lower than anticipated and the Government of India is therefore also reallocating resources from operational expenditures to works and machinery. Consequently, there is a proposed reallocation of US$17 million from Component 1 to Component 2 that is needed to achieve the project development objective. The restructuring offers some flexibility with regards to the potential engagement of a public procurement agency fulfilling explicit financial management and procurement process standards.

G. Appraisal Summary Change in Economic and Financial Analysis

13. The integrity of the project largely remains intact following the restructuring. The number of new technology centers that are being built and the number of old technology centers that are being expanded and modernized do not change. However, the disbursement schedule changes somewhat (as below). The reduction in the budget for technical assistance, which is partly due to separate grant funding and partly due to a less ambitious and more integrated contractual approach, is used to balance the higher than anticipated costs of works and new machinery.

14. The restructuring is adjusting expectations from the project design stage to be in line with the actual outcomes documented at the mid-term review stage. A slow start has led to the project today lagging the original implementation time line. The implications for the Economic and Financial Analysis are relatively modest. The expected benefits from the project-financed activities will be delayed by roughly two years. The expected costs from the project-financed activities will also be delayed by two years. Thus, the net value of the project is not changing in a noteworthy way although the realized disbursement and new disbursement projections are integrated in the model.

15. The Economic and Financial Model is replicated with some basic new assumptions about the potential downside of a decrease in spending on consultancy and new learning material (i.e. reflecting the reduction in budget for Component 1). The following assumptions were made: (i) the estimated wage premium for short-term course work is reduced by one-fifth of the original estimates; (ii) the estimated wage premium for long-term course work is also reduced by one-fifth of the original estimates; and (iii) the share of MSMEs benefiting meaningfully by technology center interventions is reduced by five percentage points (or from 75 percent to 70 percent). These base assumptions are then tested in a high case (-15%/-15%/-3%) and a low case (-25%/-25%/-7%) to assess the sensitivity of the outcomes. The re-modeling exercise highlights the positive impact the project still is expected to have (see Table 1).

Table 1: Net present value (NPV) and economic rate of return (ERR) after depreciation

Original PAD Low case Base case High caseDiscount rate: 10% NPV: US$483mn

ERR: 31%NPV: US$364mn



ERR: 28%Discount rate: 12% NPV: US$391mn NPV: US$285mn NPV: US$313mn NPV: US$340mnDiscount rate: 15% NPV: US$280mn NPV: US$191 mn NPV: US$214mn NPV: US$237

16. The base case scenario above would lead to a reduction in the net present value under a 10 percent discount rate from US$483 million to US$395 million. The economic rate of return would drop from 31 percent to 27 percent. The model thus holds up and indicates that even in a relatively pessimistic scenario the project will yield positive returns to the country. Even the more conservative, low-case scenario yields an ERR of 26 percent and a NPV of US$364mn. In addition, the original model makes use of a twelve-year discount period and the long-term nature of the interventions—including both the cycle time (from concept/design to operations) and the continuous generation of benefits—arguably warrants a longer discount period. A more recent (and similar) World Bank financed project made use of 15 years.


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III. SUMMARY OF CHANGES

Changed Not Changed

Change in Project's Development Objectives ✔

Change in Results Framework ✔

Change in Components and Cost ✔

Change in Disbursement Estimates ✔

Change in Implementation Schedule ✔

Change in Economic and Financial Analysis ✔

Change in Implementing Agency ✔

Change in DDO Status ✔

Change in Loan Closing Date(s) ✔

Cancellations Proposed ✔

Reallocation between Disbursement Categories ✔

Change in Disbursements Arrangements ✔

Change in Overall Risk Rating ✔

Change in Safeguard Policies Triggered ✔

Change of EA category ✔

Change in Legal Covenants ✔

Change in Institutional Arrangements ✔

Change in Financial Management ✔

Change in Procurement ✔

Other Change(s) ✔

Change in Technical Analysis ✔

Change in Social Analysis ✔

Change in Environmental Analysis ✔


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IV. DETAILED CHANGE(S)

OPS_DETAILEDCHANGES_PDO_TABLE

PROJECT DEVELOPMENT OBJECTIVE

Current PDOThe Program’s Development Objective (PDO) is to enhance the productivity of MSMEs by improving their access to technology and business advisory services as well as skilled workers through systems of financially sustainable Technology Centers (TCs).

Proposed New PDOThe objective of the Project is to increase access to technology and skilled workers for micro, small and medium enterprises at Technology Centers.

