Document of
The World Bank
FOR OFFICIAL USE ONLYReport No. 17054
IMPLEMENTATION COMPLETION REPORT
INDIA
ELECTRONICS INDUSTRY DEVELOPMENT PROJECT (LOANS 3093-4-5-IN)
September 24, 1997
India Country Unit South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
CURRENCY EQUIVALENTS
Fiscal Year Exchange Rate Comment
(Indian rupee-Rs/US$)
1989-90 16.66 Official Rate
1990-91 17.95 ditto
1991-92 24.52 ditto
1992-93 26.41 ditto
1993-94 31.36 Unified Rate
1994-95 31.40 ditto
1995-96 33.46 ditto
1996-97 34.45 ditto
Note: A dual exchange rate system was created in March, 1992, with a free market rate for about 60% of foreign exchange transactions at a rate of US$ 1.00= Rs. 30.65. The exchange rate was reunified at the beginning of March,
1993 at the free market rate.
FISCAL YEAR
April I to March 31
ABBREVIATIONS AND ACRONYMS
AICTE - All-India Council for Technical Education CEDT - Centre for Electronics Design and Technology CEEP - Continuing Engineering Education Program
DEA - Department of Economic Affairs
DFI - Development Finance Institution
DOE - Department of Electronics
EIDP - Electronics Industry Development Project ERAS - Exchange Risk Administration Scheme
GOI - Government of India
ICICI - Industrial Credit and Investment Corporation of India
ICR - Implementation Completion Report
IDBI - Industrial Development Bank of India
IAP - Industry Attachment Program
IEP - Instructional Enhancement Program
IlSe - Indian Institute of Science
IIT - Indian Institute of Technology
IMPACT - Industry-oriented ManPower with Appropriate Competence and Training
JGF - Japan Grant Facility
LM - learning materials
MHRD - Ministry of Human Resources and Development
NASSCOM - National Association of Software and Service Companies
PI - Participating Institution
PIU - Project Implementation Unit
RC - Resource Centre
SAR - Staff Appraisal Report
SDC - Swiss Agency for Development and Cooperation
SSS - Sustainability Support Scheme
ZOPP - German acronym for Goal Oriented Project Planning
Vise President : Mieko Nishimizu
Country Director, India : Edwin R. Lim
Task Manager : Naimeh Hadjitarkhani
FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT
INDIA
ELECTRONICS INDUSTRY DEVELOPMENT PROJECT (LOANS 3093-4-5-IN)
PREFACE TABLE OF CONTENTS
EVALUATION SUMMARY ... i
PART I: PROJECT IMPLEMENTATION ASSESSMENT ... 1
Economic Situation and Prospects 1... A. Project Objectives ... I B. Achievement of Project Objectives ... ... 2
C. Major Factors Affecting the Project ... 4
D. Project Sustainability ... 6
E. Bank Performance ... 7
F. Borrower Performance ... 9
G. Assessment of Outcome ... 10
H. Future Operation. ... 10
I. Key Lessons Learned ... 12
PART 2: STATISTICAL TABLES ... 13
LIST OF TABLES Table 1 Summary of Assessments .13 Table 2 Related Bank Loans/Credits .14 Table 3 Project Timetable .15 Table 4 Loan Disbursements: Cumulative Estimated and Actual .15 Table 5 Key Indicators for Project Implementation .16 Table 6 Key Indicators for Project Operation .17 Table 7 Studies Included in Project .17 Table 8A Project Costs. 18 Table 8B Project Financing .18 Table 9 Economic Costs and Benefits .18 Table 10 Status of Legal Covenants .19 Table 11 Compliance with Operational Manual Statements .20 Table 12 Bank Resources: Staff Inputs .20 Table 13 Bank Resources: Missions .21 ANNEXES Annex A Mission's Aide Memoire .23 Annex B Borrower's Contribution -- DOE .41 Annex C Borrower's Contribution -- ICICI. .55 Annex D Borrower's Contribution -- IDBI .67 Annex E Cofinancier's Letter -- SDC.97 A me E . oia ce' etr- D ... 97
This.document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without
World Bank authorization.
IMPLEMENTATION COMPLETION REPORT INDIA
ELECTRONICS INDUSTRY DEVELOPMENT PROJECT (LOANS 3093-4-5-IN)
PREFACE
This is the Implementation Completion Report (ICR) for the Electronics Industry Development Project in India, for which Loans 3093-IN, 3094-IN, and 3095-IN, totaling US$210 million equivalent, were approved on June 15, 1989, and made effective on September 14, 1989.
Loans 3094-IN and 3095-IN, supporting the credit line component, closed on December 31, 1993, compared with the original Closing Date of December 31, 1995. Final disbursements took place respectively on September 14, 1993, and October 8, 1993, at which time balances respectively of US$50.7 million, and US$79.7 million, were canceled. Loan 3093-IN was closed on March 31, 1997, compared with an original Closing Date of December 31, 1995. Final disbursements took place on September 16, 1997 and the balance of US$527,437.86 is being canceled. Cofmancing for the project was provided by the Swiss Agency for Development and Cooperation (SDC), and by the Japan Grant Facility (JGF).
This ICR was prepared by Sidney Thomas, consultant. Contributions, and comments on an earlier draft, by the respective agencies, ICICI, IDBI, the Department of Electronics (DOE), and by SDC, the cofinancier of the manpower component, are gratefully acknowledged. The ICR was reviewed by the present Task Manager, Ms. Naimeh Hadjitarkhani, Messrs. Salman Salman and Cecil Perera, respectively of Legal and Loan Departments, and by Messrs. Nagy Hanna, Joseph Bredie, Robert Schware, and Melvin Goldman who were involved in the project at various times.
The ICR has also been reviewed by the supervising Division Chief (Acting), Mr. Peter Nicholas, and by Ms. Kazuko Uchimura, Project Advisor, Country Department II, South Asia Region (in June 1997). The ICR was also reviewed by Mr. John Joyce, Operations Advisor, SACIN in
September 1997.
