Document of

The World Bank

FOR OFFICIAL USE ONLY

t-N 3e093-/'V4.A/~~4

-3 o e S- /A Report No. 7704-IN

STAFF APPRAISAL REPOI'T

INDIA

ELECTRONICS INDUSTRY DEVELOPMENT PROJECT

MAY 24, 1989

Asia Country Department IV (India)Industry and Finance Operations Diviqion

This document has a restricted distribution and may be used by ecipients only in the perfonmnace oftheir officral duties. Its contents may not otherwise be disclosed without Wodd BDnk author4oo. 0

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29& =Y EOUIVALENTS

Rs 1 - US$0.067Rs 15 - US$1.00

FISCAL YEI=

Government of India - April 1 - March 31IDBI - April 1 - March 31ICICI - April 1 - March 31

ABBREVIATIONS AND ACRONYMS

ASIC - Application Specific Integrated CircuitsCAD/CAM - Computer Aided Design and ManufacturIngCEDT - Center for Electronics Design and TechnologyDFI -Development Finanice InstitutionEPABX - Elect.onics Private Auxiliary Branch ExchangeERAS - Exchange Risk Administration SchemeEximbank - Export-Import Bank of IndiaFERA - Foreign Exchange Regulation I,tGOI - Government of IndiaIC - Integrated CircuitICICI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaIIT - Indian Institute of TechnologyJGF - Japan Grant FacilityLSI - Large Scale IntegrationMES - Minimum Economic ScaleMODVAT - Modified Value Added TaxMRTP - Monopolies and Restrictive Trade Practices ActOGL - Open General LicensePIU - Project Implementation UnitPMP - Phased Manufacturing ProgramPSE - Public Sector EnterpriseRBI - Reserve Bank of IndiaREP - Import ReplenishmentSCL - Semiconductor Complex Ltd.SDC - Swiss Development CooperationSFC - State Financial CorporationSSI - Small Scale IndustryVLSI - Very Large Scale Integrated Circuit

FOR OFCIAL USE ONLY

~PA

ELECTRONlICS INDUSTRY DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

IAN AND PROJECT SUMMARY ....................................T i

I. INTRODUCTION ................................................. 1

II. SECTOR BACKGROUND ............................................ 2

A. Electronics Industry Structure and Performance ........... 2B. Assessment of Competitiveness ........................... 4C. Potential and Prospects for Development .................. 5D. Policy Environment ....................................... 6E. Policy Constraints ....................................... 10F. Manpower Constraints ..................................... 11G. The Financial Sector.. ....... ,... 12

III. THE BANK'S ROLE IN INDUSTRY .................................. 18

A. Previous Bank Lending to Industry ........................ 18B. T"s Bank's Future Lending Strategy ....................... 19C. Electronics in Bank's Lending ............................ 19

IV. THE PROPOSED PROJECT ......................................... 2.

A. Project Objectives ....................................... 21B. froject Description .. 21C. Term Credit to Expand and Upgrade Electronics Capacity... 22D. Manpower Development and Training . . 23E. Technical Assistance .. 25

(i) Software Capability Devrelopment .................... 25(ii) Seminar Program .................................... 26(iii) Training and Technical Assistance for the DFIs ..... 26

F. Project Cost ......................... 27G. Financing Arrangements .................... 28

This report is based on the findings of an appraisal mission to India inJanuary 23 - 'larch 8, 1989. Mission members were Messrs. G. Gowen (SeniorEconomist), K. Arichandran (Senior Financial Analyst), J. Bredie (TechnicalEducation Specialist), Arnold Miller (Consultant), B. Wadia (Consultant),A. Bhojwani (Consultant), P. Reymond (Consultant), J. Delisle (Consultant,Swiss Development Cooperation), and A. Pittet (Consultant, SwissDevelopment Cooperation). The report was prepared by Messrs G. Gowen,K. Arichandran, and J. Bredie.

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

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Pag-e No.

V. THE PARTICIPATING FINANCIAL INSTITUTIONS ..................... 30

A. Industrial Development Bank of India (IDBI) .............. 30B. The Industrial Credit and Investment Corporation

of India Limited (ICICI) ............................... 31

VI. THE PROPOSED LOAN ........................................... 33

A. Terms and Conditions ..................................... 33B. Administrative Procedures ................................ 34C. Project Benefits and Risks ............................... 37

VII. AGREEMENTS AND RECOMMENDATIONS ............................... 39

A. Agreements ................................... 39B. Recommendation ................................... 40

ANNEXES

1. Electronics Production 1980-87

2. Manpower Development

3. Technical Assistance

4. The Industrial Development Bank of India (IDBI)

5. The Industrial Credit and Investment Corporationof India Limited (ICICI)

6. Documents in Project File

INDIA

ELET=RONICS INDUSTRY DEVELOPMENT PROJECT

Loan and proiect Summary

B kiorrowers (a) India, acting by its President.(b) Industrial Development Bank of India (IDBI);(c) Industrial Credit and Investment Corporation of

India (ICICI).

Guarantor of theLoans go IDBIand iCI i India, acting by its President

Loan Amounvts : US$210 million equivalent to be lent as follows:(a) US$8 million equivalent to India;(b) US$101 million equivalent to IDBI; and(c) US$101 million equivalent to ICICI

Terms Twenty years, including 5 years of grace, at theBank's standard variable interest rate.

Relending terms : Development Finance Institutions (DFI) CreditComponent. The loans to IDBI and to ICICI forfixed assets and permanent working capital would berelent in foreign exchange at the Bank's standardvariable interest rate plus 2% to provide a spreadto the DFIs, or in rupees at the prevailingExchange Risk Administration Scheme (ERAS) rate(presently 15% with a cap rate of 18%). This ratewould be adjusted according to ERAS terms to coverthe foreign exchange and interest rate risks.

ProiectXDescription : The project would include the following components:

(a) private and joint sector investment (US$420million) in fixed assets and permanent workingcapital with Bank financing through IDBI and ICICI(US$202 million) us a new "single window"mechanism for financing of both term and workingcapital requirements of sub-borrowers; (b)improvement of skilled man-power development andtraining capacity of selected education andtraining institutions (US$26.8 million) throughgrants from DOE (financed by US$8.0 million fromthe Bank, $16.2 million grant funds expected fromthe Swiss Development Cooperation and US$2.6million from GOI) for equipment, training and otherassistance; and (c) technical assistance (US$3.0million) for: (i) development of the computersoftware industry studies, seminar, and projectidentification; (ii) support of electronics policy

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development through seminars and studies; and (iii)upgrading the capability of financial institutionsto screen and appraise electronics projects(financing of US$2.7 million expected from JapanGrant Facility, $0.2 million from GOI and US$0.1million from the DFIs. The total cost of theproject would be US$450 million.

Risks : The credit component would provide longterm financeto about 30 subprojects, resulting in totalinvestment of about US$420 million and employmentof about 12,000 people. It would initiate reformin the system for financing industrial investmentsin the direction of increased institutionalflexibility. The manpower and training componentwould result in an upgraded capability to produce4000 middle and higher level technical andprofessional staff annually in the fields ofelectronics and computer software. The major riskof this project is that the Government willimplement further needed reforms too slowly. Thiswould commensurately reduce the pace at which theindustry achieves lower costs and increasedefficiency, which in turn would lead to less thanexpected efficiency of subsequent users throughoutthe economy. Recent policy reforms provide asufficient basis for the project, and the Bank andGovernment will continue to discuss further reformsboth in the context of macro-economic and sectorwork and the proposed project. ERAS scheme is newand will require close monitoring to ensure thatrelending rate adjusts properly to marketconditions, and the needs of financial institutionsand sub-borrowers for some predictability in theirfinancial planning. Finally, with respect to themanpower component there is a potential risk ofdelays in implementation because the organizationalset up is new, and the institutions are notfamiliar with Bank procedures. Additionalsupervision at start up will help reduce this risk.

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Estimated CGosts:

Local Ensign Total------- (US$ million) ------

Credit Line for ExpansionFixed Assets 144.1 150.0 294.1Working Capital 74.1 52. 1261.

Sub-total 218.2 202.0 420.2

Manpower Development 19.3 7.5 26.8Technical Assistance & Stvt.ies 0.6 ,2.4 3,0

Total 238.1 211.9 450.0

Financing Pla:

Bank 0.5 209.5 210.0GOI 2.8 -- 2.8Development Finance Institutions 50.7 -- 50.7Subproject Sponsors & others 167.6 167.6Swiss Development Cooperation 16.2 16.2Japan Grant Facility 0.3 2.4 2.7

Total 238.1 211.9 450.0

Estimated -Lsbursements:

Bank FY 91 22 i3 2& 95 96----------------- (US$ million)--------------

Annual 19.6 60.5 71.2 41.4 14.7 2.2 0.3Cumulative 19.6 80.2 151.4 192.8 207.5 209.7 210.0

Economic Rate of Return: Subprojects financed by the FinancialIntermediaries would have a minimum economic rateof return of 12%.

INDIA

ELECTRONICS INUSTRY DEVLPNE PROJE

STAFF APPRAISAL REPORT

I. INTRDUCION

1.01 India has the potential to develop a competitive electronicsindustry of international stature based on its large pool of high levelscientific and technical manpower, its growing and potentially vastdomestic markets, and the significant existing industrial base with itslarge pool of capable managers and entrepreneurs, including Indians nowresident abroad. After several decades of following restrictive regulatorypolicies and an inward looking trade regime, the Government, in recentyears, has enacted a far-reaching program of policy reform, which forelectronics goes further than for almost any other industry. It provides asound initial basis to try to realize this industry's immense potential forincreased production and employment and as a source of productivityimprovements throughout the economy.

1.02 The proposed Electronics Industry Development Project would assistthe Government in its further efforts to foster this industry's sounddevelopment with the objective of eventually reaching a level ofinternational competitiveness. First, it would provide technical andfinancial support to the two largest development finance institutions toimprove their capability to identify, appraise and finance economicallysound projects in this sector. Second, it would help to improve thequality of medium and high level technical and professional manpower neededfor the industry's rapid and efficient growth. Third, it would lay thebasis for expanding capacity in the most promising area, computer sofhrare,by identifying projects and measures to provide needed infrastructure.Finally, the project would provide an important basis for on-goingdiscussions between the Government and the Bank on policies for theelectronics sector and for industry as a whole.

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II. SECTOR ACKGRO

A. Electronics Industry Structure and Performance

2.01 The world electronics industry reached an estimated worldvidkproduction of nearly US$500 billion in 1987, its rapid growth spurred bytechnological advances that have lowered the cost of information processingby more than 20S per year for more than four decades. It now accounts forabout 108 of worldwide manufacturing and its impact, through communications,broadcasting, and information technology reaches to every corner of theworld economy. The Indian electronics industry, established almost 25 yearzago, accounts for only about 0.6% of international electronics production.Relatively stagnant during the 1970s with an annual growth rate of 10% inreal terms, it has begun to catch up, its growth rate accelerating to 18%per annum in the first half of the eighties and to nearly 25% per annum in1985-87. Gross output reached a level of Rs 47.2 billion (US$3.6 billion)in 19e7. The industry now comprises more than 5% of manufacturing valueadded in India and is expected to continue its rapid rate of expansion.

2.02 The subsector is domestically oriented. Total exports in 1987(including free zones) reached only Rs 3.1 billion (US$240 million) andaveraged less than 7; of output, of which 42% originate from the oldest andmost active export processing zone on the outskirts of Bombay. Except forChigia, this share is low for developing countries that have significantelectronics subsectors. Imports meet only 25% to 30% of the demand forfinal products. However, except for such traditional consumer goods asradio receivers and black-and-white television sets (B&W TVs), whose inputsare mostly produced locally, the subsector imports about half of therequired materials and components.

2.03 Public sector enterprises (PSEs) account for about 40% on averageof the subsector's output, ranging from 104 in consumer goods to nearly 100%in communications and aerospece and defense. Most of the 3,000 or soelectronics firms are small-scale industries (SSIs), which produce about 25%of total output and are especially important in consumer electronics.Medium and large private enterprises account for about 35% of total output;many of the large private firms have had long-standing associations withmultinationals.

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2.04 Electronics production in 1987 was as follows:

USS billiU *

Consumer electronics 1.42 38.6Industrial electronics .54 14.5Data processing &office supplies .30 7.9

Communications .56 15.0Aerospace and defense -24 6.4

Sub total 3.04

Components .55 14.8Export processing zones .10 2.8

Grand total 3.69 100.0

Source: Depa-tment of Electronics

Expansion in consumer electronics, particularly color televisionproduction, has helped to accelerate the subsector's recent growth. Thissegment now accounts for nearly 40% of total electronics output. Althoughthe production of data processing equipment has grown rapidly because ofGovernment-sponsored modernization programs in industry and in banking,output in this segment only reached about 46,000 units in 1987 (mostlymicrocomputers), representing 8% of India's electronics subsector comparedwith a 20% share ir. other countries. The industrial, telecommunicationsand components segments each command about 15% of the subsector's totaloutput. In telecommunications, two large PSEs dominate: Indian TelephoneIndustries and Hindustan Cables Limited. Industrial electronics, whichincludes several large PSEs, is concentrated in industrial process controlsand power electronics. In this segment, several firms with internationalties have been able to export worldwide. A breakdown of electronicsproduction, 1980-87 is given in Annex 1.

2.05 The structure of the components segment is highly fragmented, witha few very large firms at one end and many small producers at the other.Production is largely for use in radio and television sets. Semiconductors(mostly discrete devices) account for only 12% of India?s components outputcompared with 30% to 50% in industrialized countries. Small- and medium-scale integrated circuits (ICs) are produced by a single PSE, BharatElectronics Ltd. A second PSE, Semiconductor Complex Ltd., was producinglarge-scale integration (LSI) ICs partly from imported wafers until itsplant was destroyed by fire in early 1989 (para 2.15). Very large-scaieintegration (VLSI) ICs are still imported. In total, locally produced ICsmeet less than 10% of demand and account for only 3% component productioncompared with a much larger share worldwide.

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B. Assessment of Competitiveness

2.06 India's electronics subsector has developed in an environmentprotecting it from both domestic and international competition andinsulating it from technological progress. As a result, processtechnologies are generally outmoded (8 to 20 years behind); producttechnologies are 5 or 6 years behind; and Indian electronic goods generallyhave very high production costs and prices. For example, for 10 majorelectronics products, India's factory prices in 1986 exceeded world pricesby 20% to 170% and many were of inferior quality. Products with pricesnear or below world prices, such as in printed circuit boards (PCBs) andcomputer software, are rare.

2.07 Several important factors account jor the high production costsand prices. Production scales are substantially smaller than internationalminimum economic scales (MES) of leading multinationals by factors of 20 to100 in some product lines, which affects raw material prices, capacityutilization and other costs. Indian electronics industries also bear highcustoms duties on imported components inputs and several other indirecttaxes so that total indirect taxes comprise 20% to 40% of the sales price.As scales are small most firms pay 15% to 40% above world prices obtainablethrough bulk purchase of materials and components. Profit margins for welloperated Indian firms are high by international standards for electronicsindustries (from 18% to 40% of factory prices), reflecting lowercompetitive pressures and short term profit horizons. Other factors whichhurt competitiveness include the following: India's relative isolationfrom world markets, which limits exposure to product trends and changingtechnologies; the related problem of supply uncertainties stemming fromreliance on imported raw materials, components and other needs as well asdelays due to customs administration (all of which result in costlyinventories); the lack of suppliers, precision services, ii-id otherindustrial and service "infrastructure" of adequate technologicalcapability and re'liability; limited and unreliable communications services;and Government regulation and controls. In addition, Indian electronicsfirms face shortages and interruptions of power, communications, and inputsupply (which contribute to costly inventories), and labor regulations thatlead to inflexibility and encourage overstaffing.

2.08 Although the subsector is generally inefficient by worldstandards, a few firms in India now produce competitively with domesticprices that, if adjusted for indirect taxes and international profit norms,would approach world prices. These firms are typically found in productareas (such as B&W TVs) characterized by relatively simple and maturetechnologies that have been fully assimilated, and by domestic marketslarge enough to allow economies of scale. In addition, product areas thatrequire a significant level of skilled labor such as PCBs, individualelectronics products with a high design content, and above all, computersoftware, perform well. In most product areas, however, even the mostefficient firms are uneconomic, exhibiting one or more of the followingcharacteristics: production is highly capital Intensive; technology isdifficult and has not been mastered because of inadequate technologytransfer arrangements; the market is too small to allow adequate scale, orelse the technology appropriate for the size of the market is obsolete; and

high protection allows "kit assembly" from foreign sole-source sipplierswith resultant very high raw material costs.

C. Potential and Prospects foX Development

2.09 India has the potential to develop a competitive electronicsindustry. Its main advantageo are its unusually large pool of high levelscientific and technical manpower whose average wages are a tenth those ofthe U.S. and Western Europe- its growing and potentially vast domesticmarkets; and the significant industrial base -- including a long-standingelectronics industry -- that has already developed with its pool of capableand experienced managers and entrepreneurs. Also, a large number of non-resident Indians with technical and managerial experience are a source ofentrepreneurship and of assistance in developing collaborative arrangementswith foreign sources of technology and finance.

2.10 These advantages need qualification, however. Skilled manpowerlacks training and exper'.ence -- constraints which this project will helpto address (paras. 4.07-4.13). Markets are not as large as India's vastpopulation would suggest because low incomes coupled with high pricesexclude much of India's population from them; in absolute size they arecomparable to Turkey or the Philippines. The industrial base and itsmanagement evolved under a highly protected environment that until recentlytended to stifle competition, allowed survival (indeed, prevented exit),despite outmoded or obsolete technical practices and limited scales ofoperations, and fostered inefficient managerial practices. As discussedbelow (paras. 2.17-2.23), there have been major improvements in this policyframework.

2.11 The Bank prepared a study of this sector,J/ submitted to theGovernment in July, 1987, which indicates that overall demand forelectronics equipment is expected to expand In real terms at 18-20% overthe medium term. Exports will grow even faster but will remain at lessthan 10% of total production. The study identified a number of productgroups which are already competitive or can become so. The most promisingexhibit many of the following characteristics: high need for engineeringand skilled manpower in design, production, sales and installation, andservicing; a domestic market large enough to allow production at sufficientscale; the technology required for production can be assimilated,effectively used, and kept up to date given the present levels oftechnology and supporting infrastructure in India; relatively low intensityin use of capital and materials; high transport costs relative to productvalue; and local availability of critical inputs and experience atreasonable costs.

2.12 The most promising product groups for the domestic industry, whichwill be the primary focus of the industry's development in the next decade,are in the professional electronics segments of industrial electronics,computers and data processing including software, and te3ecommunicationsequipment. These segments include many product groups with prospects of

1/ India - Development of the Electronics Industryl A Sector ReRort, No.6781-IN, (June 26, 1987), (Project File, No. 1).

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becoming competitive (e.g. in instruments, process controls, EPABXs)because they are skill intensive, have relatively low capital and rawmaterials needs and do not require high volumes and large scales.Attempting products which are technically very difficult, such as state-of-the-art mainframe computers and integrated circuit testers, may be verycostly because their technologies are closely held, fast changing andrequire a hlgh level of R&r to assimilate as well as strong supportingtechnical and industrial service infrastructure.