OPS_DETAILEDCHANGES_RESULTS_TABLE

RESULTS FRAMEWORK

Project Development Objective Indicators PDO_IND_TABLE

Number of work orders accepted by technology centers (annual, in '000)Unit of Measure: NumberIndicator Type: Custom

Baseline Actual (Current) End Target Action

Value 23.00 15.00 41.00 Revised

Date 31-Mar-2012 31-Aug-2017 31-Mar-2020

Number of individual enterprises accessing services at technology centers (annual, in '000)Unit of Measure: NumberIndicator Type: Custom Supplement


Value 0.00 5.60 6.90 New

Number of medium- and long-term trainees employed within six months of graduation from technology centers (annual, in '000)Unit of Measure: NumberIndicator Type: Custom


Value 3.60 6.40 7.70 Revised

Date 31-Mar-2012 31-Mar-2017 31-Mar-2020


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TCs' gross profit before depreciation (not including land) (in Millions)Unit of Measure: Amount(USD)Indicator Type: Custom


Value 3.50 1.10 12.00 Marked for Deletion

Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Intermediate IndicatorsIO_IND_TABLE

Revenue generated by technology centers from production support and consultancy (annual, in million)Unit of Measure: Amount(USD)Indicator Type: Custom



Date 31-Mar-2012 31-Mar-2017 31-Mar-2020

Capacity utilization of existing technology center machineryUnit of Measure: PercentageIndicator Type: Custom


Value 55.00 73.00 75.00 Revised

Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Cumulative number of technology roadmaps developed by TCM and endorsed by industry associationsUnit of Measure: NumberIndicator Type: Custom



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Number of trainees trained (annual, in '000)Unit of Measure: NumberIndicator Type: Custom


Value 77.00 150.00 180.00 Revised


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Date 31-Mar-2012 31-Mar-2017 31-Mar-2020

o/w external trainers trainedUnit of Measure: PercentageIndicator Type: Custom Supplement



o/w with newly developed contentsUnit of Measure: PercentageIndicator Type: Custom Supplement



o/w femaleUnit of Measure: PercentageIndicator Type: Custom Supplement


Value 10.00 13.00 18.00 Revised

o/w from low income statesUnit of Measure: PercentageIndicator Type: Custom Supplement


Value 30.00 43.00 44.00 Revised

o/w from disadvantaged section of society (SC/ST)Unit of Measure: PercentageIndicator Type: Custom Supplement


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Value 29.00 41.00 44.00 Revised

Cumulative number of skills development contents for Centers of Excellence approved by industry associations and/or certifying agenciesUnit of Measure: NumberIndicator Type: Custom



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Number of needs assessment and related business plans developed by CNMs and endorsed by Industry AssociationsUnit of Measure: NumberIndicator Type: Custom



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Value of TCs' businesses generated with support of Cluster Network Managers (in Millions)Unit of Measure: Amount(USD)Indicator Type: Custom



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Number of users of IT Platform ('000)Unit of Measure: NumberIndicator Type: Custom



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Cumulative number of new technology centers builtUnit of Measure: NumberIndicator Type: Custom


xii



Date 31-Mar-2012 31-Aug-2017 30-Jun-2020

Gross profit by existing technology centers before depreciation excluding land (million)Unit of Measure: Amount(USD)Indicator Type: Custom


Value 3.50 9.20 12.00 New

Date 31-Mar-2012 31-Mar-2017 30-Jun-2020

OPS_DETAILEDCHANGES_COMPONENTS_TABLE

COMPONENTS

Current Component Name

Current Cost

(US$M)Action Proposed

Component NameProposed

Cost (US$M)

Component 1: Technical assistance to the existing and new Technology Centers

34.00 RevisedComponent 1: Technical assistance to the existing and new Technology Centers

17.00

Component 2: Investments to upgrade existing and develop new Technology Centers

351.00 RevisedComponent 2: Investments to upgrade existing and develop new Technology Centers

368.00

Component 3: Technical assistance to the MSME Ministry for Project implementation and Monitoring and Evaluation

15.00 No Change

Component 3: Technical assistance to the MSME Ministry for Project implementation and Monitoring and Evaluation

15.00

TOTAL 400.00 400.00

OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE

DISBURSEMENT ESTIMATES

Change in Disbursement EstimatesYes

Year Current Proposed

2014 0.00 0.00


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2015 686,424.28 686,424.28

2016 3,934,324.75 3,934,324.75

2017 51,520,000.00 7,290,435.02

2018 107,187,878.51 45,088,815.95

2019 32,781,372.46 85,000,000.00

2020 3,890,000.00 58,000,000.00


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PDO (original): To enhance the productivity of MSMEs by improving their access to technology and business advisory services as well as skilled workers through systems of financially sustainable Technology Centers (TCs).PDO (revised): To increase access to technology and skilled workers for micro, small and medium-sized enterprises at technology centers.