Planning for the production of this ICR started during the course of the January, 1997 supervision mission. An ICR mission was conducted in May, 1997. The ICR draws on the work conducted during the course of that last mission, and draws on the findings of that mission, the written contributions already acknowledged, that were made available by the various parties, and on a review of the project files. The participation in, and contributions to the work of that mission by Prof. Jaya Indiresan, consultant to SDC, and Prof. S. K. Shrivastava of the Bank's Delhi Office, are gratefully acknowledged.
IMPLEMENTATION COMPLETION REPORT INDIA
ELECTRONICS INDUSTRY DEVELOPMENT PROJECT (LOANS 3093-4-5-IN)
EVALUATION SUMMARY
1. Introduction. The Electronics Industry Development Project approved by the Board in 1989, went forward at a time when the Bank's project portfolio in the industrial sector comprised activity in a variety of selected subsectors, specifically fertilizer, petrochemicals, cement, and steel, and in a variety of cross-cutting areas, specifically project finance, export development, and technology development. Subsequently, environmental pollution control was added as a special topic pursued by the Bank in its assistance strategy for the industrial sector. But notably, by about 1991, the Bank's assistance strategy had undergone a sea change. Subsector lending ceased with the present electronics project, and interventions contemplated in the areas of capital goods and public enterprise reform were limited to sector work and studies financed under grants for technical assistance. In its place, assistance to India impacting on the industrial sector emphasized policy-based adjustment loans, the first of which was approved by the Board in December, 1991. The switch to adjustment lending itself was made possible only because a government and industry consensus coalesced in favor of reform, which in turn was facilitated by the Bank's protracted subsector interventions and the mass of sector work and subsector intelligence which underlay them. Between 1987 and 1991, the industrial sector work undertaken by the Bank included subsector studies of the automotive, capital goods, electronics, and fertilizer subsectors, along with cross-cutting work on export development, technology development, sick industry policy, industrial regulatory reform, public enterprise rationalization, trade policy reform, and financial sector reform. Within this context, the electronics project should be seen not simply as the last of an era, but more correctly as the last of an era which helped to make the new era possible, one in which Indian banks and Indian industry are increasingly able, without need of Bank support, to mobilize resources for themselves on international markets. The present project helped make that possible (para. 2) .
2. Project Objectives. The Electronics Industry Development Project (EIDP) had the broad objective of supporting the Government of India (GOI) in its goal of fostering an internationally competitive electronics and software industry. The narrower objectives of the project as designed were: (a) to provide technical and financial support to the two largest Development Finance Institutions (DFIs) in improving their capability to identify, appraise, and finance sound projects as well as to improve the performance of existing firms in this sector; (b) to assist in upgrading the training of medium and high level technical and professional manpower needed for the rapid and efficient growth of the industry; (c) to help to lay the basis for long-term continued improvement in the policy environment for electronics; and (d) to help to shape India's strategy, and prepare projects to support, software development.
1 Paragraph references within the Evaluation Summary are to the main text.
3. As stated, these objectives were both clear, and, against the background of the sector work2 which preceded the project, desirable (paras. 1-3). Moreover, these objectives appeared a priori to be both realistic and achievable. While the broader objective of the project was unchanged throughout, the narrow objective related to the role of the DFIs had to be curtailed, the victim of positive policy change in the financial sector. The objectives related to manpower, although cast only on a pilot scale, were institutionally ambitious but the objectives set were both desirable, and ultimately achievable.
4. Implementation Experience and Results. The project comprised three components in four parts, namely: (a) a credit line component to support investment subprojects in the electronics and software industries, and comprising two loans of US$101 million each to the Industrial Credit and Investment Corporation of India (ICICI)--Part A of the Project--and to the Industrial Development Bank of India (IDBI)--Part B of the Project; (b) a manpower component (Part C) financed by a Bank loan of US$8.0 million to the Government of India (GOI), Department of Electronics (DOE), and the Swiss Agency for Development and Cooperation (SDC) grant of CHF25 million (US$16.2 million at appraisal); and (c) a technical assistance component (Part D) financed by Japan Grant of Yen364.5 million (US$2.7 million). The Bank loans and the Japan Grant became effective on September 14, 1989, and the SDC Grant Agreement was signed March 7, 1991. Loans 3094-IN and 3095-IN, supporting the credit line component, closed ahead of schedule, respectively October 28, 1993 and March 29, 1993, after cancellations of the then remaining balances, leaving amounts utilized respectively at US$50.3 million for ICICI, and US$21.3 million for IDBI. Loan 3093-IN to GOI, together with the SDC grant, closed, after two extensions, on March 31, 1997. The Japan Grant was closed ahead of schedule, on April 20, 1996, after cancellation of the then balance of Yenl4O.9 million (US$1.2 million).
5. Overall, the project outcome is rated as a success, although the implementation experience was mixed. The main factor affecting the project was macroeconomic change affecting the financial sector. Rupee devaluation--47 percent between 1989 and 1991-- followed by the introduction of partial convertibility in March, 1992--a move that was welcomed by the Bank and in keeping with its macroeconomic policy advice to the government--completely destroyed demand for the credit line before it was fully committed. As designed, subloans ca[rried a rupee-tied interest rate fixed under the Government-administered Exchange Risk Administration Scheme (ERAS) (para. 5). The interest rate so fixed contained a premium designed to compensate the GoverDment for bearing the exchange risk. This premium was set so high following devaluation, that subloan interest rates rose to 26 percent, while rupee rates on the market ranged on 18-22 percent, and subborrowers could make use of the newly established convertibility of the rupee to have access to foreign currency. A market-based solution was proposed that would have obviated the problem, namely converting the line into single-currency dollars, but the Bank at that time could not change from its currency pool lending instrument, which was unattractive to subborrowers. The intermediaries for their part were not permitted, by charter, from assuming any exchange rate risk. As a result, the credit line component utilized only about US$72 million of a total allocation of US$202 million. This outcome did not, however, affect the pace of investment, as the DFIs were able to meet their commitments to subborrowers using alternative funding (paras. 5, 9). Over the period 1992-97, output growth in the electronics and computer segments averaged 22 percent per annum, comprising 17 percent
2 Report No. 6781 -IN, India: Development of the Electronics Industry: A Sector Report, May 14, 1987.
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for hardware segments, and 53 percent for software segments, a result which suggests that the key objective sought under the project of facilitating viable investment projects in these areas was met (para. 4), though Bank resources for this purpose were in the end not required.