2.13 Computer software, though still a tiny industry (estimated valueof production in 1987 was about US$160 million), is particularly promisingbecause of its high degree of skill intensity. Exports reached US$57million in 1987 and are estimated to have grown to US$70 million in 1988.Though the industry is dominated by two firms, which account for about 60%of total exports, there are dozens of smaller firms whose potentialcontribution to both domestic production and exports is constrained by lackof access to marketing expertise, software productivity tools and hardwareneeded for software development, and risk capital to finance costs ofproduct development and marketing. A technical assistance component of theproject addresses these issues (paras. 4.15-4.16). There is a moregeneralized constraint from lack of specially trained manpower as discussedbelow (paras. 2.27-2.28) which the project will also address (paras.4.07-4.13).

2.14 With regard to consumer electronics, domestic demand can supportproduction at reasonable scale of some major *onsumer items (radios, black-and-white and color TVs) as well as major inputs for these products such ascolor picture tubes and glass shells that are used in color picture tubes.Export of some consumer items to other developing countries has begun andcan be expanded to many consumer products, such as black and white TV,which are at the lower end of the technology scale and whose production isbeing relinquished by producers in more developed countries where thedemand has stagnated or declined.

2.15 In the critical area of integrated circuit production,particularly at very high levels of technical difficulty such as VLSIchips, Indian producers face much the same difficulties as for "high tech"professional electronics products: closely held, fast-changingtechnologies, and a requirement for a high level of R&D capability which inturn requires the availability of high-tech supporting services, andincreasingly costly investment due to rising scales and capitalintensiveness. India has been trying to develop a microelectronicscapability, particularly for large scale integrated circuits throughSemiconductor Complex, Ltd. (SCL), the DOE-administered wafer fabricationplant in Chandigarh that was completely destroyed by fire in February,1989. Though in production for more than four years and capable ofexporting simpler ICs such as clock chips, it had not begun to achievecompetitive efficiency. The Government is now assessing how best toreplace this loss.

D. Policy Environment

2.16 Past Policy Framework. The very high prices and variable qualityof electronic products have largely been the result of the industrial and

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trade policies followed until recently. These policies, which were anintegral part of the industrial policy framework that emerged in the latesixties and early seventies, emphasized self-sufficiency, indigenoustechnological development with minimal recourse to foreign technology,reservation of key products to the public sector, concessions to small-scale producers and pressure for the regional dispersion of production.These policies in electronics, resulted in a capability to produce a largenumber of products in each of the electronics segments. However, theyimposed major constraints on the development of an efficient electronicssubsector:

- The industrial licensing system severely regulated entry andrestrained growth of the most efficient producers. Larger firms,especially those subject to the Monopolicies and Restrictive TradePractices Act (MRTP) and Foreign Exchange Restrictions Act (FERA)were inhibited from expanding. Some 24 product areas includingsome that needed scale for efficiency (especially in consumerelectronics and components) were reserved to SSIs. Exit ofinefficient firms was discouraged by a combination of laborregulations, restrictions on asset transfer and bank lendingpractices. These policies and procedures, together with thoselimiting total domestic production capacity to the perceived sizeof the market, restrained domestic competition in importantproduct areas.

- The reservation of some segments to the public sector(telecommunications and defense) eliminated private-sectorcompetition and allowed inefficient monopolies to develop;

- The emphasis on technological self-sufficiency led to backwardnessin processes and products. The policy climate did not encourageforeign collaborations and many joint ventures involved technologysufficient to enter production but not to update thereafter.Restrictions on royalty payments and other limitations did notprovide sufficient incentives to encourage foreign firms to enterintc joint ventures especially those firms with proprietarytechnology in the more sophisticated areas;

- The trade and protection policies, which resulted in extremelyhigh levels of effective protection (d&te to high tariffs and thebanning of competing imports), prevented alternative sources ofpotential competition from developing and discouraged exports,which could have exposed the industry to international trends andcompetition;

- The high level of indirect taxes contributed to higher productioncosts, and the complicated structure of these taxes hampered thedevelopment of exports because it was difficult to identify theindirect taxes to be rebated or otherwise offset; and

- By encouraging geographic dispersal, the Government policieshindered concentration of the industry, which was vital todeveloping a strong supporting infrastructure.

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2.17 Recent Pollcy Reforms. The Government has recognized theimportance of electronics--not only for its direct contribution toindustrial output and employment but also as a source of productivitylmprovements in manufacturing and other sectors--and has singled out thissubsector for policy changes to achieve efficient growth. A series ofmajor policy changes dealing with different electronics segments commencedwith the Policy on Electronics Components in 1981, and led up to theIntegrated Policy Measures in Elee.tronics (March, 1985), which consolidatedprevious pronouncements and made additional fiscal and licensing reforms.A major reform in computer software followed with adoption in December,1986, of the Policy on Computer Software Export, Software Development andTraining. Incremental improvements have continued to be made since then.Electronics has also benefitted from the series of discrete policy actionsinitiated since 1985 applylng to all industries which cumulatively havesignificantly improved the policy environment for all industries. Thesereforms have been complemented by some liberalization of the financialsector, especially in capital markets (paras. 2.31-2.33).

2.18 Of the policy reforms affecting electronics, most important forelectronics has been the gradual liberalization of the regulatory system tolift restrictions on entry and enterprise growth. Components and consumerelectronics have been specifically delicensed, which has meant that theycould undertake new investments without having to go through complex andtime consuming Government procedures to obtain an investment license.Other electronics segments benefit from the recent increase in the generallicensing minima from Rs. 50 million (US$3.3 million) to Rs. 150 million(US$10 million). For industrial projects generally, delicensing wasextended to units importing up to 30% of input needs, up from 15% in thepast. In areas still subject to licensing, more flexibility has been glvento adjust both output mix and capacity. Licensing procedures have beensimplified. DOE introduced "single point" scrutlny of project applicationsin computers and industrial products in 1984, and computer software in1986. Access to imported capital goods for electronics has been assured byplacement of much of the specialized equipment used by electronics firms onopen general license (OGL), which has meant these items can be im.portedwithout prior clearance from the Government. Reservation of productsreserved for small scale industry, which included many types of components,has been virtually eliminated.

2.19 The product areas open for investment to electronics firms subjectto the MRTP Act (which subjects them to different types of anti-monopolyregulation) has expanded from components to include all segments exceptconsumer electronics. Electronics has benefited from the general increasein the threshold level for a firm to be classified as monopolistic. 2./Telecommunications equipment formerly the exclusive preserve of the publicsector, was opened in 1984 to the private and joint sector for manufactureof equipment at subscribers premises (i.e. telephone handsets, EPABXs) andin 1988 was broadened further to include some of the remainder, includingrural exchange and transmission equipment (for public sector firms withState Government ownership greater than 50%).

2/ The level of a firms total assets at which it is considered to be amonopollstic for the purpose of Indlan regulatory laws was lncreased ln1985 from Rs. 200 million (US$13.3 million) to Rs.l billion (US$66.7million).

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2.20 Domestic deregulation has had a major impact in increasingdomestic competition in electronics as evident from the ex-factory pricedrops in some of the major products. Color TV set prices have fallen by60% since 1984 when large scale production began. Microcomputers priceshave dropped by nearly 50% in just the last two years. Intelecommunications equipment the large public sector firms have improvedmarginally and partly due to competition from newly established privatesector firms. Pressure on domestic profits as a result of competition hasalso helped to increase the incentive to export (see para. 2.22). Inparallel with deregulation has come improved access to foreign technology,critical to electronics which now accounts for 20% of foreigncollaborations. Restrictions have been lifted entirely on foreignownership if equity is less than 40%, and greatly reduced on the types oftechnology firms are U.llowed to import. These measures have dramaticallyincreased foreign co'laborations, which reached 173 in 1985 and grew to 260in 1987 compared with an average of 10-15 a year in the mid-1970s. Foreigncollaborations have become more attracti -t ioreign partners because ofthe 1987 increase of the royalty ceiling From 5% to 8%.

2.21 In the area of trade policies, quantitative restrictions (QRs)have been greatly reduced for components, which are now mostly on OGL toactual users and have been eliminated entirely in the case of software.The July, 1988, action to allow all industrial items on "limitedpermissible" to be purchased under Import Replenishment (REP) license hasessentially eliminated this category as a quantitative restriction to userswilling to pay the additional premium, currently around 20%, which accruesto REP license sales. The import duty structure has been largelyrationalized, with raw materials generally at 45%, processed parts at 60%,components and peripherals at 80% and final products ranging from 90% to150,.

2.22 The incentive to export has recently grown as a result of threefactors: overcapacity in a number of products, especially in passivecomponents (carbon film resistors, for example) following deregulation;improvement of export policies and administration which began in 1986; i/and the adoption of a more flexible and realistic exchange rate policyleading to a real effective exchange rate that has depreciated more than30% since the end of 1985. In response exports of electronics productsfrom the domestic tariff area (i.e. excluding free zones), which hadstagnated by 1984 have more than tripled in value since then, growing from2.7% of total production in 1984 to 3.9% in 1987. With regard to the taxsystem, GOI has reduced and simplified corporate taxes; implemented amodified value added tax (MODVAT) that eliminates the cascading effect ofindirect central government taxes for most products and facilitatesindirect tax deduction for exports, and rationalization of tax incentivesfor small scale industries.

2/ A detailed review of recent changes in export policies andadministration are given in India: Export Development Proiect StaffAnoraisal Report. Report No. 7603-IN, paras. 2.09-2.19.

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2.23 As a result of the pioneering improvements in electronics policyframework which began in 1981 and the more recent general policyimprovements that date mostly from 1985 onwards, production and investmenthave greatly increased, especially from the private and joint sectors.Electronics production, which had grown in real terms at nearly 13% between1975-80 increased to more than 18% from 1980-85, and to 25% from 1985-1987.Electronics investment, as measured by the commitments of the two majorall-India financial institutions, the Industrial Development Bank of India(IDBI) and the Industrial Credit and Investment Corporation of India(ICICI), which provide about 80% of project term financing for medium andlarge firms in this segment, had increased in the period 1983-85 to morethan six times the level of a 1977-79, and in 1986/87 to more than doublethe rate of 1983-85. Noreover, the composition of electronics financinghas changed: private and joint sector investment, which was less than halfthe total commitments of these institutions in 1977-79 is now more than80%.

E. Policy Constraints

2.24 The policy improvements to date are encouraging a more efficientindustry that has promise in many areas of becoming internationallycompetitive. Despite the improvements discussed above, however, additionalreforms will be needed to ensure that cost competitiveness and quality ofIndian electronics products will approach international standards. TheJune, 1987, Electronics Sector Report (Project File, No. 1) provided anagenda for further change to achieve these objectives. The recommendationsincluded: progressively eliminating quantitative restriction on importsand at the same time gradually reducing customs duties to compel dormesticfirms to upgrade their products, improve efficiency and lower price:3 tomeet world price and quality standards; simplifying and eventuallyeliminating domestic content requirements under phased manufacturingprograms (PNPs); eliminating the remaining disincentives that restrictaccess to foreign technology leaving firms free to choose technologiesappropriate for production and market conditions, with minimum Governmentinvolvement; extending capacity delicensing to industrial electronics,computers and telecommunications; and removing remaining HRTP clearancerequirements for product groups where scale is needed for efficiency.

2.25 The study also emphasized the need for an easement of industrialexit restrictions to complement the measures taken to improve entry. Whilerecognizing that the changes for this purpose are needed in banking, laborregulations, and bankruptcy procedures that go well beyond the electronicsindustry the study suggested that the electronics industry might beselected for priority treatment. The study underlined the importance inthe longer run of extending MODVAT to a more comprehensive value-added taxsystem; the need to persuade the states to harmonize state level taxes withthe VAT system and to eliminate discrimination between local and out-of-state production which have become an important source of distortion thatis fragmenting capacity in this industry. The study also pointed out theneed to lift or reduce restrictions on location to allow economies ofagglomeration to be realized.

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2.26 Though this is a large agenda for change, there has been steady.though incremental progress in implementing it, even since the SectorReport was issued. It has taken the form both of broad industrial measuresthat affect electronics, and specific measures concerning only electronics.These include: reiucing further the licensing restrictions on MRTP firms;raising the threshold on the imported materials percentage that subjects afirm to licensing; extending delicensing to microcomputers, peripherals,and monitors; rationalization of the tariff structure for computers andcomputer peripherals; reduction of the indigenization objectives of thephased manufacturing program for all industries from 90% to 708; andelimination of QRs on a broad range of products for firms willing to pay anadditional premium. As a result of the sector study and projectpreparation, dialogue has been established with DOE and other Governmentagencies on policies for this sector that is contributing to the changethat is taking place. A Bank loan to support this industry's furtherdevelopment is well justified on the basis of improvements made before andduring the project preparation period. The project will provide a contextfor a continuing dialogue with DOE and other Government agencies on anumber of fronts as the results of project financed technical assistanceand studies are discussed. These concern the key areas of software andmanpower development as well as a range of specific issues (paras.4.19-4.20) involving import tariff levels, indigenization, standardization,dissemination of information technology, etc.

F. Manpower Constraints

2.27 Skill requirements for electronics are far higher than forindustry as a whole. Nearly 30% of the electronics work force possesstechnical degrees at bachelor level or higher; in the case of computersoftware, about 90% of the work force are engineers. The most importantbasis for Indian competitiveness is the potential availability of higherlevel skilled, technically trained manpower at low cost. Indianelectronics experts have proved their competence abroad, and in India theircosts are less than most other developing countries with significantelectronics industries. However, except for a few top-level institutionssuch as the five Indian Institutes of Technology and the Indian Instituteof Science, which export about 30% of their graduates, and the DOE managedCenter for Electronics Design and Technology (CEDT), Bangalore, the qualityof training that is being provided for middle and higher levelprofessionals is seriously deficient in practical application, iwith theresult that extensive training, often of a year or more, must be providedby individual firms before higher level technical staff can be usedproductively. The lack of quality of instruction is rooted in a number ofdifferent factors: theoretical bias of curricula, shortage of teacherswith practical experience, lack of opportunity to receive industryexperience during the formal training period, lack of funds for well-equipped laboratories and workshops, and the lack of linkage with existingindustry.

2.28 In the computer software industry, where India's potentialcompetitive advantage may be greatest, the industry faces an absoluteshortage of staff as well as an upgrading problem which is clearly evidentfrom discussions with firms in the industry. DOE estimates that the

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programmers. systems analysts, computer engineers, and similar types ofspecialties needed by the end of the Seventh Flve year plan period willhave reached more than 33,000 compared with an output from formal traininginstitutions during that period estimated at little more than 9,000. TheGovernment's software export policy (para. 2.17) recognizes thisconstraint and has recommended not only an expansion of public educationalinstitutions and establishment of three new CEDTs, but also new incentivesto upgrade the private-sector training and educational institutions. Theproject includes a component to support the Government's objective ofimproving the quality of the output of middle and higher level manpower,focused primarily on upgrading the electronics and computer scienceprograms at a carefully selected group of engineering colleges (theprincipal source of higher level technical engineering manpower) andpolytechnic institutes (the main source of middle-level technicians such asprogrammers, factory technicians, and repairmen). See paras 4.06-4.12.

G. The Financial Sector _/

2.29 Historically, India has followed relatively conservative monetaryand financial policies. The main objectives have been to mobilize domesticsavings on a large scale, contain inflationary pressures and achieve apattern of investment conforming to the Government's economic and socialpriorities. These oLjectives have been pursued through several mechanisms.First, interest rates have been administered through the Reserve Bank andthe interest rates paid on commercial bank deposits and other savingsinstruments as well as the lending rates have been kept positive in realterms. Second, the commercial banking system's scope for credit creationhas been tightly circumscribed. Third, a system of quite rigid creditallocation guidelines has been used to direct funds to earmarked industriesand social sectors. Within this policy framework, the financial system hasgrown rapidly over several decades and the nation's traditionally highsavings rates have been accompanied by significant financial deepening.Savings rates have risen steadily from about 168 of GDP in the late sixtiesto an average of 23% since 1980. However, this success on the resourcemobilization side contrasts with the more mixed results in resourceallocation both in terms of their impact on economic efficiency and thefinancial condition of lending .,.nstitutions. The evidence suggests that inconjunction with restrictive industr4al policies, the credit allocation andinterest rate policies encouraged inefficient patterns of investment inindustry.

2.30 As of December 1986, commercial bank credits of Rs 49 billion wereofficially classified as being extended to "sick industries" which havenegative net worth. Outstanding credit to sick industries alone are about15.7% of commercial banks' credit to industry and 8.1% of their totaloutstanding credit. The situation in the DFIs is similar; in 1985 IDBI'soutstanding loans to sick industries were about 11% of its portfolio. Inaddition to the sick industry problem, the collection ratios on other

A/ World Bank, India: Credit and Capital Markets Study, ReportNo. 6661-IN (February 27, 1987), provides a comprehensive analysis ofthe Indian financial sector.

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industrial and agricultural lending have been decreasing. The problems arebeing further exacerbated by increased competition faced by many industriesresulting from the ongoing industrial liberalization. Together withdeteriorating portfolio quality, the operating spreads of financialinstitutions have narrowed as recent interest rate adjustments haveresulted in lower average lending rates and higher funding costs. Thusthere is a need to rationalize the system of financial sector controls andimprove the institutions' operational flexibility and profitability. Inrecognition of these problems the Government has since 1985 set up severalcommittees to study the various financial markets and recommend ways ofimproving the working of the financial sector and their reports areproviding a basis for an ongoing process of reform. 5/

2.31 In the last few years, the Government has encouraged thedevelopment of new and more appropriate funding instruments and markets tofinance industry; thus, it has encouraged a shift away from bank loans tomore capital market funding of both private and public sector industrialfirms. First, restrictions on the purposes for which companies could issuesecurities were progressively relaxed to allow flotation of debentures tofund new companies, mergers/acquisitions and working capital. Second, thequantitative limit for issues exempt from capital issues controls wasdoubled to Rs 10 million and listing requirements were eased. Third,smaller firms were given improved access to the non-convertible debenturemarket by the raising of the interest rate ceiling on their issues to 15%from 13.58. Fourth, in an effort to encourage public sector firms to raisefunds on the capital markets, these firms were given the freedom toundertake public debenture issues even though their shares may not belisted.

2.32 Measures to diversify the markets and improve the attractivenessof issues by start-up firms have included the introduction of newinstruments such as Cumulative Convertible Preference Shares (CCPS). Thesesecurities count as equity, carry a 10% dividend and are convertible intostraight equity after three to five years. Also liquidity hasincreased--particularly in the debt markets--with the major public sectorinvestment institutions playing an important role in maintaining secondarymarkets. Finally, the Government has introduced legislation to protectinvestors and boost confidence in the markets, and new institutions such asa stock holding corporation have been set up to simplify the purchase ofsecurities. The introduction of further capital market reforms is expectedsoon.