Realized resultsOriginal targets

New targets Original targetsResults Indicator Unit

IFY15 IFY16 IFY17 IFY18 IFY19 IFY20 FY20*

Description

PDO Indicators

Number of enterprises paying for the services of TCs # 32.028.0

36.034.0

34.040.0 47.0 53.0 60.0 NA Original. Dropped. Reformulated version, see

below, 1.: 1. Number of work orders accepted by technology

centers (annual, in '000) 36.0 38.0 41.0 41.0 Reformulated. Clearer definition. Revised targets.

2: Number of individual enterprises accessing services at technology centers (annual, in '000) # NA NA 5.7 6.0 6.3 6.9 6.9 New.

Number of long term trainees employed by industry, including MSMEs, 6 months after graduating from TCs

5.711.0

6.114.0


below, 3.: 3. Number of medium- and long-term trainees employed

within six months of graduation from TCs (annual, in '000)

# 6.7 7.0 7.7 7.7 Reformulated from above. Clearer definition. Revised targets.

TCs' gross profit before depreciation (not including land) 14.35.0

14.98.0

9.210.0 11.0 11.0 12.0 NA

Original. Dropped. Moved to become an intermediate Indicator, with revised targets.

Intermediate Results Indicators

Access to Technology

Revenue of TCs from access to technology activities (production support and consultancy)

7.96.0

7.87.0


below, 4.: 4. Revenue generated by technology centers from

production support and consultancy (annual, in million) US$ 7.8 8.2 8.6 8.6 Reformulated from above. Clearer definition. Revised targets.

Capacity utilization of TCs machines 5960

7165

7370 70 70 70 NA

Original. Dropped. Reformulated version, see below, 5.:

5. Capacity utilization of existing technology center machinery % 73 74 74 75 Reformulated from above. Clearer definition.

Revised targets.


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Description

Number of technology strategies/roadmaps developed by TPs and endorsed by Industry Associations and IC

03

05

010 15 15 15 NA

Original. Dropped. Reformulated version, see below, 6.:

6: Cumulative number of technology roadmaps developed by TCM and endorsed by industry associations

# 0 4 9 12 Reformulated from above. Clearer definition. Revised targets.

Access to Skilled Workers

7. Number of trainees trained (annual, in '000) # 159105

180134

150164

160193

170223

180250

180NA Revised targets.

a) o/w external trainers trained % 01

02

62

42

42

42

4NA

b) o/w female % 1311

1611

1312

1413

1514

1715

18NA

c) o/w from low income states % 3535

3640

4340

4040

4040

4240

44NA

d) o/w from disadvantaged section of society (SC/ST) % 3830

4330

4130

3530

4030

4230

44NA

Revised targets.

e) o/w with newly developed contents % 0 25 30 35 40 50 NA Dropped. Revised activities in Component 1 do not include these.

Annual number of skills development contents for Centers of Excellence approved by industry associations and/or certifying agencies

# 02

02

02 3 3 3 NA Original. Dropped. Reformulated version, see

below, 8.:

8. Cumulative number of skills development contents for Centers of Excellence approved by industry associations and/or certifying agencies

0 0 4 6 Reformulated from above. Revised targets. Modified definition.

Upgrading and/or developing of Technology Centers

Number of new Technology Centers built 00

02

05 5 3 0 NA Original. Dropped. Reformulated version, see

below, 9.:

9. Cumulative number of new technology centers built # 0 8 13 15 Reformulated from above. Revised targets. Modified definition

10. Gross profit by existing technology centers before depreciation excluding land (million) US$ 14.3

5.014.98.0

9.210.0

10.011.0

11.011.0

12.012.0

12.0NA

Revised targets. This was previously a PDO outcome indicator becoming an intermediate indicator as PDO changed.

Access to Business Advisory Outcome dropped from PDO


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Description

Number of users of IT platform (‘000) # 0 2 5 5 3 0 NA Dropped. Revised activities in Component 1 do not include these.

Value of TC’s businesses generated with support of Cluster Network Managers (million) US$ 0.8 1.6 3.2 4.8 6.4 6.4 NA Dropped. Revised activities in Component 1 do

not include these.

* Note that the last column only covers one additional quarter (April 1 – June 30), i.e. the first quarter of the Indian Financial Year (ending March 31). This does not present any issue for cumulative indicators but the results for the annual indicators (#1-4 and #6) will either be irrrelevant or unavailable. The table above is simply reiterating the annual target for IFY20 in the last column for presentational reasons. See PAD Data Sheet above for reference. NA = Not applicable.

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