6. The manpower component was also affected by rupee depreciation, the main result being that SDC grant funds were under-utilized by CHF6.7 million (para. 9), since these funds were used in large part to reimburse local expenditures related to the Industry Attachment Program, the Learning Materials Development, Instruction Enhancement Program, furniture for training laboratories, and the hiring of local consultants. The Bank loan of US$8.0 million was however almost fully utilized, as this was disbursed against equipment imports. The manpower component was affected adversely more by delay in implementation. An initial start-up delay in establishing and staffing the Project Implementation Unit (PIU) was never made up, and in the end the project was completed some 15 months behind the original Closing Date (para. 15).
7. The technical assistance component comprised three subcomponents--a software study, a seminar series program addressing "state-of-the art" issues, and support to the DFIs for overseas training of appraisal staff. Apart from the seminar series, which was discontinued after midterm review, this component was well implemented. The software study was hailed as "the single event that transformed the industry" (para. 7). The training program for DFI staff was useful in providing the opportunity for the 32 participants, to see first-hand, plants overseas which exemplify the latest in terms of scale and technology. As a result of the discontinuing of the seminar series (para. 8), cost savings of US$1.2 million under the Japan Grant were secured. An attempt to utilize the savings to fund other relevant studies did not succeed, as continual delays and obstacles caused the Bank to disallow the request for extension.
8. The performance of the Bank was satisfactory in all areas, highly satisfactory in the area of project identification. The project was well chosen as contributing to, and supporting the much larger reform effort that the Bank was urging at the time, while being responsive to the new reform consensus that was emerging within Indian industry. Reform, when it came, impacted this project, and others which helped to foster a positive climate for reform. Project preparation and appraisal, in their technical aspects, were satisfactory. The packaging decision which lumped together the three project components may however have been flawed, since, while they all shared the same starting premise of helping India to achieve an internationally competitive electronics and software industry, they all could have been and were, independently implemented (para. 21). Moreover, the credit line and technical assistance components undoubtedly were delayed to accommodate preparation of the manpower component, which, when it was presented to the Board, was not as far advanced, in terms of establishing the PIU and other implementation arrangements, as it ideally should have been. In project supervision, the Bank's performance was satisfactory, notwithstanding some misunderstanding between the Bank and SDC as to respective roles under the manpower component (para. 26). With respect to the credit line and technical assistance components, the Bank's performance in supervising the!
activities was creative and catalytic, though some intractable problems remained (paras. 25, 27).
9. The Borrower's performance also was satisfactory (paras. 28-29). With respect to the credit line component, the DFIs performed well up until commitments and disbursements stalled, for reasons that have been addressed. Even thereafter, but with alternative sources of funding, they have continued to perform well. With respect to the technical assistance component, performance was mixed, but with the exemplary benefits, in respect of the software study and DFI technical assistance, already alluded to. With respect to the manpower component, while
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there was some initial start-up delay that could perhaps better have been anticipated at appraisal, the implementation thereafter has been exemplary, especially when taking in view the institutionally complex nature of this component, which involved the coordinated action of 37 institutions and the lenders.
10. Summary of Findings, and Future Operations. Overall, the project has helped India in moving toward the objective of achieving an internationally competitive electronics and software industry (para. 30). In terms of project finance, no future Bank operations appear warranted, as the DFIs are able to raise resources on domestic and foreign financial markets without difficulty, and they are now mature institutions that are operationally self-sustaining.
With respect to the manpower component, more work needs to be done, both to consolidate on thle gains achieved under the present project, and in addition, to expand the range of institutions participating. SDC is committed to a follow-on project to assist in this endeavor. The Bank for its part, may also want to consider further support, as there are issues, most notably of student financing (para. 33), in which the Bank as a change agent may be well placed to assist.
11. Key Lessons. The main lessons learnt from the present project may be summarized as follows (para. 34). First, desirable macro-economic policy change can sometimes adversely impact on the stated objectives of ongoing Bank operations designed under a sub-optimal policy framework, as was seen with the collapse of the ERAS scheme (para. 5). As part of project risk analysis, it is sometimes a good idea to prepare for the best, not only the worst. Second, the Bank's involvement at the level of the subsector, through its influence in shaping consensus at the level on industry and of industry associations, and also through the subsector intelligence it affords, can be a desirable complement to macro-economic policy dialog. Third, the project demonstrates that not only the borrowers, but the Bank also needs to be responsive to market forces. Two years before the terms of Bank lending were altered from currency pool to single currency loans, at the borrower's option, this project exhibited such a requirement (paras. 23, 25). Fourth, the collaboration with SDC was not as smooth as it could have been. If an explicit project launch workshop was conducted early on, at which respective roles were clearly defined and a framework for project supervision and monitoring put in place, collaboration with cofinancier could have been more amicable and effective (para. 26). Fifth, early involvement of the implementing institutions with the project preparation activity would reduce time required to bring the implementation unit up to speed with project design and avoid gestation lags that the present project encountered (para. 28). Sixth, the scope of pilot scale projects should include a design for evaluation of the pilot-scale activity, as this would be a necessary precedent to any contemplated scale-up (para. 29).
IMPLEMENTATION COMPLETION REPORT
INDIA ELECTRONICS INDUSTRY DEVELOPMENT PROJECT (Loans 3093-4-5-IN
PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES
1. The Electronics Industry Development Project (EIDP) had the broad objective of supporting the Government of India (GOI) in its goal of fostering an internationally competitive electronics and software industry. The narrower objectives of the project as designed were: (a) to provide technical and financial support to assist the two largest Development Finance Institutions (DFIs) improve their capability to identify, appraise, and finance sound projects as well as to improve the performance of existing firms in this sector; (b) to assist in upgrading the training of medium and high level technical and professional manpower needed for the rapid and efficient growth of the industry; (c) to help to lay the basis for long-term continued improvement in the policy environment for electronics; and (d) to help to shape India's strategy, and prepare projects to support, software development.