2.33 In response to the various changes in regulations and fiscalincentives the capital markets have grown rapidly in the 1980s, andparticularly since 1985. The equity market took off in 1980/81 when theamount issued rose 242% to Rs 2 billion as a result of FERA legislationwhich indigenized ownership of foreign firms. Since then the primary

1/ These are the Chakravarty Committee to Review the Working of theMonetary System (1986); the Patel Committee on the Operations of theStock Exchange (198_; the Vaghul Working Group on the Money Mark-cs(1987) and the Hussain Committee on the Carital Markets (1988).

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market has grown fat. The volume of equity issued (including rights andpreference shares) quintupled to Rs 8.8 billion in 1986 from Rs 1.77billion in 1982. The debenture market also grew significantly over thesme period when the amount isaued more than doubled to Rs 5.9 billion fromRu 2.4 blllon. In general, the relaxation of guidelines controllingdebenture issues brought down financing costs to companies, especially thecost of working capital, in comparison to bank loans. At the same time theyields to investors on these securities were higher than those paid oncomparable bank deposits. These capital market developments haveencouraged financiai. institutions to expand their activities to leasing,mutual funds, credit cards and other higher income earning activlties tocompensate for the declining marglns on their basic lending activities.

2.34 Th Baking Syste. The Indian financial system is highlysegmented with different roles clearly earmarked for the variousinstitutions. The Reserve Bank of India (RBI) has a wide-reaching role int!,e system. In addition to traditional central banking functlons, it hasbroad regulatory and policy implementatlon functions. The financial systemis overwhelmingly in the public sector. There are currently about 30private sector Indian banks and about 20 foreign banks which togethercomprise the private banking system. However, these banks are dwarfed bythe huge public sector ones, both in terms of size and geographic spread.The private sector banks and foreign banks account for only about 4.3% and4.5% respectively of total commercial bank assets. The remaining 91.2% isaccounted for by 28 public sector commercial banks.

2.35 In spite of the increased role of the capital markets, thefinancial sector is still dominated by the banking system. Commercialbanks have the lead role in resource mobilization and together with theDevelopment Banks, they are the biggest source of funding for industrialinvestments. As of June 1987, the Scheduled Commercial Banks §/ had totaldeposits of over Rs 1 trillion.

2.36 The Commercial Banks' scope for creating credit is strictlylimited by reserve and liquidity ratio requirements which currently channelabout 51% deposits into compulsory investments in the securities ofGovernment and public sector institutions at below-market rates.Furthermore they have limited discretion over the direction of theirlending as RBI credit allocation guidelines account for about 77% of totaldeposits.

2.37 Under this system, the commereial banks are a major source offunds for the public sector through their purchases of securities issued bythe central and state governments, public sector companies and all-Indiafinancial institutions, which satisfy Statutory Liquidity Ratio (SLR)requirements set by RBI. The strict control of bank operations has hadsome unintended effects. Apart from promoting inefficient resourceallocation and fostering rigidities, the system has had a negative impacton commercial banks' profitability, because the net interest income they

fJl There are currently 50 Scheduled Commercial Banks and they account forabout 95% of gross bank credit.

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receive Is only slightly more than their administrative costs. In fact thecommercial banks' profits are therefore largely derived from unfunded itemssuch as fee income on international trade, foreign exchange commissions andgains on portfolio trading activities. The comercial banks have beengiven greater flexibility as a result of reforms announced in October andNovember 1988. These reforms have: (a) removed the Interest rate ceilingon working capital loans; (b) given customers the freedom to change banks;and (c) effectively removed the restrictions previously imposed on the sizelimit of working capital and term loans the commercial banks are able toprovide. As a result 04 the new freedom to set interest rates, the bankshave been able to lower the interest cost to the most credit worthycustomers to 16', while slightly increasing the rates charged relativelyweaker credits.

2.38 As a consequence of the Chakravarty Committee recommendations, RBIhas been adjusting the interest rate structure by increasing the interestrates paid on public sector bonds held by commercial banks as SLRrequirements bring public sector borrowing rates closer to market rates.While this rationalization does not appreciably affect the profitability ofthe comercial banks, it significantly increases the costs of thedevelopment banks which raise resources through selling their bonds to thecommercial banks. Given this, and for other reasons, it would beappropriate to extend the same flexibility to set rupee lending rates,which has been given to the commercial banks, to the development banks.

2.39 The Indian developmen1t finance system comprises national andstate level development banks and investment institutions. At the nationallevel the predominant development banks are Industrial Development Bank ofIndia (IDBI), The Industrial Credit and Investment Corporation of IndiaLimited (ICICI) and Industrial Finance Corporation of India. In additionthe Export-Import Bank of India (Eximbank), was set up in 1982 to provideworking capital and term finance for exports, having taken over thosefunctions from IDBI; the Industrial Reconstruction Bank of Indiaestablished in 1984 has replaced the Industrial Reconstruction Corporationof India with responsibility for rehabilitating sick units. The nationalor All-India investment institutions are Life Insurance Corporation ofIndia (LIC), Unit Trust of India and General Insurance Corporation ofIndia. At the state level, funding is provided by the State IndisstrialDevelopment Corporations and State Financial Corporations. Thesedevelopment finance institutions (DFIs) are the major source of termlending to industrial firms, and the vast majority of their lending is toprivate sector firms. As at March 1987, these institutions 2/ haddisbursed about Rs 290 billion, 75% of which was to the private sector.Annual sanctions and disbursements were Rs 81 billion and Rs 56 billion,respectively, up from Rs 66 billion and Rs 49 billion in the previous year.

2.40 The three main all-India DFIs (IDBI, ICICI and IFCI) accounted for75% of total disbursements by the development finance institutions in1986/87. They follow a consortium approach to project financing in whichthe institutions periodically meet in order to co-ordinate matters of

Z/ Eximbank data not included.

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policy, business, procedures, processing applications, appraisal andfollow-up of projects. One institution is assigned responsibility AS "leadinstitution" for project financing. The lead institution appraises theproject, discusses wit,, other participating institutions, arranges forconsortium financing (which is governed by pre-agreed rules concerningsize), provides assistance on behalf of all participating institutionsagainst single documentation, supervises the end-use of assistance, andmaintains follow-up as long as loan balances are outstanding. This systemlimits competition between the DF-s but greatly facilitates projectadministration.

2.41 The industrial term lending institutions have, in recent years,been faced with an increasingly riskier lending and investment environment.The state-level institutions have been weakened over time by poorcollection performances. The direct lending portfolios of all developmentbanks, state level and all-India, have come under increasing pressure astheir borrowing costs have risen along with the rise in administereddeposit and public bond rates. Their financial conditions havedeteriorated as their clierts have had to adjust to a less regulated andmore competitive environment, and steady depreciation of the exchange rate.At the all-India level these adverse developments have been partiallyoffset by the leasing business and other higher-yielding activitiesundertaken by these institutions and more recently improvements incollection rates so that so far, their profitability has been maintained.

2.42 Exchange Risk Administration Scheme (ERAS). The DFIs previouslyon-lent their foreign currency borrowings, on a back-to-back basis, with amark-up of 1.5% to cover costs of administration and risks, with theinterest rate and foreign exchange risks borne by the sub-borrowers. Giventhe steady depreciation of the rupee and volatility of foreign exchangerates in the last few years, sub-borrowers have borne extremely high, andoften highly unpredictable, effective repayment rates. The absence of awell developed foreign exchange currency market in India has meant thatprivate sector borrowers have limited means to protect themselves againstsuch risks. As a consequence, these firms' debt-servicing capacities havebeen impaired, which in turn has negatively affected the foreign currencyloan portfolios of the lending institutions. By 1987, the demand forforeign currency loans had fallen dramatically; foreign currency sanctionsby ICICI fell an estimated 34% in that year.

2.43 The Government, in conjunction with the major DFIs (IDBI, ICICI,and IFCI), has responded to the situation with the development of anExchange Risk Administration Scheme (ERAS) which commenced April 1, 1989,under the management of IDBI. Under ERAS, the DFIs will move to a currencypooling system for their foreign commercial borrowings. Sub-borrowerswill pay a rupee-denominated rate made up of: (a) the weighted averageinterest cost of the DFIs foreign borrowings; (b) a premium in respect ofthe estimated foreign exchange risk; and (c) the DFI's intermediationspread of 2.0%. The scheme has commenced with an initial rate of 15%, 1Iabove the present term lending rate of the DFIs. The rate will be reviewedevery six months and adjusted as necessary to cover the foreign andinterest rate costs, based on international interest rate and currency

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movements, subject to an lnitial cap of 18%. Thus, each sub-borrower wouldhave a floating rate sub-loan, subject to the cap. The actual ERAS rateaffecting loans already made, and tne initial rate on new loans and theceiling rate for new loans will be adjusted quarterly. ERAS will beoptional and sub-borrowers will have the right to borrow in a givencurrency and assume the attendant foreign exchange risks. The Governmenthas agreed that the rate will be adjusted as necessary to cover the foreignexchange and interest rate risks. It has also agreed that if due to largefluctuations the fund runs into a deficit in the short run, the Governmentwill make advances into the fund and be repaid when the fund is in surplus.

2.44 Financing Electronics Firms. The sharp division in the presentfinancial system between the provision of working capital financing, whichis the responsibility of the commercial banks, and project financing, whichincludes fixed assets but only 25% of permanent working capital, frequentlyleads to delays and occasionally to liquidity crises because the commercialbanks us8e quite different, more conservative and sometimes less flexiblefinancing norms. For electronics firm these problems tend to be moresevere because of their financing characteristics. First, electronicsfirms in India on average require almost 50% more gross working capital forthe same level of fixed assets as manufacturing firms as a whole(reflecting dependence on imported materials, and low fixed capitalintensiveness) and are therefore more likely to be hurt by delays orshortages in working capital finance. Second, imported raw materials areroughly twice as important an element of working capital as all of industry(reflecting that many components and most raw materials cannot economicallybe produced locally) which requires access to a higher level of foreignexchange to finance working capital that is often more difficult to obtainthan local currency. Finally, electronics firms have been much fastergrowLig because of rapidly expanding domeetic markets; thus commercial bankcredit limits tend to be quickly outgrown. Electronics firms juststarting up, that comprise more than 85% of the value of investmentfinanced by the DFIs, are hit especially hard as they often face teethingproblems in start up due to the need to assimilate new technologies andadjust to the unce'tainties of fast-changing markets.

2.45 The project proposes to address these financing difficulties bylodging the responsibility for ensuring adequate financing for both fixedassets and permanent working capital for clients of this project with theDFIs until a project is operating at capacity (see para. 4.04). Thisreduction in financial institution specialization, approved by RBI on apilot basis for this project, could have a liberalizing impact on theindustrial finance structure as a whole, if RBI thereafter introduces thechange more widely.

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III. THE BANK'S ROLE IN INDUSTRY

A. Previous Bank Lending to Industry

3.01 The Bank has made 19 developw-nt finance loans amounting to US$1.4billion through financial intermediaries, (mainly ICICI and IDBI), foronlending to private and joint sector firms engaged in all aspects ofindustry. Fourteen operations concerned ICICI alone. Three (Credit356-IN, and Loans 1511-IN and 1260-IN) were channelled through IDBI toState Financial Corporations (SFCs) and State Industrial DevelopmentCorporations (SIDCs) for relending (Loan 2928-IN the Industrial Finance andRestrt'cturing Project) approved in 1988, uses both intermediaries. TheBank'= experience with IDBI and ICICI in implementing past projects hasbeen discussed in recent Project Completion Reports (PCRs) and theconclusions have been taken into account in project preparation.

3.02 The first development finance project in India specifically topromote exports, Industrial Export (Engineering Products) Project, (LoansNo. 2629-2930-IN), for US$250 million approved in September 1985, wasdesigned to support the growth of exports of engineering products throughprovision of term finance through ICICI (US$160 million) and partieipatingcommercial banks (US$90 million) and the creation of productivity andmarketing funds for exporters. As of January 31, 1989, about 72% of theloan to ICICI had been sanctioned. The slow performance has been dueprimarily to the reluctance of sub-borrowers to bear the currency poolforeign exchange risk at relatively high interest rates. The fact thatexports of engineering exports have expanded much less rapidly thanprojected at appraisal is also contributing to rlow disbursements. InFebruary 1988, the project was modified to allow GOI to bear the foreignexchange risk for a fee and relending these funds in local currency. As aresult of this modification, the remaining funds are expected to becommitted by ICICI ly August, 1989.

3.03 The most recent DFI project under implementation, the IndustrialFinance and Technical Assistance Project (Loan 2928-IN), which becameeffective in August, 1988, provides US$310 million in financial andtechnical assistance support to IDBI (US$205 million) and ICICI (US$105million) to help them meet their requirements for long term foreignexchange resources and to strengthen their capacity to appraise projectseffectively in a less regulated environment, cope with the more difficultportfolio management problems stemming from the adjustment process, andmobilize resources through new financial instruments in more competitivefinancial markets. The project also provided US$50 million to the majorGovernment steel company, SAIL, for technical assistance to upgradetechnology and improve efficiency. The project is proceeding smoothly.

3.04 The Bank Group has also provided US$3.2 billion for projects inthe fertilizer, cement, and petrochemicals subsectors where opportunitiesexisted for the Bank to support policy reforms at the subsectoral level andto finance economic investment. Implementation of these projects has been

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generally satisfactory with all projects currently under implementatione.pected to have satisfactory rates of economic return and, despite someinitial delays, to be fully disbursed by the respective closing dates.

B. The Bank's Future Jending Strategy

3.05 The Bank has had an active industrial sector work program andprepared a number of sector reports on such subjects as industrialregulation, tetbhology policy, export promotion, public enterprisemanagement and credit and capital markets .nd a number of subsector reportsincluding electronics, automotive products, steel, capital goods andfertilizer. The 1987 CEM, IMnia: An Induatrializing conomy in Tr iti /also focused on the development of the industrial sector and supplied thebroad outlines of a reform program. Many of the issues in these reportswill continue to be discussed with the Government in the context of futureoperations.

3.06 The future lending program for industry is primarily based on thesector work and will thus include:

(i) industrial finance projects which will serve as a focal point forevaluating and discussing with Government overall progress onindustrial and financial policy reform as well as addressing issuesin the financial institutions;

(ii) export, technology and industrial energy conservation projectswhich will serve as a focal point for evaluating and discussingwith Government overall progress and improve the policy, financialand institutional support for activities in these key areas; and

(iii) subsector projects which will provide policy, technical andfinancial support for economic investments in areas where improvedefficiency will have implications for the growth of the wholeindustrial sector (e.g., petrochemicals, electronics, cement andcapital goods).

3.07 In all of these areas, loans are basically linked to the policyreforms that are being undertaken either in designated policy areas such asexports, technology, etc. or in the policies that affect a specificsubsector. The basic criterion that determines the decision to go aheadwith a loan is whether the policy environment is conducive to efficientinvestments in the area or subsector that is being supported. Thus, thelending strategy involves supporting investments in areas where policyimprovements have already been undertaken, consistent with the conclusionsof the previous sector work.

1/ Report No. 6633-IN (March 13, 1987).

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C. Electronics in Bank's Lending

3.08 Electronics has been included among the subsector projects in theBank's industrial program for India because it has already reachedsignificant size, has good potential for rapid growth and efficiency andwill have significant impact on other sectors throughout the economy. Forthese reasons, the Government has given electronics high priority in theSeventh Five Year plan and in the Eighth Five Year plan now underpreparation. It has shown a willingness to make major policy changes,greater than for almost all other industrial sectors, to foster theindustry's sound development with the objective of eventually reaching alevel of internationally competitive production.

3.09 The project will complement two other contemporary projects whichdeal with related issues. The Industrial Technology Development project (aFY90 project whose appraisal mission returned early April, 1989) addressestechnology issues that will impact upon electronics in the areas of riskfinancing and R&D infrastructure. The Export Development Project which wasapproved by the Board on May 12, 1989 2/ includes financing of technicalassistance in promising export areas, including software development forexports.

2/ See Staff Appraisal Report No. 7603-IN, April 20, 1989.

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IV. THE PROPOSED PROJECT

A. Project Objectives

4.01 A major goal of the Government's program of policy reform is tofoster an industry that will become internationally competitive. Thisproject is intended to initiate a long term relationship with India tosupport this goal and the specific objectives set for the project reflectthis. The project would: (a) provide technical and financial support toassist the two largest DFIs improve their capability to identify, appraiseand finance sound projects as well as to improve performance of existingfirms in this sub-sector; (b) assist in upgrading the training of mediumand high level technical and professional manpower needed for the rapid andefficient growth of the industry; (c) help to lay the basis for long termcontinued improvement in the policy environment for electronics; and (d)help to shape India's strategy, and prepare projects to support, softwaredevelopment.

B. Project Descrigtion

4.02 The project would comprise:

(i) A credit component for investment in electronics industryexnansion and ugnrading of about US$420 million under a new"single window" approach providing both fixed investment andpermanent working capital which will allow each firm to deal withonly one financial institution to ensure adequate total projectfinancing;

(ii) Skilled manMower development and training of US$26.8 million forprovision of equipment, training, and related assistance throughDOE as grants to selected engineering colleges, polytechnicinstitutes and Centers for Electronics Design and Technology(CEDTs) to upgrade preparatory training of electronics andsoftware engineers and technicians, and for industry training toupgrade engineers already employed; and,

(iii) Technical assistance of US$3.0 million for (a) a study, semina:csand project identification for the development of the computersoftware industry including software exports; (b) a program ofseminars and studies to expose Government and industry leaders toworldwide developments in electronics and help to establish astronger factual basis for addressing future policy and investmentissues; and (c) training and consultancy assistance to the DFIs toupgrade project preparation and implementation capalbility in thisindustry.

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C. Term Credit to Expand and U12rade Electronics Capacity

4.03 Under this component, the Bank will finance US$202 million inlines of credit to cover estimated foreign exchange costs of both fixedassets and permanent working capital to viable projects in electronics andrelated areas involving estimated total investment of $420 million in boththe private and joint sectors for medium and large scale projects. It willuse two major financial institutions as intermediaries, IDBI and ICICI,which provide 70%-80% of the term financing to projects of this size inthis sub-sector.

Single Window Credit Line

4.04 To ameliorate the problems for electronics projects under thepresent system of divided responsibility for financing term loans forprojects and working capital (para. 2.44), sub-projects financed under thisproject would be provided with both fixed asset financing which is about70% of the total, and the incremental permanent working capitalrequirehents which constitutes the remaining 30%, through a singlefinancial institution, up to the time that a firm reaches full capacityproduction. This approach would eliminate the inconvenience of dealingwith several financing agencies. It would also reduce the risk that afirm's working capital needs are not taken care of because of differingapproaches in assessing and monitoring those needs. Because firms wouldreceive term loans for permanent working capital, however, receivableswould be excluded because they can be conveniently handled separately bycommercial banks under the present system of overdraft facilities and billsdiscounting. Exclusion of receivables is in line with RBI's long termpolicy that eventually they should be financed only by way of billdiscounting. The DFIs have agreed, that they would use the subsidiary loanfrom GOI to finance working capital (see para 6.02) only when part of aBank financed investment project for fixed investment. The "single window"approach to project financing, though commonplace elsewhere in the worldbecause of the trend away from Government mandated specialization, is newfor India. RBI l is confirmed to the DFIs its willingness to permit itsintroduction to India on a pilot basis, restricted to the electronicssector under this project. RBI would consider broadening its application toother industrial sectors after the experience from this project can beevaluated in terms of the benefit of improved project financing against thecosts in terms of loss of control in meeting other objectives.