2. As stated, these objectives were both clear, and, against the background of the sector work' which preceded the project, desirable. Moreover, these objectives appeared a priori to be both realistic and achievable. This project was put forward, in 1989, at a time when GOI was still feeling its way tentatively toward economic and policy reform aimed at fostering an internationally competitive manufacturing sector. The Bank helped in this endeavor by carrying out a series of subsector studies, a common theme of which was to sketch the outlines of a reform program that sought, in a practical and realistic way, to move from the then status quo which was characterized by heavy import protection, production licensing, and high cost, inefficient modes of production, toward less protection, greater freedom of entry and exit, and more internationally cost-competitive modes of production. In addition to a study of the electronics subsector, the Bank at around that time carried out studies of the automotive, steel, capital goods, and fertilizer subsectors, while maintaining involvement, through on-going projects, in the steel, cement, petrochemicals, and fertilizer subsectors, and more broadly in the financial sector through credit-line operations. Sector work had also been carried out or was underway addressing the cross-cutting areas of public enterprises, sick industry policy, industrial regulatory reform, trade policy reform, and financial sector reform. Within that context of a vibrant policy dialogue, the electronics and software subsector offered itself as an area where concrete help could be provided, while at the same time there appeared reasonable assurance that conditions were being made increasingly favorable for the achievement by India of international competitiveness. The context was therefore in place that would justify the objectives sought under the project, both from the Bank's point of view, and Gol's. Moreover, the objectives appeared realistic, although clear risk factors were identified and assessed right from the beginning.
Report No. 6781-1N, India: Development of the Electronics Industry, A Sector Report, May 14, 1987.
2
3. In the event, while the broader objective of the project was unchanged throughout, the narrow objective related to the role of the DFIs had to be curtailed, the victim of positive policy change (paras. 11-12) in the financial sector. The objectives related to manpower, although cast only on a pilot scale, were institutionally ambitious--the implementation delays experienced might perhaps have been foreseen--but the objectives set were both desirable, and ultimately achievable.
B. ACHIEVEMENT OF PROJECT OBJECTIVES
4. Sector Policies. Narrowly construed, the project had no sector policy objectives, since there were no policy changes that were to be implemented as conditions of the supporting loans or in the course of project implementation. At the same time, the broader objective of fostering an internationally competitive industry carried with it the clear expectation that GOI would follow through on reforms already tentatively started by 1989. This the GOI did. The reforms have been broaclbased, and have by and large proceeded in the desired direction. Restrictions on entry and exit were eased, and tariffs and quantitative restrictions on competing imports have been reduced (Table 1) ensuring continuing competitive pressures whose impact could only be to imnprove the
Table 1: RECENT IMPORT DUTY CHANGES (percent)
Item FY95 FY96 FY97 FY98
(proposed)
Computers and peripherals 65 40 22 22
Integrated circuits 40 25 22 12
Color monitor tubes 40 25 22 12
Hard disk drives and storage devices 65 25 12 12
Electronic computer parts 50 35 22 12
Specified raw materials 20 15 12 12
Specific components 40 25 22 22
Populated PCBs of electronic goods 65 35 32 22
Color picture tubes 65 40 37 32
Glass parts for picture tubes 30 30 27 27
Color TVs in accompanied baggage 80 80 62 52
Source: ICICI.
international competitiveness of the industry. While the present project cannot be directly credited with these achievements, it is not unfair to suggest that work such as was carried out in the context of this project and its preceding sector work helped to crystallize in practical terms the issues involved in contemplating a program of sector reform, and in so doing it helped to build the consensus within industry and government to press forward. Electronics was key in this regard as it epitomized an area where India had potential competitive advantage that could only be dulled within a protectionist regime, reducing prospects for export growth that would otherwise be attainable. Software, in particular, was directly targeted within the project as an area where India could be helped in shaping an essentially outward-oriented strategy, and that intervention worked spectacularly well, with the segment enjoying a sustained growth rate of 50 percent per annum over the VIII-th Plan period (1992-97), moreover with industry insiders directly crediting the work which the project helped to support (para. 7). Not only in software, but more broadly, India of course has opted to push for export growth, the achievement of international competitiveness, and the globalization of the economy, turning away from the inward-oriented, import-substitution strategy that had been pursued for four decades following Independence. It did so with a suddenness and a pace that was not anticipated at the time the project was designed, though it was
3
a result that was hoped for. The Bank's work with India in the electronics and software sector could only have helped in hastening the process. When change came, the Bank changed its lending strategy along with it, and the present project effectively became the last subsector-specific credit- line operation.
5. Financial Objectives. While welcome as desirable change, the reform process negatively affected some financial objectives of the project. Commitments and disbursements under the credit line component first stalled, then dried up completely. It stalled in the wake of rupee devaluation
(47 percent between 1989 and 1991), which rendered insolvent the Exchange Risk Administration Scheme (ERAS) under which subloans were made. This led the ERAS administrators to raise the (rupee-tied) on lending rate to a prohibitive 26 percent p.a. Demand for the credit line then dried up completely when the rupee was made partially convertible, allowing subborrowers to have access to foreign currency without paying more than 18 percent-22 percent for rupee borrowings, less than the rupee-tied rate which the ERAS administrators left unchanged at 26 percent. As a result, only about US$72 million equivalent, out of a total credit line availability of US$202 million for the two DFIs together, were utilized, and the rest was canceled.
6. This cancellation had little effect on the implementation of appraised subprojects, however, as these went through with alternative financing (see Part II, Statistical Tables 8A and 8B).
Subborrowers and others raised 64 percent of project funding, as compared with 37 percent estimated at Appraisal. The DFIs for their part had improved access to the international financial markets, which allowed them to raise foreign currency resources, independent of the Bank, to the tune of US$95.6 million equivalent, when Appraisal estimates had provided for none. This improved access to international capital markets was made possible in part by GoI's financial sector reform measures.
7. Institutional Development. The institutional development objectives sought under the project were well and substantially achieved, in all of the components. In the manpower component (see Section IV of ICR mission Aide-Memoire, reproduced herein as Annex A), which was the most institutionally complex of the three main project components, project objectives were
substantially achieved, and an institutional foundation well laid for the accelerated diffusion of best practice as it relates to manpower training for the electronics and software industry. Institutional development objectives with respect to the credit line component were achieved, with a combined total of 32 DFI staff having been sent overseas, to see first-hand, plants, in both the West and Far East, that represent state-of-the-art in terms of scale and technology in a variety of industry
segments. The DFIs continued to play a major role2 in financing the sustained rapid growth of the electronics and software sector, which registered a combined 22 percent p.a. growth over the period 1992-97, comprising 17 percent for hardware segments, and 53 percent for software. With respect to the software study which was financed under the technical assistance component, this has been referred to as "the single event that transformed the industry," (Annex A, Section V).
The software industry, partly as a result of this intervention, is now well organized, with the National Association of Software and Service Companies (NASSCOM) playing a key and vibrant
2 IDBI's sanctions and disbursements for projects in the electronics subsector increased four-fold between fiscal years 89/90 and 95/96. ICICI's outstanding portfolio in the subsector increased 41 percent between fiscal years 92/93 and 96/97, from Rs 5.6 billion to Rs 7.9 billion.
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role in articulating an export strategy for the country as a whole, and advising GOI on policy changes and actions needed to alleviate constraints as they emerge.
8. The one initiative in the institutional development area which fell flat was the state-of-the- art seminar series. There were two variants of this intervention that were provided for, one under the manpower component, the other under the technical assistance component, both to be implemented by DOE with the help of consultants. Notwithstanding the use of consultants hired to organize these seminars, it was decided after the first of these had been mounted a number of times acrosis the country, that the effort entailed a major supervisory burden for the DOE that was not justified by the benefits secured, nor by the response received from industry. The remaining seminars contemplated were consequently dropped.
9. Physical Objectives. The main physical objectives sought under the project were respectively the investment activity under the credit line component, and the variety of interventions under the manpower component intended to improve educational and training activity relevant to the sector. With respect to investment activity, subprojects identified and appraised under the project were carried out notwithstanding the cancellation of the balances after only about US$72 million were disbursed. Total investment was, if anything, higher than that anticipated at Appraisal, totaling US$662 million, as compared with US$420 million anticipated. With respect to the manpower component, the Bank's allocation of US$8.0 million was almost fully disbursed, while CHF18.3 million (out of CHF25 million) of the SDC grant have been disbursed. This expenditure is reflected in buildings, laboratories, equipment, books, journals, learning materials and curriculum development, etc., representing the physical objectives sought and achieved.
C. MAJOR FACTORS AFFECTING THE PROJECT
10. Factors not generally subject to government control. There were no natural disasters, war or civil disturbance affecting the project. Neither was there any major deficiency in performance of the Bank, cofinancier, or of any contractors or consultants. World market conditions if anything were favorable, as export performance (41 percent p.a. growth over the period 1992-97) was al major factor driving growth in electronics and software.
11. With respect to the credit line component, the major factor affecting the project was macroeconomic change affecting the financial sector. During 1989-1991, India was responding to a number of external shocks by undertaking measures to strengthen the financial system and deregulation of the exchange rate regime. As a result, the ERAS scheme was rendered unworkable (see para. 5). This accounts for the most salient feature of the project which is that the major (credit line) component, for which US$202 million was allocated, was utilized only to the extent of about US$72 million, the rest having been canceled. As already indicated (para. 9), however, the response of the DFIs and subborrowers was sufficient to make up for the IBRD financing shortfall, and subprojects appraised and approved under the credit line by and large went forward as planned, albeit with delays in some instances.
12. This broader macro-economic change affected the manpower component as well, though not as greatly. Rupee devaluation caused the inflation of project cost in rupee terms. It also caused significant cost savings, in respect of the SDC outlays for local expenditures such as
5
furniture, consultants and the like, in terms of foreign currency requirements. Consequently, the allocation of the cofinancier, SDC, was under-utilized to the tune of CHF6.7 million, out of CHF25 million, the original total allocation. The World Bank loan for this component, US$8.0 million, was however almost fully utilized, as it was disbursed against equipment imports.
13. With respect to the abandonment of the state-of-the-art seminar series under the manpower and technical assistance components, the major factor here was the marketing and other outreach that would have been needed to make this activity a success. Insufficient industry response to this marketing outreach was certainly beyond the control of government and its PIU, but the calculated decision thereafter to abandon the activity was. This added to the cost savings under the technical assistance component, which totaled US$1.2 million.
14. Factors generally subject to government control. While the manpower component was in the end well and successfully implemented, it was subject to start-up delay in actions that fell to GOI to implement, specifically the setting up and staffing of the Project Implementation Unit (PIU), the final selection of participating institutions and resource centers under the project, and the concluding of an agreement with SDC for cofinancing the project. The last was anticipated to be concluded by December 31, 1989. For a variety of reasons, principally the conclusion and internal approval within GOI of a Detailed Project Report (DPR), the SDC agreement was not concluded until March 7, 1991. This start-up delay was never made up (para. 15) and the Closing Date had to be extended to accommodate completion of this project component.
15. Factors subject to control of implementing agencies. With respect to the manpower component, the PIU took up its task with great dedication and commitment, coordinating the efforts of some 37 institutions. However, the gestation lags involved in an effort of this magnitude were likely underestimated at appraisal. On the other hand, the PIU may have been slow in correcting an initial understaffing problem. Moreover, the PIU may have been slow also in putting in place adequate project management structures for implementation, monitoring and evaluation. It was not until 1994, that the PIU, with assistance from SDC, mounted a project planning workshop (ZOPP). The workshop helped in bringing about a clear understanding of this project component among the PIs, which responded enthusiastically, setting the stage for excellent cooperation and later successful implementation. Compared to the time agreed at Negotiations, the component has been brought in 15 months behind the scheduled Completion Date of December 31, 1995, which itself was 18 months beyond what was thought actually to be required, per the Staff Appraisal Report (SAR). Delay in establishing and properly staffing the PIU accounts for most of the delay.