4.05 A credit line of the size proposed can be committed within threeyears. The '-otal demand for electronics investment in projects presentedto the DFIs ..ached US$233 million equivalent in 1986 climbed to aboutUS$250 million in 1987 and reached US$290 million during 1988. Thecombined foreign exchange requirements for those three years reached US$340million. Investment has kept pace with, if not exceeded, increases inproduction which is expected to grow steadily at 18% - 20% over the nextfour to five years. The DFIs have completed an analysis of projects likelyto be submitted over the next three to four years and have identified some40 possible projects involving investment of about Rs.10.4 billion (US$691million) with a foreign exchange requirement for fixed assets alone of

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Rs.464 million (US$309 million). These estimates appear reasonable. Underpresent projections, the Bank loan would finance 46% of the estimatedforeign exchange requirements for investment and working capital ofelectronics sub-projects over the next three years.

D. Manoower Development and Training

4.06 Though middle and high level skilled technical manpower isgenerally available in India, skilled technical and engineering manpowerwith specific, relevant, practical training in electronics, computers,programming, systems engineering and related skills is a serious constraintto expansion in the potentially most competitive segments, especiallycomputer software (para 2.28). To help alleviate this constraint thiscomponent would aim: (a) to improve the quality of pre-service training ofmiddle level skilled manpower (technicians) and higher level skilledmanpower (engineers) in electronics and computer software; (b) to improvethe quality of engineers and technicians already employed; and (c) tostrengthen the links between pre-service training centers and industry.

4.07 To achieve these objectives this component would have thefollowing main elements:

(a) Improvement of electronics and computer software training programsat a selected group of 14 engineering colleges (ECs), which arethe principal source of high level technical manpower for thisindustry, a selected group of 12 polytechnic institutes (PI) whichprovide mid-level technical manpower such as rupair andmaintenance technicians, and programmers, six Centers forElectronics Technology and Design (CETD). This element would (i)develop up-to-date learning materials in areas such as productdesign, computer science and software development, etc. where suchmaterials are lacking; (ii) introduce hands-on product design anddevelopment exercises and training; (iii) modernize teachingfacilities and equipment; and (iv) provide practical training forteachers that have no industry experience. Base costs are US$18.0million.

(b) Upgrading of practicing engineers and technicians through (i) theconduct of state-of-the-art seminars for middle and higher leveltechnical employees of small and medium scale firms and (ii)support of continuing engineering education programs. Deliveryinstitutions for this element would be the Indian Institutes ofTechnology (IIT) at Bombay and Delhi and the Indian Institute ofScience, Bangalore. A fourth institute satisfactory to the Bankwill be selected later. It is also expected that the specialexpertise in training technicians of the Nettur Electronics Center(NEC) in Bangalore will be utilized. Base costs are US$2.0million.

(c) Strengthening of links between industry and the ECs through (i) aprogram of industrial attachment for students; and (ii) theprovision of part-time teachers from industry. Base costs areUS$1.7 million.

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4.08 This is a pilot project dealing with a relatively small number ofinstitutions. In the case of the strengthening of pro-service training(para. 4.07 (a)), which is the largest single element, a smail group ofqualified institutions were identified by Bank consultants from amongapproximately 300 ECs and 600 PIs on the basis of crlteria which emphasizeclose proximity to clusters of computer and other electronics firms, thecapacity of the institution to implement the project and the strength oflinks between the institute and industry. All ECs are associated withautonomous universities; the PIs are state government institutesadministered by State Ministries of Education. The institutions that DOEhas identified to participate in the project, limited to 32 (14 ECs, 12 PIsand 6 CEDTs) have been reviewed and are satisfactory. Agreement wasreached that the institutions finally selected must be satisfactory to theBank.

4.09 Each EC or PI will be attached to one of four higher leveltraining institutions, which will act as a 'resource center' to providetechnical and administrative support, including development of neededcurricula and course materials, conduct of teacher training, assistance infacility and laboratory development, and development of the technicalinformation base to support training and laboratory work. Three resourcecenters have been identified by DOE which would work with the ECs: the IITDelhi, IIT Bombay, and IISC, Bangalore. They are satisfactory to the Bank.All three centers have a long history in technical education and close tieswith industry that qualify them as resource centere. They are the sameinstitutions that will implement the component for training engineersalready in-service (para. 4.08(b)). The identification and contribution ofthe fourth resource center will be determined in September, 1989.Agreement was reached that the Resource Centers finally selected must besatisfactory to the Bank. The PIs will be supported by IIT Delhi and theIISC Bangalore. Because of the special expertise of the Nettur TechnicalTraining Foundation Electronics Center (NEC) in teaching electronics, it isexpected that NEC would also be assisting with the PIs.

4.10 In connection with its role to expand and upgrade manpowertraining, DOE has established and staffed two other CEDTs in addition toCEDT, Bangalore, located in Srinagar and Aurangabad, to provide technicalsupport and training to the electronics industry, particularly smallerfirms. When necessary physical facilities are completed, these twoinstitutions will be assisted by the project to develop their capability toprovide seminars and training for industry in their regions as part of thecomponent to provide in-service training. Four additional CEDTs, locatedin Imphal, Gorakpur, Calicut, and Mahali, are being established but not yetstaffed by DOE. They would be eligible for modest assistance to qualifythem for the same purpose, when judged ready by the relevant resourcecenter.

4.11 Project implementation, monitoring and evaluation of thiscomponent will be the responsibility of a Project Implementation Unit (PIU)which has just been set up in the Department of Electronics, assisted bythe four resource centers. The PIU will be responsible for procurement ofequipment and materials, maintaining project accounts and coordinating the

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curriculum development, teacher training, and state-of-the-art seminars.It will be staffed by a Project Director to be appointed by June 15, 1989,about four project coordinators, a part-time procurement officer andaccountants. The PIU would be under the overall guidance of a steeringcommittee consisting of representatives from the computer software andelectronics industry, the four resource centers, the Ministry of HumanResources Development (MHRD) and other concerned GOI ministries, the SwissDevelopment Cooperation (which helped prepare the project and will becofinancing it) and chaired by the Department of Electronics. It wasagreed that the staffing of the PIU and membership of the SteeringCommittee would be satisfactory to the Bank and would be established inaccordance with a timetable satisfactory to the Bank.

4.12 The estimated costs of this component including contingencies isUS$26.8 million (Rs.402 million), of which approximately US$11.0 million isfor equipment and the balance for local training, books, software andequipment maintenance, which would be needed over a five year feriod. Thebasis for calculating contingencies is given below, para 4.24. Additionalinformation and detailed costing for this component are provided inAnnex 2. Working papers are in the Project File, No. 2.

E. Technical Assistance

4.13 The technical assistance component includes three elements, onefocused on the future development of a key segments of electronics, thesecond with improving future policies generally, and the third withupgrading the capability of the DFIs:

(US$ million)

(i) Software capability development 0.9

(ii) Seminar program 0.7

(iii) Training and technical assistance for the DFIs 1A4

Total 3.0

(i) Software Capability Development

4.14 As noted above, para. 2.13, computer software, especially softwarefor exports, is one of the most promising potential areas for expansion inthe India electronics industry. Its development, however, is inhibited byinadequate knowledge of markets and how they can best be developed, lack ofaccess to technology which is fast-changing, a shortage of trained andexperienced manpower and infrastructure bottlenecks especially incommunications. The project would finance a phased technical assistanceprogram of studies, seminars and project identification to help relievethese constraints and provide a better basis for expansion of both domesticand export software capabilities. It is expected that the outputs of thisprogram would include: (a) detailed information regarding both foreign and

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domestic markets, their suitability for the Indian industry, and how bestthey can be penetrated; (b) guidelines for training and skill development;(c) recommendations regarding software standards; (d) recommendationsregarding level of service, pricing, and standards in data communicatlons;and (e) mechanisms for helping to import, absorb and diffuse technology,including proposals for establishing one or more productivity centers runand, over time, financially supported by the domestic software industry.

4.15 This program will be carried out by DOE in close consultation withthe Bank in accordance with a schedule, organizational arrangements andprocedures to be agreed with the Bank. Further details are contained inAnnex 3(A). A working paper and draft terms of reference are alsoavailable (Project File, No. 3).

(ii) Seminar Projr_j

4.16 The objective of this program is to improve the info mational andanalytic basis for investment and policy decisions concerning theelectronics industry. The first part of this component would be a two weekseminar in the United States in "Silicon Valley," organized with theassistance of consultants in which key senior Indian Government, bankingand industry representatives can review first-hand important worldwidedevelopments in the electronics industry and then try to apply thisknowledge to the Indian situation. This seminar would draw upon experiencedeveloped by the Bank in connection with a similar program held in October,1987, for the People's Republic of China. This would be followed, in thesecond part, by a series of short seminars in India in different citiesmore widely attended for which the initial two week seminar would providebackground material and a common set of assumptions regarding worldwidedevelopments for the follow up seminars in India. Each seminar in Indiawould be focused on specific topics which are relevant to the concerns ofindustry and Government, for which discussion materials would have beendeveloped in the course of studies prepared by local and/or internationalconsultants financed under the project.

4.17 This program is expected to be launched ln the fall of 1990 whenthe results of the software study could be used as inputs. This programwill be undertaken by DOE in close consultation with the Bank on the basisof a schedule, organizational arrangements and procedures to be agreed withthe Bank. Additional details are prcvided in Annex 3 (B). A concept paperfor this program is in the Project File, No. 4.

(iii) Training and Technical Assistance for the DFIs

4.18 To complement the "single window" line of credit (para. 4.05) thisproject would provide technical assistance to the two DFIs. Its objectivewould be to upgrade their capability to identify and appraise viableprojects in this industiy, including projects to restructure and improveefficiency of existing clients who need to adjust to increased competitlonbrought on by deregulation. For this purpose, agreement has been reachedwith the DFIs, based on a working paper discussed during appraisal (ProjectFile No. 3), on a three year program consisting of the following elements:

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(a) access to data bases and telated services to provide firm levelinformation about suppliers and foreign partners. information abouttechnology, and current data on production, trade, prices, etc; (b)identification studies for selected future products that might be financedby the DFIs which will help them to develop appropriate criteria of scaletechnology etc. needed to be competitive; (c) a training program foroperational staff to expose them to new products and processes in theelectronics sector and thereby upgrade their capability to identify andappraise new projects; and (d) diagnostic assistance using domestic andinternational consultants to assist the institutions in dealing with clientfirms that need to upgrade technology or improve efficiency.

4.19 The DFIs agreed to prepare a work plan satisfactory to the Bankfor its implementation by September 30, 1989. Additional details and therequirements that would need to be met are given in Annex 3(C). Theconcept paper for this program is in the Project File, No. 5.

F. Project Cost

4.20 Total project cost is estimated at $ 450 million (Rs.6.7 billion),of which $212 million (Rs. 3.2. billion) is estimated to be in foreignexchange. No contingencies have been calculated for the credit component(US$ 420 million) to finance expansion and modernization because it is aline of credit. In the event of escalation in the average cost of sub-projects, the total number of sub-projects would be reduced.

4.21 For the manpower component, the total cost is estimated to beUS$26.8 million, in which provisions for contingencies total 15% ofbaseline costs. Physical contingencies have been estimated at 10% for theequipment categories and 5% for the others to allow for adjustments in thescope of work. Price contingencies are basedA on projections of annualinflation rates, for local costs and foreign costs as follows: for localcosts - 8% for 1989/90, 7% for 1990/91 to 1992/93, 6.5% for 1993/94 and1994/95, for foreign costs--5.3% for 1989/90, 5.0% for 1990/91, 4.1% for1991/92 to 1994/95. Cost estimates for the manpower component are detailedin Annex 2. The technical assistance component costs are estimated to beUS$3.0 million in which provisions for contingencies total to 16% of baseline costs. Physical contingencies have been estimated at 10% of baselinecosts and price contingencies on the same basis as for the manpowercomponent. Cost estimates for technical assistance are detailed inAnnex 3. A summary of total project costs is given in Table IV-1.

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Table IV-1: PROJECT COST SUMMARY

Million Rs. Million USS

Project Components Local Foreig Total Local Foreign Total Forei n

Credit line for Expansionfixed assets 2162 2250 4412 144.1 150.0 294.1 51working capital 111 _780 1891 4A 5 126.1 42

Sub-total 3273 3030 6303 218.2 202.0 420.2 48

Manpower development 254 89 343 16.9 6.0 22.9 28Technical Assistance 8 3 39 .5 2.1 2.6 82Sub-total base costs 262 120 382 17.4 8.1 25.5 32

physical contingencies 18 11 29 1.2 0.7 1.9 26price contingencies 19 17 36 1.3 2.4 62

Sub-total 299 148 447 19.9 9.9 29.8 34

Grand Total 3572 3178 675 238.1 211.9 450.0 47

a/ Figures may not add due to rounding.

G. Financing Arrangements

4.22 Table IV-2 gives the financing plan. The proposed Bank loans ofU-S210 million would finance each component as follows: 100% of the foreignexchange costs of the credit component; 100% of the foreign exchange costs ofthe manpower development component, and a small portion of the local costs.The balance of the credit component would be financed as follows: sub-projectsponsors, 22% (which includes 30% of the fixed asset financing in the form ofequity but only a small proportion of the local permanent working capitalfinancing which would be financed mostly by loans from financial institutionsand other sources in accordance with current practice), and others, includingcapital markets, 16%.

Table IV-2: PROJECT FINANCING PLAN(US$ million in current prices)

BorrowingProiect Component IBRD GOI DFI Firms Others SDC JGF Total

Credit line forExpansionFixed assets 150.0 - 14.4 88.3 41.4 - - 294.1Working capital 52.0 - 36.2 9.5 28.4 - - 126.1Sub-total 202.0 - 50.6 ,7.8 69.8 - - 420.2

Manpower development 8.0 2.6 - - - 16.2 - 26.8Technical Assistance s - = .. - 0 .0 .1 2.7 3.0

Total 210.0 2.8 50.7 97.8 6'9.8 16.2 2.7 450.0% of Total 46.7 0.6 11.3 21.7 L5.5 3.6 0.6 100.0

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4.23 For the balance of the manpower development component,cofinancing of SF24 million (US$16 million) has been requested from theSwiss Development Cooperation (SDC); the Government would provide US$2.6million. The Bank and SDC financing would be passed on to traininginstitutions as budget allocations. The Government expects to enter intoan agreement with SDC, which is to become effective no later than December31, 1989. For the balance of the Technical Assistance component, financingof US$2.7 million is expected from the Japan Grant Facility (JGF), of whichan estimated $2.4 million would be for foreign exchange costs. The balanceof local costs for technical assistance would be provided by GOI(US$200,000), and the DFIs (US$100,000).

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V. THE PARTICIPATING FINANCIAL INSTITUTIONS

5.01 With the advent of more competitive conditions in both thefinancial and industrial sectors, the role of the development financeinstitutions (DFIs) in industrial finance has acquired renewed importance.In spite of the rapid growth of the capital markets in India and the accessto them by a large number of established industrial firms, the DFIs arestill the single most important source of industrial project financegenerally, and for the electronics industry in particular. Theirassistance to industry extends beyond the simple provision of funds andboth the Government and the private sector have come to rely on them forin-depth knowledge of financial and industrial developments in the Indianeconomy. IDBI and ICICI are the two largest DFIs in India, togetheraccounting for over 50% of total term investment financing to industry bythe financial institutions. Both corporations are making good progresswith the implementation of the policy and strategy statements and thecollection programs which were agreed on during negotiations of theIndustrial Finance and Technical Assistance Project.

A. Industgial Development Bank of India (IDBI)

5.02 IDBI, which was established in 1964 as a wholly owned subsidiaryof RBI, is now fully owned by GOI. As the lead institution for industrialinvestment finance, IDBI operates as a direct lender and as an apexrefinance institution for the state financial institutions and thecommercial banks in their investment lending operations. It also acts asthe central coordinating agency for the operations of the other twonational level DFIs (ICICI and IFCI) and the term lending activities of theLife Insurance Corporation (LIC) the General Insurance Corporation (GIC),and the Unit Trust of India (UTI). Its importance as a direct lender isdemonstrated by the fact that it accounted for about 39% of totalindustrial investment lending by the All-India and state level financialinstitutions in 1987/88. Its promotional role covers a wide range ofactivities at the national level and, through specialized institutions, onthe local level. These activities aim at the development of both soundindustrial investments ar.d financial practices, and include industrypotential surveys, entrepreneurship development programs, consultancy andadvisory services and expanded development banking training programs.

5.03 IDBI's 21 member Board, appointed by Government, represents across section of GOI officials, industrialists and commercial anddevelopment bank executives. While the Board is responsible for internalpolicies and reviews IDBI's overall operations and its interaction with thepublic and private industrial sectors, full powers are delegated to an 11person executive committee, headed by the Chairman of the Board. IDBI'sorganizational structure comprises six administrative units, each headed byan executive director/advisor. The Direct Finance Operations group isresponsible for appraisal, disbursement, supervision, billing, collection,and recovery of all direct lending operations. The proposed project willbe implemented by this group.

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5.04 IDBI's financial assistance to the industrial sector is effectedthrough three basic areas of operations. First is direct finance in theform of loans, underwritings, direct capital subscriptions or guarantees.This is available to projects costing at least Rs 50 million (approximatelyUS$3.4 million) and accounts for about 44% of IDBl's portfolio. Directly-financed projects are generally cofinanced with other all India termlending institutions. Second is refinanced loans (31% of IDBI'sportfolio), which are originated as loans to small- and medium-sizedbusinessos by state-level institutions and banks which bear the risk onthese operations. Third is rediscounted bills (19% of portfolio), coveringsale of machinery, financed by banks on a deferred payment basis, andbearing corresponding bank guarantees.

5.05 IDBI has had a history of satisfactory profit performance and itsoverall financial condition is sound, with a consistent high level ofliquidity and debt servicing capacity. Its assets more than doubled overthe last five years to Rs 138 billion as of FY88, while revenue has grownat an average rate of 20% to Rsl2.4 billion over the same period. Returnon average net worth was 18.5%, up from 16.5% in FY87. Return on averageassets has also increased from 1.4% in FY87 to 1.5% in FY88.