A PIU Director was appointed in June, 1990, about a year behind appraisal estimate. The cofinancing agreement between GOI and Switzerland was entered into in March, 1991, later than had been anticipated because the approval by GOI of the Detailed Project Report (DPR) was a condition of concluding this document. The staffing of the Unit remained a problem--as at June 1992, three years later than was anticipated at appraisal, a procurement officer still had not been hired--some of the delay being attributed to the difficulty of finding an individual with prior experience of Bank procurement and disbursement guidelines--and the PIU remained understaffed in relation to the staffing strength envisaged at appraisal. It seems clear that the implementation schedule drawn up at appraisal was over-optimistic, and miscalculated first the internal GOI processes--the preparation and approval of the DPR--needed to get the project underway, and second the time it would take a newly appointed PIU director to staff the Unit and have it fully
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functioning. At the same time, it is hard not to think that the PIU could have moved more quickly in getting up to speed. With respect to the technical assistance component, the seminar series was curtailed, for reasons earlier addressed (para. 8). An attempt was made to utilize the savings so generated by conducting three additional studies following up on the very successful (para. 30) software study, specifically: (i) a study on workforce development in information technology; (ii) a study of financing for software firms, and (iii) a study of export potential of the Indian software industry. The implementation responsibility for these studies was transferred to ICICI in 1992.
However, as of December, 1995, these studies had not yet got off the ground, pending a decision on tax exemption for the consultants. The Bank declined a request to extend the Closing Date for the Japan Grant to March 31, 1997 to permit these studies to be undertaken, citing "lack of action to carry out the studies in a timely manner."
D. PROJECT SUSTAINABILITY
16. The achievement of the objectives sought under the project is likely to be sustainable.
17. DFI Finance. With respect to the DFIs' ability to identify, appraise and finance viable projects in the electronics and software industry, this does not appear supply-constrained or institutionally-constrained at the present. Notwithstanding the cancellation of most of the credit line component, both participating DFIs went on to add significantly to their electronics and software portfolios (para. 9). Financial sector reform, while altering the terms under which it becarne feasible for the Bank to lend to these institutions, strengthened considerably their ability to mobilize foreign currency resources without resort to the World Bank. Both have since been successful in independently raising resources on world markets, eliminating supply-side constraints as a possible bar to sustainability of the kind of activities sought under the project.
18. Any constraints must rest instead with demand, which for the moment shows no sign of abating. Output growth performance of the industry (22 percent p.a. over 1992-97) has far outpaced overall economic growth (6.0 percent p.a.), and industrial sector growth (7.4 percent p.a.). And export performance of the industry (41 percent p.a. over 1992-97) is even more impressive. The policy environment is on the whole favorable to continued efficient, outward- oriented growth of this industry, and the sources of competitive advantage--large domestic market that can support scale economies, and provide a base from which to aggressively pursue export markets, and huge supply of low-cost skilled, technical and scientific manpower--will not soon be vitiated by the economic trends and forces at play, which in the longer run would of course act to eliminate this advantage.
19. Demand side forces are the surest guarantor of sustainability with respect to the objectives sough-t under the manpower component. While there remains some uncertainty as to the modalities of attempting to scale up the pilot-scale exercise that constituted the manpower component of the present project, there is a clamor for inclusion by engineering colleges and polytechnics that were not included in the present project that should almost certainly guarantee a continuing supply response. The cofinancier of the present project, SDC, has already indicated its determination to support a follow-up project, and the DOE, likewise, is committed--and already staffed--to follow through. As they do so, continuing budgetary stringency would likely limit the extent to which the programs supported would continue to be grant based. Already, participating institutions under the
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present project are being forced to pursue programs that would ensure a greater degree of self- sustainability of the initiatives. Enhanced revenue generation is key in this effort, and expected to flow from expanded fee-based (i) continuing engineering education program (CEEP) course offerings, (ii) equipment maintenance activities, and (iii) consultancy services to business and industry. There is a fourth avenue of revenue generation which needs to be actively explored, which is to raise student fees. There is little doubt, based on the income stream that flow to graduates and diplomates in the electronics and computer fields, that higher student fees in these disciplines would do little to dampen the strong demand; there would likely be a concurrent need, however, to institute some sort of student loan scheme to bridge the financial gap for students between current cash outflows to pay tuition, expenses, and living costs, and the future income stream that is almost certain to flow upon graduation. There is a fifth source of revenue generation, which is grant support from industry to endow professorial chairs, university and polytechnic laboratories, etc. This has already happened to a remarkable degree in India, and likely to continue. All in all, indications are that powerful demand forces at work domestically and internationally, and India's strong positioning, make it highly likely that the gains secured under the present project are sustainable.
E. BANK PERFORMANCE
20. Project Identification. Electronics and software industries were correctly identified as thrust areas in which India should aim for international competitiveness. More perhaps than in most industrial subsectors, with the possible exception of the closely related and overlapping subsector of capital goods, electronics and software represent an area where the prize of export earnings and growth is endangered by inward-looking protectionist industrial policy. This project, and the sector work which preceded it, represented a practical "case study" of sorts illuminating the choices faced by India. The consensus emerged within industry that the comforts of protectionism, if it meant high costs and lack of international competitiveness, should be rejected in favor of the greater opportunities offered by an outward orientation, albeit with the dangers and threats that come with tighter integration into the global marketplace. Without that consensus emerging within industry itself, it is unlikely that GOI would ultimately have been as bold as it was
in the reforms that were ushered in starting about 1991 with the massive rupee devaluations whose effects on the credit-line component were negative, as has been seen, but which was the necessary first step of the reform program. This project was well chosen as contributing to, and supporting, this much broader reform effort that the Bank was urging at the time, while also being responsive to the new consensus that was emerging within Indian industry. The reforms, when they came, were however sooner than the project designers anticipated.
21. Project Preparation. Overall, although the project components individually were well conceived and designed, and although they were all linked by the shared premise of a common overall objective--helping India in its supply response to perceived competitive advantages in the electronics and software areas--they could nevertheless have been separately implemented, and arguably should have. As it happened, the credit line component came to an end by March, 1993, ahead of schedule for reasons which have been discussed (para. 5). This eventuality did not in any way affect the justification for and usefulness of the manpower component, which was just then getting off the ground, and which did not come to a close until four years later. Likewise, the activities undertaken with Japan Grant under the technical assistance component could as well, and
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with equal justification, have proceeded in the absence of the other two components. The independence of these components does not straight-away warrant the conclusion that they should have been implemented separately, as a priori there are advantages and disadvantages to both options. The disadvantages were that by forcing the three components to march in lock-step, the credit line and technical assistance components were delayed because of the manpower component, since these could have followed on from the 1987 sector report much more quickly than in the end they did, while the manpower component, although well designed, was institutionally not ready when the project went to the Board, as evidenced by the institutionally-oriented delays (paras. 14- 15) that then ensued. As against these disadvantages, and associated costs, the advantages appear to be limited to the illusionary one of justification--the manpower component could not stand alone in terms of bureaucratic justification, notwithstanding all its institutional complexity, because the amount of the loan (US$8.0 million equiv.) would have been too small, while without the institution-building features of the manpower and technical assistance components, the credit line component would have been deemed insufficiently innovative. Whatever might have been the compulsions a priori that drove the decision to put three independent, though related, components together, the outcome ex post seems clear that project preparation was the worse for it. Nor were there scale economies in project supervision, if any, that could not also largely have been secured by having three separate projects, each implemented on its own natural timetable.
22. Taking the components individually, however, and with respect in particular to the quantity and quality of staff that were deployed to assist the Borrower in project preparation, and the quality of the work that was produced, the Bank performed very well.
23. Project Appraisal. The appraisal document was well written, and the judgments expressed in the document were well founded and in places prescient in describing the risks that threatened successful implementation. The riskiness of the ERAS arrangement under the credit line component was well identified and discussed. The risk of implementation delay in respect of the manpower component also was well identified in the appraisal report. In the event, it is hard to fault the appraisers for pressing ahead with the ERAS design, since even after its demise, the Bank had not the flexibility in its lending instruments to fashion a market based solution to the problem.
(Subborrowers would have been willing, after the collapse of ERAS, to borrow in dollars on a single currency basis--and assume the exchange risk in so doing--but not the Bank's currency pool.
Two years on, the Bank amended its offerings to allow single currency loans, but too late to save the line which had been long canceled by that time.) With respect, however, to the manpower component, it is difficult in hindsight to see how the appraisers could have been as optimistic as they were with respect to the implementation schedule. The appraisers anticipated that additional supervision at start-up would have reduced the risk, but again in hindsight, the gestation delays involved in producing a Detailed Project Report, and in staffing the PIU could not have been amenable to solution through additional supervision. These drawbacks however are clear only in hindsight, for which reason the appraisal cannot be rated less than satisfactory.
24. Project Supervision. All implementing entities have expressed satisfaction with the quality of the Bank's supervision.
25. With respect to the credit line component, the average response lag for subloan applications was 14.1 (calendar) days, which is acceptable, though not exemplary. Emerging problems under
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this component were quickly identified by supervision missions, and the response by Bank staff in attempting to resolve the issue was creative and thorough. In the end, it was the uniqueness of the Bank's currency pool which prevented a market-based solution from emerging, following the collapse of the GOI-sponsored ERAS scheme for onlending. That the Bank later extended its single currency loan offerings may be attributed in part to the work that was done in the context of project similar to this one.
26. With respect to the manpower component, the Bank in its supervision reporting accurately conveyed the facts at issue, although the ratings, in hindsight, considering the considerable start-up delays that were experienced, may have been too high. One may speculate that more severe ratings would have engendered a more proactive stance, and helped the PIU to achieve a faster start-up. The collaboration with the cofinancier worked well, though not without some misunderstandings. The Bank envisaged from the outset that SDC would play an active role in supervision, given its "long experience in India",3 while the SDC seemed at first uncertain as to how proactive they should be given that it was a "Bank" project. Later, however, SDC played a critical role in helping, together with the PIU, to organize the ZOPP4 workshop which was acclaimed by all participants as helping to lend clarity to the framework for project implementation, monitoring, and evaluation. Thereafter, SDC took the lead role in conducting the mid-term review (May, 1995) for this component, with the Bank making only an ex post contribution. After the mid-term, the Bank altered its supervision arrangements, making use on a day-to-day basis of selected staff at the Resident Mission. This arrangement worked well, and helped to expedite remaining procurement and other supervision issues that emerged from time to time.
27. With respect to the technical assistance component: The software study was well implemented, and the results met with acclaim in India in software circles. The training program for the DFIs was also well implemented, also with positive results for the DFIs. And the seminar series program was in the end discontinued for reasons previously mentioned (para. 8). The Bank's performance in supervising these activities was creative, and catalytic, as staff sought to leverage initiatives under this project, in particular the software study, into a broader involvement in support of informatics development. GOI in fact requested follow-up assistance in this area from the Bank, which however declined, as by that time the Bank's approach to industry lending had changed (para. 4). When the seminar series program was discontinued, staff attempted to make use of the savings by helping to identify, and draft terms of reference for, a number of additional studies in the informatics area that were worth pursuing, but which in the end became bogged down by a variety of delays and obstacles that caused the Bank to decline the Closing Date extension that would have been needed for these to go forward (para. 15).
F. BORROWER PERFORMANCE
28. The commitment of all the parties to this project was very high. The DFIs, until the ERAS problem arose, were performing in line with expectations in terms of commitments and disbursements, and the quality of the subproject appraisals was generally adequate. Of 108
subloans approved (before cancellations), only two occasioned queries, for which satisfactory
3 Per the aide-memoire of the January/February, 1990 mission.
4 German acronym for Goal Oriented Project Planning.
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answers were provided. One project was rejected, but only because it ventured into the area of telecommunications, which the Bank did not want included under the present project. The level of project ownership and conmmitment within DOE was very high, and was instrumental in bringing the manpower component to a successful conclusion, despite start-up and institutional difficulties.