5.06 IDBI directly finances medium and large electronics projects, andin its role as apex institution for the state financial institutions,refinances small scale electronics projects. Total sanctions for large andmedium projects for 1987 reached Rs 705 million (US$55 million) whichrepresents about 5% of its total direct project lending and accounts for30%-40% of term financing for projects of this size in India inelectronics. About 55% finances privr;:e sector firms, 30% joint sector andthe rcmaining 15% goes to public sector enterprises owned by the states.Electronics project identification and appraisal is undertaken by smallteams which include engineers, economists and financial specialists. Aboutsix operational staff have become specialized in this sector although theyalso handle projects in the power sector. The quality of appraisals isgenerally good. However, as electronics is a new, rapidly developingsector they tend to lack technical experience. While they are able to drawupon local electronics specialists to review project proposals from atechnical point of view it is difficult to find experts with the relevantpractical operating experience, and very few have up-to-date knowledge ofchanging conditions worldwide. Data and information on technological andmarketing developments internationally is not easily available and isusually out-of-date. The proposed technical assistance program (paras.4.19-4.20) will help to upgrada IDBI's capability in this sector.Additional details on IDBI including past and projected financialstatements are presented in Annex 4.

B. The Industrial Credit and Investment Corgoration of India LimitedICICI

5.07 ICICI, established in 1955 under private ownership to provide longterm finance to private industry, is now Government controlled with 81%ownership by public corporations. ICICI has developed into one of thecountry's major financial institutions and it is the main provider of

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foreign currency term loans to Indian firms. The corporation offers a widersnge of financial services largely to the private sector and in recentyears it has diversified out of its traditional functions into areas suchas merchant banking, leasing, hire purchase, venture capital and credit-rating services. In addition to its operational activities, ICICI alsoplays an important developmental role. It advises the Gover.ment onindustrial issues, carries out sector studies and develops new ideas andmethods of improving the financial markets.

5.08 ICICI is well managed and operates effectively under anexperienced fifteen member board, with balanced representation fromGovernment, public, and private industry. The Board meets periodically toset out and review ICICI's financial and operational policies and to decideon major project proposals in which exposure in a single enterpriseexposure would exceed Rs 35 million (US$2.3 million). Management of ICICIis entrusted to the Chairman and Managing Director, who is supported by twodeputy managing directors.

5.09 Organizationally, ICICI is divided into five administrativegroups: operations, planning, finance, special operations andadministration. The operations group, headed by the General Manager, isresponsible for lending including appraising new projects, supervising andmonitoring ongoing loans, and making collections. The proposed projectwill be implemented by this group.

5.10 ICICI's growth and financial performance has been impressive.Over the last five years (1982-1987/88), its assets increased to Rs 36billion while net profit more than tripled from Rs 240 million to Rs 770million. Consequently, ICICI's return on equity averaged about 25% duringthis period, while return on average assets increased from 1.6% in FY83 to2.4% in FY88. However, due largely to reduced interest spreads followingincreased borrowing costs, ICICI expects lower returns in the immediatefuture years. The proposed ERAS arrangement should help in raising spreadson foreign lending and help prevent deterioration in financial performance.

5.11 ICICI's fast-growing term lending to electronics, all to mediumand large scale projects in the private and joint sectors, reached Rs.615million in 1987, accounting for nearly 7% of its total direct lending.Roughly comparable to IDBI it, too, accounts for 30% - 40% of term lendingto electronics projects of this size in India. Electronics projectidentification and appraisal is handled by five operations officers whoalso handle projects in the chemicals area. Like IDBI the quality ofappraisals is generally good. Operations staff experience similarproblems, however, in getting access to experienced experts and to sourcesof up-to-date infirmation, particularly regarding internationaltechnological developments. The technical assistance proposed under thisproject (paras 4.19 - 4.20) would help to remedy this. Additional detailson ICICI including past and projected financial statements are presented inAnnex 5.

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VI. THE PROPOSER LOAN

A. FTrms and Cgoditions

6.01 An amount of US$210 million would be lent in three loans: toGOI (US$8 million); to IDBI (US$101 million); and to ICICI (US$101 million)at the Bank's standard variable interest rate with a repayment period of 20years, including 5 years of grace.

6.02 Relending Terms and Conditions. The Bank loans to ICICI andIDBI for fixed investment and permanent working capital would be relent tosub-borrowers in foreign exchange at a rate 2% above the World Bank rate orin rupees at the adjustable rate under the foreign exchange riskadministration scheme (ERAS) as described in paras 2.42-2-43, which iscurrently 15% with a cap rate of 18 percent. These rates are highlypositive in real terms, given the present and projected inflation rates of8. The proceeds of the Japanese and Swiss grants for the manpower andtechnical assistance components would be passed on to the implementingagencies as budgetary allocations.

6.03 Sub-groject Eligibility Criteria for the DFIs. An eligibleenterprise is defined as an industrial enterprise, which is engaged orintends to engage in manufacturing, processing or exporting. An eligiblesub-project would involve the establishment, expansion, and/or balancing,modernization, and replacement proposal of an eligible enterprise in theelectronics subsector and related areas including computer softwaredevelopment, systems integration, and precision engineering services,including tool rooms testing, designing, quality control and research anddevelopment. An understanding was reached that projects for central publicsector firms in telecommunications would not be presented for financing byIDBI under this project since the Bank has dealt with this sub-sector in adifferent context. All appraisals would include detailed sub-projectanalysis showing the economic and financial rates of return of sub-projectproposals, which, to be acceptable to the Bank, would generally have aminimum economic rate of return of 12% and a financial rate of return of15%. An enterprise should have an acceptable capital structure such thatwith the new loan the debt:equity ratio of the enterprise would not exceed70:30.

6.04 Sub-loans Terms and Conditions. The relending terms andconditions reflect the policies of the institutions and agreements reachedby the Bank as follows:

(a) sub-loans maturities would be at least 3 years and up to a maximumof 15 years, including a grace period of up to 3 years.

(b) the free limit will be US$8.0 million for the fixed investmentunder a single project;

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The DFIs also gave assurances that working capical sub-loans would notnormally exceed 5 years. Under these guidelines, 15% of the sub-projectsby number accounting for 50% of the total component are expected to beabove the free limit.

B. Administrative Procedures

rocurem

6.05 DFI Credit Componert. Under the DFI credit component, forcontracts exceeding US$8 million equivalent to be financed out of theproceeds of the Bank loan, the financial institutions would insist thatsub-borrowers follow international competitive bidding (ICB) procedures inaccordance with Bank guidelines. For purposes of bid comparisun under ICB,local manufacturers would receive a 15% price preference or the level ofcustoms duties, whichever is less. Given the fast changing and proprietarynature of electronics technology in many product areas it is expected thata number of large projects would be inappropriate for ICB and would beprocured by either direct contracting or limited international bidding(LIB) procedures as is permitted for in appropriate cases under the Bank'sGuidelines. In such cases the DFIs would provide justification that showsthat ICB is not practicable and the procedures followed are reasonableunder the circumstances to achieve economic procurement. For contracts ofless than US$8 million, procurement would be in accordance with thefinancial institution's internal procedures which have been used on anumber of previous Bank projects and are acceptable to the Bank.Presently, the financial institutions require their borrowers to solicit atleast three competitive and responsive quotations for all procurement. Foreach withdrawal application, the concerned financial institution would haveto certify that the agreed procurement procedures have been followed. Thefirnncial institutions would maintain records of the method of procurement,the bid evaluations and awards for each sub-project. The Bank wouldperiodically review these records on a sample basis in the course ofregular project supervision. The table below shows procurement method bycategory.

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PROCUREMEnT METHODS(USS Million)

Project Element Procurement Method TotalICB LCB Other N/A Cost

Credit Component 420.2 420.2(Bank) (202.0) (202.0)

Manpower Training 6.1 10.4 6.7 3.6 26.8(Bank) (5.5) (2.5) (8.0)

Technical Assistance 2.7 0.3 3.0(Bank)

Total 6.1 10.4 429.9 3.9 450.0(Bank) (5.5) (2.5) (202.0) (210.0)

Note: ICB - International Competitive BiddingOther - Includes limited international bidding, international shopping

direct purchase anid procurement of consulting services underBank Guidelines for the Use of Consultants.

6.06 Manpower Develooment and Training. Under the manpower developmentand training component, procurement will be as follows:

(i) Goods and Eguipment. International Competitive Bidding (ICB)procedures would be followed for all contracts in excess ofUS$200,000 equivalent to be financed out of the proceeds of eitherthe Bank loan or SDC grant funds. Equipment in smaller packages,and aggregating to a maximum of about US$2.5 million would beprocured through local competitive bidding (LCB) under governmentprocurement procedures acceptable to the World Bank. Equipmentpackages expected to be below US$200,000 but exceeding US$20,000and aggregating to a limit of US$1.0 million containing highlyspecialized items not available in India, may be awarded underLimited International Bidding (LIB). Off-the-shelf items notexceeding US$20,000 for each package and aggregating to a maximumof US$1.0 million could be purchased through international andlocal shopping procedures involving the solicitation andcomparison of at least three competitive price quotations.

(ii) Furniture and consumable training materials would be procured byLCB except for contracts below US$20,000 where prudent shoppingprocedures would be used. Educational materials would bepurchased through prudent shopping procedures directly frompublishers or local distributors.

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(iii) Services. The services of local specialists and consultants wouldbe procured in accordance with the Bank's "Guidelines for the Useof Consultwnts by World Bank Borrowers and by the World Bank asExecuting Agency. "

(iv) Bank Review. Draft bidding documents, master equipment listsIndicating packages and cost estinates, and bid evaluations andawards would be subject to review by the Bank for contracts valuedat US$200,000. Terms of reference for local specialists and theannual programs of work of the RCs would also be reviewed by theBank.

6.07 For the technical assistance to be financed by the JGF and theBank, the employment of consultants would be in accordance with the Bank'sGuidelines for Use of Consultants. Appointment of all consultants andtheir terms of reference unless otherwise agreed, would be subject to theprior approval of the Bank.

Disbursements

6.08 Term Lending Component. Under the term lending component, forfixed asset and permanent working capital financing the Bank loan wouldfinance either 100% of the foreign costs financed by the sub-loans of IDBIand ICICI to eligible enterprises or 80% of the amount of the sub-loans.

6.09 To facilitate disbursements, special accounts, one for GOI (US$0.5million), one for IDBI (US$10 million) and one for ICICI (US$10 million),would be established. After effectiveness of the loans, the borrowerswould request the Bark to deposit into the Special Accounts the statedamounts, which would serve as the revolving funds. The Bank wouldreplenish the Special Account on the basis of requests for reimbursementson a quarterly basis or whenever the amount in each Special Account reaches50% of the respective initial deposit. Reimbursement to the financialinstitutions would be made through the Special Account against Statementsof Expenditure (SOEs) for sub-loans which are below the free limits.Supporting documentation under SOEs would be retained by these institutionsand would be subject to review by Bank supervision missions, and to annualaudit by auditors acceptable to the Bank, such audit to be submitted within4 months after the close of each financial year. For all sub-loans inexcess of the free limit requiring prior Bank approval, IDBI and ICICIwould fully document withdrawal applications when requesting replenishmentsto the Special Account.

6.10 Manpower Training and Technical Assistance Components. Disbursementof funds provided by the Bank, SDC and JGF would be made against thefollowing categories of expenditures: (a) for equipment, furniture, booksand journals and consumable materials, as appropriate, 100% of foreignexpenditures, 100% of local expenditures ex-factory when purchased directlyfrom manufacturers or 80% of other local expenditures; (b) for localtraining, local specialists and foreign specialists, 100% of totalexpenditures. Disbursements for equipment under contracts valued at morethan US$200,000, and for all consulting services would be against full

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documentation; disbursement for contacts less than US$200,000 and books andeducational materials would be made against SOEs.

6.11 In accordance with the Bank's current disbursement profiles fordevelopment finance projects, it is expected that the US$202 million loansfor the credit component will be committed in 3 years, disbursed over sixyears and closed on December 31, 1995. The manpower and technicalassistance components will both be disbursed within five years.

Reporting and Audits

6.12 IDBI and ICICI would submit to the Bank quarterly progress reportson commitments, disbursements, collections, and arrears under the projectand for the institution as a whole. IDBI and ICICI would also submitfinancial statements in conformity with the Bank's standard reportingrequirements, including the submission of audited financial statements,prepared by independent auditors acceptable to the Bank, within 4 months ofthe close of each financial year. Audit of the IDBI and ICICI SOEs wouldbe submitted within 4 months, and of the GOI SOEs within 9 months after theclose of each financial year. After full disbursement of a sub-loans, thefinancial institutions would prepare a sub-project completion report,comparing actual vs. projected costs and benefits of the sub-project.After closing the DPI loan, the financial institutions would prepare andsubmit an operational audit report of the experiences and results underthis component (including DFI technical assistance) within 6 months.Operational audit reports covering the experiences and results under theManpower component and the Technical Assistance component (except for DFItechnical assistance) would be prepared by the Government within 6 monthsof the completion of those components.

C. Project Benefits and Risks

6.13 Benefitg. Policy reform for the electronics industry over thepast eight years--greater than for almost any other Indian industry--isintended to make this industry more competitive internationally, andthrough lower costs and prices, to disseminate the benefits of informationand telecommunications more widely domestically. This project will supportthese objectives in several ways. First, it will improve the quality ofelectronics investment by strengthening the capability of the DFIs toidentify and appraise viable new projects, and upgrade the technicalcapability of existing firms. Second, it will provide improved trainingfor the principal resource this industry requires, skilled manpower, whichin turn will raise productivity and facilitate transfer of technology thatis critical for this industry. Third, the project will develop programsand identify projects to help relieve constraints on the highly promisingcomputer software industry, and expand its capacity, especially in exports.Finally, through the above studies, the technical assistance to the DFIsand through a series of seminars specifically for Government and industryleaders the project would foster a more informed dialogue within Indiaabout the future of this industry, and how it can become a viable part ofthe electronics industry world wide.

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6.14 The credit component to the DFIs would provide long term financeto about 30 sub-projects resulting in total investment of about US$420million and employment of about 12,000. It would also initiate reform inthe system for financing industrial investments to meet both investment andworking capital requirements which could have far-reaching impact ifextended to other industries. Diagnostic assistance under DFI technicalassistance would help about 50 existing firms become more efficient. Themanpower development component would upgrade the capability of some 34technical institutions to provide improved training for about 4,000technical professionals per year at medium and highly skilled levels.

6.15 Risjk. Although policy reform is relatively well advanced in thisindustry, it should go farther, especially in the area of promoting greaterimport competition and reducing prices of final products. Thus one risk ofthis project involves uncertainty over the speed of implementation offurther needed reforms. Slow implementation would commensurately reducethe growth and efficiency of the industry itself, and reduce the efficiencyin the rest of the economy if use of information and telecommunicationtechnology is discouraged by high costs and prices. The program to improvescreening and appraisal capacity of the DFIs will help to reduce this risk.So also will the technical assistance program which will provide a betterfactual and analytic basis for investment decisions and policy improvementsthat may be needed. A second major risk concerns the rate of utilizationof the credit line under the proposed Exchange Rate Administration Scheme(ERAS). Since dhe attempt to link the relending rate to the cost of fundsthrough floating rates is new, the Government, the DFIs and the Bank willmonitor developments closely to ensure that the relending rate adjustsproperly to market conditions and adequately meets the needs of theGovernment to be compensated for bearing the foreign exchange and interestrates risks, and the needs o, the financial institutions and sub-borrowersfor some predictability in their financial plaTming. Finally, concerningthe manpower component there is a potential risk of delays inimplementation because the organizational set up is new, and theinstitutions are not familiar with Bank procedures. Additional supervisionat startup will help reduce this risk.

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VII. AGRE13MENTS AND RECONtlNDAION

AresmentsL

7.01 Agreements were reached with Government

(a) with respect to ERAS:

(i) to adjust the ERAS rate as necessary to cover the interestrate and foreign exchange risks (para 2.43); and,

(ii) to make an advance to the ERAS fund if the fund runs into adeficit in the short-run due to unexpected exchange ratemovements which would be repaid when the fund is in surplus(para 2.43).

(b) with respect to the Manpower Component:

(i) to establish a Project Implementation Unit and SteeringCommittee in accordance with a timetable and staffingacceptable to the Bank (para. 4.11);

(ii) to select, and support under the project, resource centers,engineering colleges, polytechnic institutes and centers forelectronics design and technology satisfactory to the Bank(paras. 4.08-4.09); and,

(iii) to enter into an agreement with the Government ofSwitzerland for cofinancing which will become effective nolater than December 31, 1989, (para. 4.23).

(c) to follow acceptable procedures on procurement, disbursement,reporting and auditing (paras. 6.06, 6.09-6.10, 6.12).

7.02 Understandings were reached with Government with respect to theTechnical Assistance component, to conduct the programs on softwareindustry development and support of electronics investment and policydevelopment in accordance with a schedule, organizational arrangements andprocedures to be agreed with the Bank (paras. 4.15, 4.17).

7.03 Agreements were reached with the Development FinancialInstitutions:

(a) to follow procedures for administering ine term lending component,acceptable to the Bank, including repayment terms of no more thanfifteen years (five year maximum for permanent working capitalloans) including up to three years of grace, a free limit of US$8million, minimum financial and economic rates of return of 15% and12%, respectively, working capital financing only as part ofinvestment project financing (paras. 6.02-6.05, 6.09, 6.12); and,

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(b) to provide the Bank with a satisfactory work program for theimplementation of the DFI technical assistance component bySeptember 30, 1989 (para. 4.19).

Re-commendatio

7.04 The proposed Electronics Industry Development Project constitutesa suitable basis for Bank loans of US$8 million to India, of US$101 millionto IDBI and US$101 million to ICICI at the Bank's standard variable rate,and terms of 20 years including 5 years of grace.

-41-

ANNEX 1

MIA

BLECTROcs-C lnDUSTRY DEVKLONUmT PRCUBCT

INDIA ULECTRONXCS PUODUCTION. 1980-87(RI million)

1980 1981 1923 1231 12h 1985 1986 1987

Consumer Electronlcs 2,140 2,461 3.371 3,330 5,6?0 10,437 12,750 18,200

Control, Xnstrumeat.tion

and Industrial 1,300 1,590 1,900 2,510 3,350 4,040 5,250 6,850

Computer Systems 300 325 510 780 920 1,550 2,800 3,750

Comunications & Broadceastin 1,850 1,542 2,550 2,700 3,205 3,801 5,040 7,?00

Aerospace & Defense 680 692 1.084 1.262 1.490 1.960 2220 _3.000

Total Equipment 6,265 6,575 9,425 10.550 14,835 21,650 28,060 36,900

Components 1,630 1,731 2,141 2,300 3,030 4,100 5,100 7,000

Export Processing Zones 1655 2SS 483 750 1.035 841 1.437 1.300

Total Electronics 8,060 8,560 12,050 13,600 18,900 26,600 34,597 47,200

Source: Department of Electronics, Data Bank and nfomation Division.

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ELECTRONICS INSDnXSY DEVELOPMENT PROJECT

NANPOWER DEVELOPMENT

A. THE COMPONENT

Origin of the Component

1. The component was identified in April 1986 when a World Bank missionreviewed the findings of the Study Team on Electronics Manpower. This studyteam was established by the Seventh Plan Working Group on Electronics for theDepartment of Electronics (DOE). Noting the skill intensive-nature of theelectronics industry, the Study Team recognized that upgrading of the work-force, together with improvements in financing and industrial policies, wouldbe necessary to improve quality and competitiveness. In view of the relativelylow level of wages, a well trained workforce would be a major factor inimproving competitiveness. For these reasons, the DOE decided to consider anumber of manpower development schemes. These included: (a) establishment ofthree new Centers for Electronics Design and Technology (CEDTs); (b) develop-ment of a manpower information system; (c) support for training programs formedical and consumer electronics service technicians; (d) support forelectronics education in universities; (e) upgrading of engineering collegeteachers; and (f) promotion of institute/industry exchanges.

2. Following discussions with representatives of the electronics andcomputer industries, educational institutes, ICICI and DOE manpower special-ists, the mission chose to focus on the training of higher and middle levelmanpower, specifically the pre- and in-service training of engineers andtechnicians. This objective would support the overall aim of the ElectronicsIndustry Development Project, which is to assist the industry in improvingquality and competitiveness. Higher and middle level technical manpower wouldplay a crucial role in introducing better design and manufacturing technol-ogies, improving quality control, establishing better distribution andservicing systems and developing the potential for software exports in thecomputer industry.

3. To examine what was needed to be done to improve the quality of higherand middle level manpower, a team of four consultants from industry, governmentand academia, headed by Professor N.J. Rao, Chairman of the Center forElectronics Design and Technology at the Indian Institute of Science (11Sc) inBangalore, analyzed the manpower and training situation. The consultantsreviewed the available reports on the demand, supply and quality of manpowerfor the electronics and computer industry and the adequacy of the availabletraining. In November 1988, the consultants submitted their final report.l/The report confirmed that industry needs to provide a substantial amount ofadditional training for newly graduated engineers and technicians before theyare productive. In-service training programs have become a regular feature inthe larger electronics and computer firms that commit considerable resources to

I/ Manpower Development in Electronics and Computers in India, ProjectReport prepared for the World Bank, by N.J. Rao, H.S. Jamadagni, S.P.Ranade, and S.S. Suryanarayanan, November 1988.

-43- ANNEX 2Page 2 of 32

upgrade the skills of t'aeir engineers and technicians. However, many of themedium and small size companies do not have the resources, expertise or fundsto train their fresh engineers and technicians and must depend on the existingcontinuing engineering education programs to upgrade their practicingengineers. For all firms, large or small, the quality of their freshlyrecruited engineers and technicians depends to a large extent on the quality ofthe pre-service engineering education programs offered at Engineering Collegesand Polytechnic Institutes.

4. In India, as in most countries, basic engineering skills are acquiredin Engineering Colleges (ECs) for (under-graduate) engineers and in PolytechnicInstitutes (PIs) for (diploma) technicians. Such ECs and PIs are an acceptedand efficient way to train large numbers of technical personnel in basicengineering skills for employment in industry and services. (Specialized andindustry-specific skills are usually learned on-the-job or in in-servicetraining programs). However, the consultants found that many of the ECs andPIs that train the labor force used by the electronics and computer industryhave difficulties in keeping up with the fast changing technologies in theseindustries. The reasons for this include: insufficient funds to purchase up-to-date technical information, learning materials and equipment; insufficientopportunities for students to get hands-on experience in product design anddevelhipment; and lack of emphasis on repair, maintenance and quality controlskills. Moreover, few of the teachers in ECs and PIs have had an opportunityto gain experience from working in industry. Many start teaching immediatelyafter graduation because of the serious shortage of teachers. In addition,very few institutes have strong linkages with industry and organize programs oftraining and visits in industry (industrial attachment) for their students.

5. To alleviate some of these difficulties and improve the quality ofengineers and technicians who are being trained as well as those who arealready employed, the consultants recommended that: (a) the pre-servicetraining at ECs and PIs of engineers and technicians in electronics andcomputer software be improved, through better provisions for obtaining thelatest technical information and learning materials, better access to modernequipment and instruments during training, and more opportunities for hands-onproduct design and development and repair and maintenance exercises; (b) thelinkages between the ECs, PIs and the industry be strengthened throughindustrial attachment and the provision of part-time teachers from industry;and (c) the in-service training of engineers and technicians be improved,particularly in the areas of new technologies, industrial design, computerapplications, software applications and repair and maintenance throughimproving continuing engineering education programs and state-of-the-artseminars. The DOE and other concerned ministries supported the recommendationsof the consultants, in principle, and the component was appraised inFebruary/March 1989 by a World Bank mission assisted by electronics andcomputer industry specialists provided by the Swiss Development Cooperation(SDC).

Obgletives and Scope of the Component

6. The component would assist on a pilot scale in improving the qualityof the workforce of the electronics and computer software industry by improvingthe skills and knowledge of engineers and technicians already employed or beingtrained for employment in these industries and by strengthening the linkages

-44- ANX 2Page 3 of 32

between training institutes and industry. The aim is to equip the engineersand technicians with the skills necessary to bring about the necessaryimprovements in the quality ;;f products and the level of technology in theindustry. It would build on previous efforts of DOE to establish QualityControl Centers and Centres for Electronics Design and Technology and to raisethe standards of employee training and the quality of engineering education inthe country.

Obj ectives

7. The component will assist in:

(a) Improving the auality of practicing engineers and technicians byconducting state-of-the-art seminars for middle and higher leveltechnical employees of small and medium scale industries and bysupporting Continuing Engineering Education Programs at the IndianInstitutes of Technology of Bombay and Delhi, the Indian Institute ofScience and at the Centers for Electronics Design and Technology(CEDTs).

(b) Improving the auality of engineers and technicians under training atselected ECs and PIs through a program of: developing up-to-datetechnical learning materials in areas such as product design, computerscience and software development and repair and maintenance where suchmaterials are lacking; introducing hands-on product design anddevelopment exercises and training; modernizing teaching facilities andequipment; and, providing practical training for teachers who do nothave experience in industry.

(c) Strengthenin. the links between industry and engineering educationinstitutes through industrial attachment for students and the provisionof part-time teachers from industry.

DescriRtion of the Component

8. The objectives will be achieved by tapping the unique expertise andclose linkages with industry of the IITs of Bombay and Delhi and the IISc ofBangalore a fourth Resource Center, acceptable to the Bank will be selectedby the DOE and appraised before October 15, 1989. These four instituteswill act as Resource Centers (RCs) and organize seminars in state-of-the-arttechnologies of interest to small and medium scale firms and expand and/orimprove their continuing engineering education programs. They will alsoassist 14 selected Engineering Colleges (ECs) and 12 selected PolytechnicInstitutes (PIs) in improving the quality of training in their electronicsand computer science departments and strengthen their links with industry.The YRCs will also support the CEDTs to expand and improve the special shortcourses these centers offer for practicing engineers and technicians. Thesecourses aim at upgrading the skills and knowledge of the electronics andcomputer industry workforce in modern technologies, equipment and processes.One of the objectives of the Project is to improve the programs and exper-tise of the Polytechnic Institutes in electronics and computer software.Since the Nettur Technical Training Foundation Electronics Center (NEC) hasspecial expertise in this area it is expected that the services of NEC willbe utilized in the Project.

-45- ANNEX 2Page 4 of 32

9. Conducting State-of-the-Art Seminars and Supporting ContinuingEn*isarin *ducation tosrams. (Estimated base line cost, US$2.0 aillion)

(a) In consultation with representatives of the electronics and computerindustry, industry associations and the DOE, the RC's will identifythe need in small and medium scale firms for information on state-of-the-art topics in engineering science and technology applications andinvite well known local or international specialists (including non-resident Indian, NRIs) in these areas to conduct a series of seminarsat convenient locations. About six such seminars sill be offered eachyear for about 25 participants from industry in four differentlocations in the country. In total it is planned that over the lifeof the project approximately 3,000 engineers and technicians willattend and benefit from these seminars at nominal cost to their firms.Funds will be provided to finance most of the cost of organizing andconducting the seminars.

(b) To improve the opportunities for practicing engineers and techniciansto benefit from the on-going continuing engineering education programsoffered at the RCs particularly at the IITs of Bombay and Delhi, fundswill be made available to expand and improve the resources, facilitiesand educational equipment required for these programs with a partic-ular emphasis on the production of distance learning materials foroff-campus training. Also the CEDTs would be supported to start orexpand their advisory and consulting services to the electronics andcomputer firms in their region. This would include the upgrading andtraining of their staff, the procurement of books, technical trainingmaterials and equipment.

10. Provision of Special Learning Materials. Modernizing Teachingfacilities, and upgrading teachers. (Estimated base line costs, US$18.0million)

(a) To improve the quality and relevance of training at selected ECs andPls, specialists from the RCs and industry will collaborate inproducing learning materials (course ware) in areas of studies weresuch materials are now lacking. The need for such materials in aboutsixty percent of the courses in electronics and computer science hasbeen determined. About 32 courses in electronics, 9 in computerscience and 8 in laboratory practice (see the list on page and ofthis Annex) have been tentatively identified where a lack of appro-priate course materials is hampering the preparation of engineers andtechnicians in ECs and PIs. The provision of textbooks and technicaljournals will also be improved. In addition, tl'e selected ECs and PIswill be supplied with an adequate quantity of technical catalogues tomake it possible for student to undertake hands-on product design anddevelopment work. Also, suitable consulting firms will be contractedto conduct product surveys and produce product ideas to assist thestudents in designing, developing and manufacturing (on a prototypebasis) potentially commercially viable products as part of theirtraining.

(b) The teaching facilities, particularly the electronics, fabrication,and computer laboratories at ECs and the fabrication, computer,production systems and maintenance laboratories in the PIs are in some

-46- AMEX 2Page 5 of 32

cases lacking or if they are available, poorly equipped. To enablethe stadents to get hands-on experience in product development, qual-ity control, maintenance, etc. approximately 32 electronics and 32computer laboratories will be established or modernized at the selec-ted institutes. Also consumable materials (parts and components)required for the laboratory classes will be provided.

(c) To enable the teachers to guide and assist the students in thepractical laboratory work, the RCs will organize a total of 32 six toeight-week courses for teachers of the ECs, 62 four-week courses forteachers of the PIs, and 5 three-day exposure courses in IndustrialDesign for teachers of ECs and PIs.

11. Providing Industrial Attachment and Part-Time Teachers from Industry,(Estimated base line cost US$1.7 million)

(a) To provide engineering students with an opportunity to learn first-hand about potential jobs in industry, the RCs assisted by specializedconsulting firms will organize industrial attachment programs. Firsta survey will be conducted to identify firms interested in partic-ipating, determine the optimum duration of the attachment and proposea time table that fits the academic calendar. Initially theseattachment programs will be for third year students of ECs who willspend at least six weeks in an electronics or computer firms in theirarea. Depending on the size of the firm, small groups of two to fourstudents will be assigned specific jobs during their attachment underthe guidance of an experienced engineer or technician designated forthat purpose. The students would be required to prepare a report ontheir attachment which will be taken into account in their annualassessment and grading. Funds will be provided to cover travel andother direct costs for the students and for a small honorarium for thesupervisor. The attachment program if successful will be extended tothe students of PIs and to the teachers of ECs and PIs.

(b) To make it possible for the ECs and PIs to release their teachers fortraining, the RCs will try to recruit experienced engineers andtechnicians from industry to substitute on a part-time basis forteachers undergoing training. It is expected that the use of teachersfrom industry will benefit the students preparation for employment andstrengthen the link and cooperation between tnie institutes and localindustries. Funds will be provided to pay such part-time teachers.

B. COSTS. FINANCING AND IMPLEMENTATION OF THE COMPONENT

Costs

12. The total cost of the component is estimated at US $26.8 millionequivalent. A summary of the estimated cost by activity is provided inTable 1 and by category of expenditure in Table 2. More detailed costestimates are provided on pages 14-19 of this Annex.

-47- -ANE2Page 6 of 32

Table 1: SUMMARY OF COSTS BY iCTMVITY

Ru. million USS millionActivity Local Foreign Total Local Foreign Total

1. SOA Seminars 0.70 7.54 8.24 0.05 0.50 0.55

2. CEEP's 17.76 3.90 21.66 1.18 0.26 1.44

3. Learning Mate-rials Dev. 14.65 - 14.65 0.98 - 0.98

4. Staff Training 62.00 12.54 74.54 4.13 0.84 4.97

5. ModernizingFacilities 115.36 64.74 180.10 7.69 4.32 12.01

6. IndustrialAttach. 14.28 - 14.28 0.95 - 0.95

7. Industry Teachers 10.80 - 10.80 0.72 - 0.72

8. PIU 18.23 0.57 18.80 1.22 0.04 1.25

Base Line costs bL 253.78 89.29 343.07 16.92 5.9S 22.28

Contingencies 34.90 24.34 S9.24 2Li 1.,.95i

Total Costs A/k/ 288.68 113.63 402.31 19.25 7.57 26.82

I/ Does not include US$1.65 million equivalent in identifiable taxes.bJ Figures may not add due to rounding.

Table 2: SUMMARY OF COSTS BY CATEGORY OF EXPENDITURES

Category Rs million US$ millionLocal Foreign Total Local Foreign Total

A. Civil Works 34.00 - 34.00 2.27 - 2.27B. Equipment 70.10 70.10 140.20 4.67 4.67 9.35C. Furniture 13.50 - 13.50 0.90 - 0.90D. Books and Journals 9.08 2.27 11.35 0.61 0.15 0.76E. kocal Training 36.12 - 36.12 2.41 - 2.41F. ?.qal Specialists 52.40 - 52.40 3.49 - 3.49C. Poveign Specialists - 9.60 9.60 - 0.64 0.64H. Maintenance 9.30 - 9.30 0.62 - 0.62I. Coneumables 30.60 6.00 36.60 1.95 0.49 2.44

Base Line Costs A/ 255.10 89.97 343.07 16.92 5.95 22.87

Contingencies 35.08 24.16 59.24 2.34 1.61 3.95

Total Costs / 290.18 112.13 402.31 19.26 7.56 26.82

A/ Figures may not add due to rounding.

-48- ANNEX 2Page 7 of 32

13. Base line costs have been estimated on the basis of February/March1989 prices. The cost of civil works has been estimated as approximately10% of the total cost. Furniture and equipment costs have been estimatedon the basis of actual costs of equipment for similar facilities in Indiaand include allowances for transportation and installation. Unit costs forlocal training and local specialists have been based on standard rates usedby the GOI. The unit costs for foreign specialists have been based on therates used by international organizations for similar services in India andelsewhere in the region.

14. Taxes and Duties. Identifiable taxes were estimated at aboutRs. 24.75 million (US$1.65 million equivalent), and were based on currentpractice of duties on imported goods (average of 30% on importedequipment). The Government would finance all taxes and duties.

15. Contingency allowances of US$3.95 million (about 17% of baselinecosts) have been included to account for unforeseen physical conditions andestimated price escalation. Physical contingencies were estimated at 10% ofbaseline costs for equipment, and 5% for all other categories. Pricecontingencies for local costs and foreign costs were estimated on the basisof the projected annual rates of price escalation for local rates and forforeign rates.

16. The foreign exchange component of US$7.56 million (about 28% oftotal costs) has been calculated on the basis of the following foreignexchange percentages: equipment - 50%; foreign specialists - 100%; booksand consumable materials - 20%.

Einancing

17. The proposed IBRD Loan of US$8.0 million plus cofinancing expectedfrom the Swiss Development Cooperation (SDC) on a parallel basis forUS$16.2 million would finance about 90% of the total estimated cost of thecomponent. The Government of India would be responsible for the remaining10% of the costs, amounting to US$2.61 million equivalent (Table 3). TheIBRD Loan would cover the foreign exchange costs and the cofinancing grantwould cover the local costs of the component. GOI has agreed to enter intoa cofinancing agreement with the Government of Switzerland which wouldbecome effective no later than December 1, 1989.

-49- ANNEX 2Page 3 of 32

Table 3: FINANCING PLAN(US$ million)

Item GOI IBRD SDC TOTALamount % amount % amount % amount %

A. Civil works 2.61 100 - 2.61 9.7

B. Equipment - 8.00 73 3.02 27 11.03 41.2

C. Furniture - - 1.00 100 1.00 3.7

D. Books and Journals - - 0.88 100 0.88 3.3

E. Local Training - - 2.87 100 2.87 10.7

F. Local Specialists - - 4.07 100 4.07 15.2

G. Foreign Specialists - - 0.77 100 0.77 2.9

H. Maintenance - - 0.76 1J0 0.76 2.8

I. Consumables - - 2.83 100 2.83 10.6

Total Costs aZ 2.61 9.7 8.00 30.0 2.6.20 60.4 26.82 100

A/ Figures may not add due to rounding.

Management and Implementation of the Component

18. Project management and implementation would be undertaken by aProject Implementation Unit (PIU) to be established by the Department ofElectronics (DOE). Implementation would be done according to the scheduleshown on pages 20-21 of this Annex. The PIU would be managed by a ProjectDirector. The PIU senior staff would include next to the Project Director:about four Project Coordinators to coordinate with the Resource Centers andsupervise the project activities at the participating institutes; a Pro-curement Officer responsible for all procurement including equipment,furniture, books and consumable materials; accountants responsible formaintaining ths accounts and records. PIU staff would be assisted bysupport (technical assistant) and clerical staff. The selection of thestaff for the PIU positions would be based on professional qualificationsand experience with similar responsibilities and satisfactory to the WorldBank.

19. The PIU -ould be responsible for procuring and monitoring theservices of the four RCs which would be responsible for executing an annualprogram of work prepared by the coordinator of the respective RC . Thisprogram of work would be subject to review and approval by a SteeringCommittee. The annual program of work would be based on the outline of theservices to be provided for the duration of the project contained in theLetter of Commitment signed between the PIU and the RCs at the start of theproject. The program of work would specify the learning material develop-ment, training, consulting and other services to be provided by the staffof the RCs or consultants hired by them and the equipment and materialsrequired by the RCs to provide these services. It would also contain a

-50- MM 2Page 9 of 32

time-table or schedule setting out when the services will be provided and abudget specifying man-months of work, fees, cost of materials and over-heads. A similar letter of commitment would also be entered between thePIU and the CEDTs, ECs and PIs selected to receive assistance under thisproject. The Steering Committee would have representatives from thecomputer and electronics industry, industry associations, the RCs, theMinistry of Human Resources Development (HHRD), other concerned governmentdepartments, the Swiss Development Cooperation and DOE. The SteeringCommittee would meet several times a year to review the annual programs ofwork, budgets and the progress reports of the RCs.

20. The PIU would also procure the equipment, furniture, books andconsumable materials on the basis of specifications prepared by the RCs andthe tender documents to be drawn up and executed by the PIU. It wouldensure that transport, installation, warranty and service would be providedby the suppliers. In consultation with the RCs the PIU would contract,following World Bank guidelines for the Use of Consultants, the services ofspecialized consulting firms to plan and to organize the state-of-the-artseminars and to conduct the survey and undertake the planning for theindustrial attachment. The participants to the state-of-the-art seminarswould be selected by the firms contacted by the RC's. For the teachertraining programs at the RC's the selection of teachers who will receivetraining would be done by their institute in consultation with the RC's.