DOEi's performance in this regard may be rated as exemplary. There was arguably a deficiency in preparation, however, in that the PIU Director was not appointed already at the preparation stage, to forestall start-up delays in implementation. To the extent this was due to procedural constraints related to the timing of project approval and funding commitments, these may need to be re- examined if future projects are to be implemented without start-up delays. The technical assistance component, except for the seminar series program, was well implemented by the Borrowers--the DFIs and DOE. And in the case of the seminar series, the action taken to discontinue was well considered and timely. The savings thereby generated offered up an opportunity to carry out some additional studies in the informatics area but this opportunity went unseized for reasons previously addressed (paras. 15, 27). Compliance with covenants was satisfactory, albeit with occasional delays in the provision of audit reports.
29. With respect to the follow-up action which is needed, in the case of the manpower component, some more work than has so far been done is required to draw the lessons of the pilot scale operation which constituted the present project, precedent to the scale-up exercise that must now be attempted. These issues are addressed in the mission's aide-memoire (Annex A, paras.
4.10-4.17). Ideally, a design should have been included for evaluation of the pilot-scale activity, as this would be a necessary precedent to any contemplated scale-up.
G. ASSESSMENT OF OUTCOME
30. Notwithstanding the cancellation of most of the credit line component, and the delay (para.
15) in completing the manpower component, the outcome of this project must be rated as satisfactory. Growth in the electronics and software subsector has been impressive, and the DFIs have played a major role in this result, even if resources in the end had to be mobilized from sources other than the Bank--a result which in itself represents a broader success of the Bank in its long association with the two DFIs concerned. Likewise, DOE is now well staffed and positioned, having completed the manpower component, to mount the scale-up exercise which is required to assure that the future supply of graduates and diplomates in this field would be of even higher quality than they have been in the past. This is key to continuing success, as India faces a moving target in terms of the global competition in this subsector. Finally, the software study undertaken as the major part of the technical assistance component has been hailed within industry circles as the "single event that transformed the industry," and so may be credited, at least to some degree, with the enormous success that the Indian software industry has enjoyed since that report was completed.
H. FuTuRE OPERATION
31. With respect to the identification, preparation, appraisal, and financing of investment projects in the subject subsector, it seems clear that the DFIs that participated in the project have matured to the stage where further assistance from the Bank is not per se required, although the perspective and observations of the Bank are valued and welcomed by these institutions. These
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DFIs are now able to mobilize resources on international and domestic markets, and so the Bank's erstwhile role as lender of last resort appears no longer to be required. Considering the structure of Bank charges, which includes commitment and guarantee fees, it may even be the case now that the Bank is no longer competitive as a source of long-term funds for these DFIs, except in so far as the longer-term maturities that the Bank can offer makes an important difference to the volatility of onlending rates, and in terms of liability mix and management.
Therefore, the role of the Bank as an agent of institutional development, and as a source of long term foreign currency resources, has now by and large been rendered redundant by success. This leaves a role for these DFIs, vis-a-vis the Bank, as administrators of funds sought to be allocated by the Bank for such purposes as environmental pollution control and protection of the ozone layer. But not for electronics and software. Therefore no future intervention by GOI or the Bank is envisaged in the area of providing project finance. What GOI must continue is its broader reform program intended to reduce levels of protection and costs even further, and thereby to strengthen the international competitiveness of local industry even further.
32. With respect to manpower, much remains to be done however. The cofinancier, SDC is committed to supporting a follow-on operation intended to help secure the self-sustainability of the initiatives launched under the present project. This is a worthy and needed endeavor, but it needs to be supplemented by action aimed specifically at additionality, in terms of the number of engineering colleges and polytechnics allowed to participate in the improvement schemes designed under the present pilot scale operation.
33. There is a potential institutional development role here for the Bank, as there are a number of anomalies related to educational finance, where the Bank may conceivably be able to play a role as change agent. Sustainability is crucially dependent on revenue generation by participating educational institutions, and a key overlooked source of revenue generation is student fees, which are grossly subsidized at the moment, even though students upon graduation attract relatively high salaries, and so ought to bear a much higher fee burden. It is of course acknowledged that any increase in student fees would imply a need for students to be financed in the interim by an appropriate student loan program. These issues transcend electronics and computer education, but the huge student demand in these areas makes it potentially a test area for broader educational finance reform. It should be pointed out that GOI has instituted some change in this regard already, although much remains to be done.
Technical institutes have been permitted to be established on a self-financing basis. Student fees charged at Government and aided engineering colleges/polytechnics have been raised significantly, while at the Indian Institutes of Technology (IlTs), student fees have increased from Rs 200 per year in 1989 to Rs 15,000 at present. To the extent such changes will require supporting institutional change in the area of student finance, the Bank may have an opportunity to fulfill a function as a change agent in this regard, should the GOI so desire.
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I. KEY LESSONS LEARNED
34. The key lessons learnt from the project may be summarized as follows:
a) desirable macro-economic policy change can sometimes adversely impact on the stated objectives of ongoing Bank operations designed under a sub-optimal policy framework, as was seen with the collapse of the ERAS scheme (para. 5). As part of project risk analysis, it is sometimes a good idea to prepare for the best, not only the worst;
b) the Bank's involvement at the level of the subsector, through its influence in shaping consensus at the level of industry and of industry associations, and also through the subsector intelligence it affords, can be a desirable complement to macro-economic policy dialog;
c) the project demonstrates that not only the borrowers, but the Bank also needs to be responsive to market forces. Two years before the terms of Bank lending were altered from currency pool to single currency loans, at the borrower's option, this project exhibited such a requirement (paras. 23, 25);
d) the collaboration with SDC was not as smooth as it could have been. If an explicit project launch workshop was conducted early on, at which respective roles were clearly defmed and a framework for project supervision and monitoring put in place, collaboration with cofinancier could have been more amicable and effective (para. 26);
e) early involvement of the implementing institutions with the project preparation activity would reduce time required to bring the implementation unit up to speed with project design and avoid gestation lags that the present project encountered (para. 28); and f) the scope of pilot scale projects should include a design for evaluation of the pilot-scale
activity, as this would be a necessary precedent to any contemplated scale-up (para.
29).