21. The component would be implemented over a period of five years,starting in the fall of 1989. During the first year the equipment will beprocured and installed, the facilities will be made ready for the equipmentand the learning materials for the teacher training courses will beprepared. The state-of-the-art seminars would start as soon as possiblesince this is an on-going program currently undertaken by a number of thelarger electronics and computer firms. The state-of-the-art seminarssupported in this project would aim at extending this type of trainingprogram to employees of medium and small-scale firms. The teacher trainingcourses conducted by the RCs would start in the second year. Thedevelopment, testing and distribution cf the learning materials would be acontinuous effort for the duration of the project. The component would becompleted by December 31, 1994.

Status of Project Pregaration

22. The preparation of the component started in June 1987 and wascompleted in November 1988 when the project preparation report wassubmitted by the consultants. The report was accepted by the World Bankand SDC. The DOE and tHRD have established committees to finalize andreach agreements on the detailed proposals of the report. It containsproposals for: (a) the curriculum/subject areas of the electronics andcomputer programs at the ECs and PIs for which learning materials need tobe developed; (b) the number and type of teacher training courses that needto be conducted for the teachers of the CEDTs, ECs and PIs; (c) proposedlists of laboratories and teaching facilities that need to be establishedat the selected CEDTs, ECs and PIs; (d) draft lists of equipment for theselaboratories and teaching facilities; (e) the selection of the RCs; andfinally, (f) a list of ECs and PIs selected on the basis of their capacityfor absorbing and benefitting from the assistance under this component andfor their close proximity to electronics and computer industries.

-51- ANNEX 2Page 10 of 32

23. The GOI has identified the institutes which will participate inthe project which were reviewed by the Bank at negotiations and onesatisfactory. The final group of RCs, ECs, Pls and CEDTs selected toparticipate must be satisfactory to the Bank. The establishment of the PIUand appointment of a Director was also agreed upon. The GOI will provide atimetable for the complete staffing of the PIU and appointment of asteering committee which must be satisfactory to the Bank.

Procurement

24. Procurement arrangements are shown in Table 4 below.

Table 4: EXPENDITURE BY PROCUREMENT CATEGORY(US$ million)

Total CostProcurement Method including

Category ICB LCB Other p/ NA Contingencies

A. Civil works - 2.61 - - 2.61B. Equipment 5.51 4.51 1.00 - 11.03

(5.51) (2.70) (8.21)C. Furniture - 1.00 - - 1.00D. Books and Journals - - 0.88 - 0.88E. Local Training - - 2.87 2.87F. Local Specialists - - 4.07 - 4.07G. Foreign Specialists - - 0.77 - 0.77H. Maintenance - - - 0.76 0.76I. Consumables 0.57 2.26 - - 2.83

TOTAL hI 6.08 10.38 6.72 3.63 26.82(5.51) (2.70) - - (8.21)

A/ includes international shopping and direct purchase.h/ figures may not add due to rounding.

Note: Figures in parenthesis are the amounts financed by the Loan.

25. The PIU has the responsibility to assure that the equipmentprocured under the project fits the requirements of the teaching programs atthe participating engineering institutes. In addition, the Consultantssuggested that for specific laboratory equipment which are used on a day-to-day basis by students (e.g., power supplies, function generators, oscil-loscopes, PCs etc.) the specifications include the requirement that repairservices can be provided by the suppliers. This is to ensure that componentand parts required for the relatively frequent repairs of this equipment arereadily available and down-time is limited. Equipment would be tenderedunder ICB and LCB procedures. Equipment packages would be divided into twomain groups: those items to be procured in large quantities with a valuegreater than US$200,000 equivalent would be procured on the basis ofinternational competitive bidding (ICB) in accordance with the World Bankguidelines. Local manufacturers would be given a margin of preference inbid comparison of 15% of the c.i.f. price of competing imports or the actualcustoms duty, whichever is lower. A condition for tender availability of

-52- AEX 2Page 11 of 32

repair and maintenance services in or near the engineering institutes andcriteria for evaluation and contract awarding would be the proven capabilityof the suppliers to provide repair and maintenance. Another condition wouldbe that the equipment operates properly under local conditions. The PIUwould ensure that such requirements are spelled out in the tender documents.

26. Equipment in smaller packages, and aggregating to a maximum ofabout US$2.7 million would be procured through local competitive biddingunder government procurement procedures acceptable to the World Bank. Thesame requirement for efficient maintenance and repair services would berequired from the local manufacturers. For equipment packages expected tobe below US$200,000 but containing highly specialized items not available inIndia, may be awarded under the Bank's guidelines for Limited InternationalBidding. Off-the-shelf items not exceeding US$20,000 equivalent for eachpackage and aggregating to a maximum of US$1.0 million could be purchasedthrough prudent shopping on the basis of three competitive price quotations.

27. Furniture and consumable training materials would be procuredlocally through competitive bidding and for contract below US$20,000 throughprudent shopping procedures. Educational materials would be purchasedthrough prudent shopping procedures directly from publishers or localdistributors.

28. Bank Review. Draft bidding documents, master equipment listsindicating packages and cost estimates would be subject to reviewed by theAssociation. Terms of reference for local specialists and the annualprograms of work of the RCs would also be reviewed by the Association.

Disbursement

29. The proposed loan of US$8.00 million equivalent would be disbursedover a period of two years (page 13). Disbursement would be made againstcategory of expenditures for equipment as follows: 100% of foreignexpenditures, 100% of local expenditures ex-factory and 80% of other localexpenditures.

30. The disbursement forecast is based on the profile of other Bankfinanced education projects in the Asia region since a profile for educationprojects in India has not been established due to the limited operations inthe sector. The disbursement forecast is feasible since the procurement ofequipment, furniture, books and materials which represents about 53% of theloan and grant funds is expected to be completed after two years.

SRecial Account

31. In order to facilitate disbursement, a Special Account will beestablished at the Reserve Bank of India, with an authorized allocation ofUS$500,000 representing an estimated average of three months' expenditures.

Accounts. Audits and Reporting

32. The Project Implementation Unit (PIU) would establish and maintainseparate accounts for all project expenditures. The accounts will bemaintained in accordance with sound accounting practices. The accountingstaff will be given training in disbursement and accounting procedures and

-53-Page 12 of 32

practices followed by the World Bank. Auditing of the accounts will beperformed annually by an independent auditor and according to proceduresacceptable to the World Bank. The Special Account and accounts supportingStatement Of Expenditure (SOE) activities would be audited annually byindependent auditors acceptable to the World Bank. The SOE audit shouldcontain a separate opinion from the auditor as to whether the statements ofexpenditures submitted during such fiscal year, together with the proceduresand internal controls involved in their preparation, can be relied upon tosupport the related withdrawals. An audit report will be submitted to theWorld Bank within nine months of the end of the Government's fiscal year.The PIU wou'd also monitor progress in project implementation and report tothe World Bank each semester. Within nine months of the Closing Date, thePIU would submit a project completion report to the World Bank.

C. BENEFITS AND RISKS

Benefits

33. The major benefits of the component would be:

(a) The availability of engineers and technicians with the skillsrequired for the modernization and improvements of the qualityand competitiveness of the electronics and computer industrywould be improved.

(b) The improvement of the training for the principal resource thisindustry requires, skilled manpower, which in turn will raiseproductivity and facilitate transfer of technology that iscritical for this industry.

(c) There would also be a more permanent improvement of the teachingfacilities and equipment at the participating engineeringeducation institutes which would represent a long term benefitwith regard to the capacity of these institutes to produce highquality engineers and technicians.

(d) The component would also institutionalize two activities: indus-trial attachment and the use of part-time teachers from industrywhich will not only improve the linkages between education insti-tutes and industry but also improve the relevance of engineeringeducation.

Risks

34. The major risk concerns the fact that this is the first World Bankassisted project to be implemented by the Department of Electronics. Somedelays are to be expected during the early stages of the implementation dueto the fact that the DOE would have to learn World Bank procedures foraccounting, record keeping and reporting. The other risk is that theResource Centers may be slow in delivering the services and the teachingassignments they have contracted for because of conflicting obligations. Toreduce that risk the project has made funds available for the resourcecenters to contract additional staff and resources from outside tosupplement their own resources and staff.

-54-ANNE 2Page 13 of 32

D. AGREEMMES

35. During negotiations agreements were reached with GOI.

(i) to establish a PIU and steering committee in accordance with atimetable and staffing acceptable to the Bank.

(ii) to select, and support under the project, resource centersengineering colleges, polytechnic institutes and centers forelectronics design and technology satisfactory to the Bank.

(iii) to enter into a cofinancing agreement with the Swiss Governmentthat becomes effective no later than December 31, 1989.

ESTIMATED SCHEDULE OF DISBURSEHENT(US$ million)

IBRD Amount per CumulativeFiscal Yr. Semester Amount a/& Semester IBRD SDC IBRD % SDC %

19901 1.27 1.00 1.27 15.5 1.00 6.32 1.28 1.00 2.55 31.0 2.00 12.5

19911 3.19 1.82 5.74 71.1 3.82 23.92 2.27 2.76 8.C0 100.0 6.58 41.1

19921 1.73 8.31 51.92 1.73 10.04 62.8

19931 1.58 11.62 72.62 1.58 13.20 82.4

19941 1.41 14.61 91.22 1.41 16.20 100

A/ Figures may not add due to rounding.

ELECTEtNICS INDUSTRY DVEVLOFHEMT PBOJCYtLWOM DgmLDR

Costs eatimates in Rs Lahks and US * Million

I-proving the Quality Improving the Quality of Strengthening Industry-Universityof Prectio. ngineers Engineers and Teohaleans Link"gesand Technicians in Training

01 02 03 04 05 08 07 08CATEGORIES STATS CONTINUING LEARNING STAFF MODERN. INDUSTRIAL INDUSTRY PIU TOTALS CONTINGM. TOTALS

OF 0 TE ART IN. MATERIAL TRAINING FACILITIES ATTACH. TEACHERS INCLUDINGEXPENDITURES SEKINARS EDUCATION DEMELOP. CONTINGEN

________________________________________________________________________________________________________________________________

CIIt NO 5.00 251.00 84.00 340.00.03 1.67 .56 2.27 .34 2.61

9 EQUIPH 70.00 200.00 1124.00 8.00 1402.00EQUIPMENTS ~~~.47 1.33 7.49 .05 9.36 1.68 11.03

C FURNITURES 9.00 8.00 116.00 2.00 135.00.06 .05 .77 .0.1 .90 .10 1.00

D BOOIS/JOURNALS 7.50 22.00 84.00 113.50.05 .15 .56 .76 .13 .68

B LOCAL TRAINING 5.40 30.00 183.00 142.80 361.20.04 .20 1.22 .95 2.41 .48 2.87

F LOCAL 77.00 146.50 48.00 108.00 144.50 624.00SPECIALIST .51 .98 .32 .72 .96 3.49 .b8 4.07

G FOREIGN 76.00 21.00 96.00SPECIALIST .50 .14 .64 .13 .7t

B MAINTENANCR 5.60 12.40 50.00 25.00 93.00.04 .08 _33 .17 .62 .14 .76

I COSiUMA8LES 2.00 12.50 343.00 8.50 . 366.00.01 .08 2.29 .06 2.44 .39 . 2.83

T1 0 T A L: Rp 82.40 216.60 146.50 745.40 1801.00 1A2.80 108.00 188.00 3430.705 .55 1.44 .98 4.97 12.01 .95 .72 1.25 22.87 3.95 26.82

NOTE: The total component cost does not include US * 1.65 H in identifiable taxes.

ELECTRONICS INDU8TRY DEVELOPMENT PROJECTMANPOWER DEVELOPMENT

cost estimates for FY 90

Improving the Quality Improving the Quality of Strengthening Industry-Ubiversityof Practic. Engineers Engineers and Technicians Linkagesand TechnicLans In Training

01 02 03 04 05 06 07 08CATEGORIES STATE CONTINUING LEARNING STAFF MODERN. INDUSTRIAL INDUSTRY PIU TOTALS CONTINGEN. TOTALSor OF THE ART ENG. MATERIAL TRAINING FACILITIES ATTACH. TEACHERS INCLUDINGEXPENDITURES SEMINARS EDUCATION DEVELOP. CONTINGEN.

A CIVIL WORK 2.00 100.40 16.80 119.20 10.6i 129.61.01 .67 .11 .79 .07 .87

8 EQUIPMENTS 28.00 60.00 224.80 6.40 336.20 42.74 361.94(501 iMp.) .19 .53 1.50 .04 2.26 .26 2.55C FURNITURES 3.60 3.20 46.40 1.80 54.80 4.16 58.96

.02 .02 .31 .01 .37 .03 .39 1D BOOKS/JOURNALS 1.50 2.20 16.80 20.50 1.56 22.06 at(201 imp.) .01 .01 .11 .14 .01 .15 1E LOCAL TRAINING .54 10.50 18.30 20.34 2.23 31.57

.00 .07 .12 .20 .01 .21F LOCAL 15.40 29.30 4.80 -10.80 26.90 69.20 6.78 95.98SPECIALIST .10 .20 .03 .07 .19 .59 .05 .64a FOREIGN 7.50 7.50 .57 6.0?SPECIALIST .05 .05 .00 .05

(100X imp.)H MAINTENANCE 5.00 5.00 .38 5.36.03 .03 .00 .04

I CONSUMABLES .20 1.25 68.60 2.55 72.60 5.52 78.12(20X Imp.) .00 .01 .46 .02 .46 .04 .62…--------------------------------------------------------------------__------__---------------------------------

T O T A L: Rs 8.24 62.25 29.30 208.90 373.40 .00 10.80 44.45 737.34 74.55 811.9.05 .42 .20 1.39 2.49 .00 .07 .30 A.92 .50 5.41 "

wA

ELECTRONIcS INDCUSRY DtVELOFHENT PRWJECT-AO DEVEWFHENT

Cost estimates for FY 91

Improving the Quality Improviag the Quality of Strengthening Industry-Unlversityof Practlc. Zagineers Engiseer end Technoician Linkagesand Techoiciana lD Training

01 02 03 04 06 06 07 08CATEGORIES STATE CONTINUING LEARNING STAFF MODERN. INDWSTRIAL INDUSTRY PIU TOTALS CrINTINGEN. TOTALS

OF OF THE ART ENG. MATERIAL TRAINING FACILITIES ATTACH. TEACHERS INCLUDINGEXPENDITURES SEMINARS EDUCATION DEVELOP. CONTINGEN.

A CIVIL WORK 3.00 100.40 67.20 170.60 28.49 199.09.02 .67 .45 1.14 .19 1.33

B EQUIPMENTS 42.00 120.00 674.40 1.60 838.00 150.00 9B8.00(50% Imp.) .28 .80 4.50 .01 5.59 1.00 6.59

C FURNZTURES 5.40 4.80 69.60 .40 80.20 10.35 90.55.04 .03 .46 .00 .53 .07 .60 u

D BOOKS/JOURNALS 2.25 6.60 29.40 36.25 4.93 43.18(20% imp.) .02 .04 .20 .26 .03 .29

e LOCAL TRAINING 1.62 6.00 45.75 14.28 67.65 8.73 76.38.01 .04 .31 .10 .45 .06 .51

F LOCAL 28.95 58.60 14.40 32.40 28.90 161.25 20.80 182.05OSPECIALIST .18 .39 .10 .22 .19 1.08 .14 1.21

a FOREIGN 22.50 22.50 2.90 25.40SPECIALIST .15 .15 .02 .17(100% imp.)

H HAINTNANCE 5.00 5.00 .65 5.65.03 .03 .00 .04

I CONSUMAILES .60 3.75 102.90 2.55 109.80 14.16 123.96(20% imp.) .00 .03 .69 .02 .73 .09 .83

____________________________ ____________________________ ____________________________ ____________________-------T 0 T A L: RB 24.72 89.35 58.60 291.95 943.50 14.28 32.40 38.45 1493.25 241.01 1734.26

S .18 .60 .39 1.95 6.29 .10 .22 .26 9.96 1.61 11.56

Wc.J

ELECTRONICS INDWSTRY DEVELOPENT P1OJECTMANPOWER DEVELOPMNT

Cost estlmates for FY 82

Improving the Quality Improving the Quality of Strengthening Industry-Universityof Practic. Engineers Engineers and Technicians Linkagesand Technicians ln Training

01 02 03 04 05 06 07 08CATEGORIES STATE CONTINUING LEARNING STAFF MODERN. INDUSTRIAL INDUSTRY PIU TOTALS CONTINGEN. TOTALS

OF OF THE ART ENG. MATERIAL TRAINING FACILITIES ATTACH. TEACHERS INCLUDINGEXPENDITURES SEMINARS EDUCATION DEVELOP. CONTINOEN.

A CIVIL WORK 50.20 50.20 12.30 62.50.33 .33 .08 .42

B EQUIPMIENTS 112.40 112.40 25.63 138.03(50% imp.) .75 .75 .17 .92

C FURNITURES .00 .00 .00.00 .00 .00

D BOOKS/JOURNALS 1.50 4.40 12.60 18.50 3.29 21.79(20% imp.) .01 .03 .08 .12 .02 .15

E LOCAL TRAINING 1.08 6.00 45.7b 42.84 95.87 17.03 112.70.01 .04 .31 .29 .64 .11 .75

F LOCAL 11.55 43.95 9.60 21.60 28.90 115.60 20.58 136.18SPECIALIST .08 .29 .06 .14 .19 .77 .14 .91

a FOREIGN 15.00 15.00 2.67 17.67SPECIALIST .10 .10 .02 .12(100% imp.)

N MAINTENANCE 5,00 5.00 .89 5.69.03 .03 .01 .04 p

I CONSUMABLES .40 2.50 68.60 2.55 74.05 13.18 87.23(20% imp.) .00 .02 .46 .02 .49 .09 .S8

_______________________________________________________________________________________________________________

T 0 t A L: Rs 16.48 21.55 43.95 109.95 193.60 42.84 21.60 36.45 456.42 95.57 581.99 "8 .11 .14 .29 .73 1.29 .29 .14 .24 3.24 .64 3.88 W

EiLCTONICS IUSTRY DEVELOENT PROJECTNPOWEU DElW

Cost ostimates for FY 93

Iproving the Quality Improving the Quality of Strengthening Industry-Universityof Prectlc. Engineers Elnneers and Technicians Linkagesand Technicians in Training

01 02 03 04 0 06 07 08CATEORIES STATE CONTINUING LEURNING STAFF MODERN. INDUSTRIAL INUSTRY PIU TOTALS COUTINO. TOTAL6SOF OF THF ART ENO. MATERIAL TRAINING FACILITIES ATTACH. TEACHERS INCLUDINGEXPENDITURES SEMINARS EDUCATION DEVELOP. CONTINmli.

A CIVIL WO .00 .00 .00.00 .00 .00

8 ECQUIPENTS 58.20 66.20 15.40 71.60(SOS lop.) .37 .37 .10 .46C FURNITURES .00 .00 .00

.00 .00 .00

0 BOOKS/JOURNALS 1.50 4.40 12.60 18.50 4.14 22.84(20% imp.) .01 .03 .08 .12 .03 .15

E LOCAL TRAINING 1.06 6.00 36.60 42.84 16.52 19.38 105.90.01 .04 .24 .29 .56 .13 .71

F LOCAL 11.55 14.65 9.80 21.60 28.90 86.30 19.33 101.63SPECIALIST .08 .10 .06 .14 .19 .58 .13 .70G FOREIGN 11.00 10.10 25.10 1.71 31.21SPECIALIST .10 .07 .17 .04 .21

(100t iLp.)H MAINTENNCE 2.80 6.20 26.00 5.00 39.00 6.74 47.74

.02 .04 .17 .03 .26 .06 .32I CONSUMABLES .40 2.50 68.60 .43 71.93 16.11 88.04 it(20% imp.) .00 .02 .46 .00 .48 .11 .13

0T 0 T A L: Res 16.48 24.35 14.65 67.30 162.40 42.84 21.60 34.33 383.91 88.81 472.76S .11 .1S .10 .45 1.08 .29 .14 .23 2.56 .59 3.15 w

ELECTRONICS INWSTRY DEVELOIIT PROJECTHAIOR DVELOPHIT

Cost estimates for FY 94

Improving the Quality Improving the Quality of Strengthening Industry-Unaiversityof Praotic. Enganeer Engineers and Teoaeioians Linkagesand Tochnioians In Training

01 02 03 04 05 06 07 08CATEGORIES STATE CONTINUING LERNING STAFF l4ODEUN. INDUSTRIAL INDUSTRY FlU TOTALS CONTINGEN. TOTALSOF OF THIE ART 1NG. MATERIAL TRAINING FACILITIES ATTACH. TEACNEEXPENDITURlS SEMINARS EDUCATION DIVE LOP. CTa.

A CIVIL WOME .00 .00 .00.00 .00 .00

B EQUIP!ENTS 56.20 S6.20 16.10 74.30(50% imp.) .37 .37 .12 .50C FURNITURES

.00 .00 .00

.00 .00 .00D BOOKXS/JOURNALS .75 4.40 12.60 17.75 4.83 22.68(20% imp.) .01 .03 .08 .12 .03 .15e LOCAL TRAINING 1.08 1.50 38.60 42.84 82.02 22.31 104.33.01 .01 .24 .29 .55 .15 .70F LOCAL 11.55 9.60 21.60 28.90 71.65 19.49 91.14SPECIALIST .06 .06 .14 .19 .46 .13 .610 FOREIGN 15.00 10.50 25.60 6.94 32.44SPECIALIST .10 .07 .17 .05 .22(100% imp.)B NAINTMNANCE 2.60 6.20 25.00 5.00 39.00 10.61 49.61.02 .04 .17 .03 .26 .07 .33I CONSUKADL3S .40 2.50 34.30 .42 37.62 10.23 47.85(20% imp.) .00 .02 .23 .00 .25 .07 .32

T 0 T A L: Rs 16.48 19.10 .00 67.30 128.10 42.84 21.60 34.32 329.74 92.51 422.25 °S .11 .13 .00 .46 .86 .29 .14 .23 2.20 .62 2.62a.

INDIAELECTRONICS INDUSTRY DEVELOPMENT PROJECT

MANPOWER DEVELOPMENThnpbmen Schdub

FAM _o" im 1_ tO isi 1994 losS(CdsduYeu 1o 191 t Io SIo Is_____" t___ 1

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-62- ANNE 2-62- Page 21 of 32

i[l I .1 -- W -___________

IL~~~~~~I

LeiICz

l

z _ __ _

LEARNING MATERIAL DIVEWPWNT AND STAFF TRAINING PROGRAMII YEAR AND BY RESOURCE CENTER

RAD §1990 1991 1992 1993 1994RSOURCE CEINTR Ils IITD IISc IITD Ilsc IITD I18c IITD IISc IITD

IITB NEC 1ITB NEC II1T NEC IITB NEC IITB NEC

ACTIVITY TYPE OF COURSE TYPE OF INSTITUTE NUME OF COURSE

{LECTRONICS (COURSE) EC 3 3 3 3 3 3t 60H LEC. + 45H LAB.

{COMPUTER (COURSE) EC 1 2 1 2 1 2{ 60H LEC. + 458 LAB.

LUARNING {03 MATERIAL { ZLECTRONICS (COURSE) PI 2 3 2 3 1 2D EVLOPEWET LECTURES (5701)

{ ELECTRONICS (COURSE) PI 1 2 1 1 1 1( LABORATORIES (10009)

I IND. DESIGN (COURSE) IC 1{ (LEC. + LAB.)

{FAC. TRAIN. ELECTRONICS IC 2 2 2 2 2 2 2 2((8 WEEKS) (20 PART)

(FAC. TRAIN. COPUTER EC 1 2 1 2 1 2 1 2( (6 WEEKS) (20 PART)

{FAC.TRAIN. ELETRONICS PI+CEDT 2 2 2 2 2 2 2 2t (8 WEEKS) (20 PART)

( FAC. TRAIN. COMUTER PI+CEDT 2 2( (4 EEKS) (20 PART)

f FAC. TRAIN. IND. DESIGN EC+CEDT 1 104 STAFF t (6 MONTHS) (6 PART)

TRAINING {t EXPOSURE COURSE IN INDUSTR. DESIGN 1 1 1{ (3 DAYS) (40 PART)

{ S.STAFF TRAIN. ELECTRONICS EC+PI 2 2 2 2(4 WEEKS) (15 PART) +CEDT

I S.STAFF TRAIN. MAINTENANCE EC+PI 1 1 1 1 1 1{ (4 WEEKS) (15 PART) +CEDT

t S.STAFF TRAIN. STORE+LIBRARY EC+PI 2 2 2 2{ (2 WEEKS) (15 PART) +CEDT

{ S.STAFF TRAIN. PCB EC+PI 2 2 2 2t (4 WEEKS) (10 PART) +CEDT

( S.STAFF TRAIN. MECHANICAL EC+PI 2 2 2 2l (4 WEEKS) (15 PART)

LEARNING MATERIAL DEVELOPMENT AND STAFF TRAINING PROGRAMBY II8c - BANGALORE

ACTIVITY TYPE OF COURSE TYPE OF INSTITUTE NUMBER or COURSES

1990 1991 1992 1993 1994

{ ELECTRONICS (COURSE) EC 3 3 3{ BoH LEC. + 45H LAB.

{ COMPUTER (COURSE) EC i 1 1LEARNING t 60H LEC. + 45H LAB.

03 MATERIAL fDEVELOPMENT ( ELECTRONICS (COURSE) PI

{ LECTURES (570H)

{ELECTRONICS (COURSE) PI{ LABORATORIES (1OOOH)

{ FAC. TRAIN. ELECTRONICS EC 2 2 2 2{ (8 WEEKS) (20 PART)

C FAC. TRAIN. COMPUTER EC 1 1{ (8 WEEKS). (20 PART)

04 STAFF | FAC.TRAIN. ELETRONICS PI+CEDTTRAINING { (8 WEEKS) (20 PART)

{ FAC. TRAIN. COMPUTER PI+CEDTC (4 WEEKS) (20 PART)

{ S.STAFF TRAIN. ELECTRONICS EC+PI{ (4 WEEKS) (15 PART) +CEDT

IItIt.

LEARNING MATERIAL DEVELOPMENT AND STAFF TRAINING PROGRAMBY IIT - BOMBAY.

ACTIVITY TYPE Of OOURSE TYPE OF INSTITUTE NUMBER OF COURSES

1900 1991 1992 1993 1994

{ ELECTRONICS (COURSE) ECG OBO LEC. + 465N LA.

( COMPUTER (COURSE) EC 2 2 2f SO6 LEC. * 45H LAB.

LEARNING (03 MATERIAL ( ELECTRONICS (COURSE) PI

DEVELOPMENT { LECTURES (570H)It ELECTRONICS (COURSE) PI( LABORATORIES (1000H)

( IND. DESIGN (COURSE) EC 1t (LEC. + LAB.)

t FAC. TRAIN. ELECTRONICS ECt (S WEEKS) (20 PART)

( FAC. TRAIN. COMPUTER EC 2 2 2 2I (6 WEEKS) (20 PART)(I FAC.TRAIN. ELETRONICS PI+CEDT{ (8 WEEKS) (20 PART)

04 STAFF ITRAIN'IG ( FAC. TRAIN. COMPUTER PI+CEDT

t (4 WEEKS) (20 PART)

{ FAC. TRAIN. IND. DESIGN EC+CEDT{ (6 MONTHS) (6 PART)

t EXPOSURE COURSE IN INDUST. DESIGNt (3 DAYS) (40 PART)

4' '

LEARNING MATERIAL DEVEWPTME AND STAFF TRAINING PROGRAMBY IIT - DIELI

ACTIVITY TYPE OF CoRS TYPE OF INSTITUTE NUMBER OF COURSES

1990 1991 1992 1993 1904

ELECTNICS (COURSE) EC 3 3 3609 LWC. + 459 LAB.

f CCPUTTR (COURSE) RCLEARNING { SOH LEC. + 468 LAB.

03 MATERIAL {DEVEBOWPHNT ELECTRONICS (COURE) PI 2 2 1

C UCTUS (5708)

I ELECTRONICS (COIU) PI 1 1 1LABORATORIES (10009)

C FAC. TRAIN. ELECTRONICS EC 2 2 2 2(6 WEEKS) (20 PART)

f FAC. TRAIN. COMPUTER EC(6 WERKS) (20 PART)

{ FAC.TRAIN. ELETRONICS PI4CEDT 2 2 2 2C( WEEKS) (20 PART)

04 STAFF CTRAINING I FAC. TRAIN. COMPUTER PI+CCDT

{ (4 WES) (20 PART)

i S.STAFF TRAIN. ELECTRONICS XC+PI 2 2{ (4 VEEKS) (15 PART) 4CEDT

C S.STAFF TRAIN. MAINTENAC EC+PI 1 1 1C (4 WEEKS) (15 PART) +CEDT

IIuts

0

LEUUNING MATERIAL DEVELOPIENT AND STAFF TRAINING PROGRAMBY NEC - BANGALORE

ACTIVITY TO OF COUR TM Of INsTITUTE NUMBER OF COURSE1990 1991 199? 1993 1994

t ELECTRONICS (COUSE) IC60B LEC. + 458 LA.

{COMPUTER (COURSE) ECLEANING { BOi LEC. + 458 LAB.

03 MATERIAL iDEVELOPIE I EECTRONICS (COUSE) PI 3 3 2

{ LECTURES (5700)

( ELECINIICS (COURSE) PI 2 1 11 LABORATORIES (1000H)

I FAC. TRAIN. ELECTRONICS EC{ (8 WE) (20 PART)

| FAC. TRAIN. COMPU TER EC{ (6 WEEKS) (20 PART)

( FAC.TRAIN. ELETFONICS PI+CEDT 2 2 2 2{ (8 VEEKS) (20 OART)

{ FAC. TRAIN. COMPUTER PI+CEDT 2 2( (4 VEERS) (20 PART)

04 STAFF S.STAFF TRAIN. ELECTRONICS EC+PI 2 2TRAINING { (4 VEEKS) (15 PART) *CEDT

C S.STAFF TRAIN. MAINTENANCE EC+PI 1 1 1 1 1C (4 WEEKS) (15 PART) iCEDT

{ S.STAFF TRAIN. STORZ+LISRARY EC+PI 2 2 2 2f (2 WEEKS) (15 PART) eCRDTI{ S.STAFF TRAIN. PCB EC+PI 2 2 2 2i (4 WEEKS) (10 PARW) *CEDT

|SSTAFF TRAIN. CRCHNICAL ZC+PI 2 2 2 2{ (4 WEEKS) (15 PART) 4CEDT

-68-

Page 27 of 32

IMnroving the Ouality of Engineers in Training

Engineering Colleges EC's

List of Courses for which Learning Material will be Developed

Electronics Engineering

1. Electronic Devices2. Analog Electronics3. Digital Electronics4. Design of Digital System5. Design of Analog and Data Acquisition Systems6. Power Electronics (Designing with Power Devices)7. Communication Electronics8. Design with Microprocessors9. Physical Design of Electronic Equipment10. Manufacturing Technology of Electronic Equipment11. Industrial Design of Electronic Equipment12. Reliability of Electronic Equipment13. Electromagnetic Compatibility of Electronic Equipment14. Television Engineering15. Optoelectronics16. Switching Systems for Communication17. Industrial Electronics18. Control Systems

Computer Science

1. Programming Languages2. (1-puter Architecture3. Data Structure and Algorithms4. Systems Programming5. Operating Systems6. Data Base Management7. Business Information Systems8. Computer Graphics9. Computer Networks

-69-ANNE% 2Page 28 of 32

Improving the Ouality of Technicians in Training

Polytechnics Institutes PI's

List of Courses for which Learning Material will be Developed

Electronics Engineering (Theory)

1. Electronics Drawing2. Analog Electronics3. Digital Electronics4. Electronic Communication5. Test & Measuring Instruments6. Electronics Components7. Power Electronics8. PCB design and Technology9. Physical design of Electronics Equipment10. Estimation and Costing11. Computers12. Maintenance of Electronic Equipment13. Production Technology of Electronic Equipment14. Consumer Electronics

Electronics Engineering (Laboratory Work)

1. Analog Electronics Lab2. Digital Electronics Lab3. PCB Lab4. Computer Lab5. Production and Assembly Technics6. Electronic Equipment Maintenance Lab7. Consumer Electronics Lab8. Communication Systems Lab

-70-ANNMX 2Page 29 of 32

Pronosed Draft List of Equinment and Cgst Estimate

Electronics Equipment for a Two Students Station

1. 20 MHz Dual trace oscilloscope 15,0002. 10 NHz Pulse generator 4,0003. Function generator 4,0004. Analog multimeter 1,5005. Digital multimeter 4,0006. Breadboard system for digital circuits 3,0007. 2nd level breadboard system 6,0008. Microprocessor laboratory 8085 4,5009. Interface module for microprocessor 2,00010. Power supply 517/2.5A, +/-12V, 30V 3,00011. In-circuit emulator for 8085A 8.000

Total per station: Rs. 55,00

Printing Circuit Board Equipment-for a Standard PCB Laboratory

1. Vertical reduction camera 140,0002. Photoresist dip coater 23,0003. Spray etching machine 50,0004. Ultraviolet exposure unit 25,0005. Roller tinning unit 25,0006. Illuminated magnifier (2x) 6,0007. PCB mini drilling machine (2x) 20,0008. Very high speed drilling machine

60,000 rpm, with optical system 120,0009. Notching machine 7,00010. Treadle operated shearing machine 12,00011. Artwork table (5x) 20,00012. Hot air oven 16,00013. Air curtain 15,00014. Refrigerator 8,00015. Photo printing and development unit 8,00016. Screen printing unit (Manual) 5.000

Total per unit: Rs. 500,000

Computer Equipment for a Two Students Station

1. PC - XT with 640 kb memory01 Hard disk 20 Mb02 Floppy drives 5" 1/401 B/W monitor01 Printer 80 col. Rs. 30,000

-71-ANNEX 2Page 30 of 32

Proposed Draft List of Equipment and Cost Estimate

Office Equipment

1. Photocopying machine A3 with 100,000

reduction facilities

2. Telex (including line) 70,000

Total per unit: Rs. 170,000

Workshop Equipment for a Standard Fabrication Laboratory

1. Bench drilling machine up to 6mm 10,000

2. Bench drilling machine up to 20mm 15,000

3. Pantograph engraving machinewith worktable of 450 x 200mm

30,000

4. Bending machine (2 x 600mm) 20,000

5. Shearing machine (2 x 600mm) 20,000

6. Notching machine (up to 3mm) 15,000

7. Workbench equipped (5x) 25,000

Total per unit: Rs. 135,000

8. Combined milling cum lathe machine

small size, for PI only 200,000

Total for PIs: Rs. 335,000

-72-ANNEz 2Page 31 of 32

PROVISIONAL LIST OF SELECTED INSTITUTES

Eineering Colleges

1. College of Engineering, Trivandrm, Kerala

2. PSG College of Engineering, Coimbatore, Tamil Nadu

3. College of Engineering, Osmania University,Hyderabad, Andhra Pradesh.

4. College of Engineering, Poona, Maharashtra

5. College of Engineering, MS Un_versity, Baroda, Gujarat

6. College of Engineering, Indore, Madhya Pradesh

7. HBTI Institute of Technology, Kanpur, Uttar Pradesh

8. Bengal Engineering College, Howrah, West Bengal

9. Thapa Engineering College Ludhiana, Punjab

10. Malviya Regional Engineering College, Jaipur, Rajasthan *

11. Regional Engineering College, Kurukshetra, Haryana *

12. Regional College of Engineering, Suratkal, Karnataka

13. ID College of Engineering, Abmedabag, Gujarat

14. Regional Engineering College Rourkela, Orissa

-73-ANNEX 2Page 32 of 32

Polytechnic Institutes

1. Murugappa Polytechnic, Adyar, Madras.

2. HNEer Chand Polytechnic Jallandhar, Punjab

3. MEI Polytechnic, Bangalore

4. Institute of Electronics and Rural TechnologyAllahabad,U.P.

5. Assam Engineering Institute, Guwahati, Assam

6. Government Polytechnic, Kalamessary, Kerala (for Elec.)

7. Cusrow Wadia Institute of Technology, Pune

8. Bhagubai Mafatlail Polytechnic, Bombay

9. Babu Nanda, School of Engineering Cuttach, Orissa

10. SV Polytechnic, Indore

11. Haryhana Polytechnic, Nilokeri

12. Women's Polytechnic, Jodhpur Park, Calcutta

Centres for Electronics Design and Technology

1. CEDT Srinagar (Jamu & Kashmir)

2. CEDT Auran&abad (Maharasthra)

3. CEDT Imphal (Assam)

4. CEDT Gorrakpur (Uttar Pradesh)

5. CEDT Calicut (Kerala)

6. CEDT Mahali (Purjab)

-74-

t ~~~~~~~~~~~~~~~~~~~ANNEX -3Page 1 of 6

INDIA

ELECTRONICS INDUSTRY DEVELOPMENT PROJECT

TECHNICAL ASSISTANCE

' 1. The technical assistance component includes four elements:

(US$ million)

(a) Software development (including exports) 0.9(b) Seminar program for Government and industry 0.7(c) Training and technical assistance for the DFIs 1.4

Total 3.0

A. Software Development

2. The computer software industry includes the following prodcts andservices: standard software packages; custom software; softwaredevelopment services; consultancy; training; data processing systemsintegration; microcoding; and services, such as data entry and digitizing.As noted in the main text, para. 2.17, this industry especially softwarefor exports, is one of the most promising industries for expansion. Itsdevelopment, however, is inhibited by inadequate knowledge of markets andhow they can best be developed, by lack of access to technology which isfast-changing, by a shortage of trained and experienced manpower, and byinfrastructure bottlenecks especially in communications. The project wouldfinance a technical assistance program to help relieve these constraintsand provide a better basis for expansion of both domestic and exportsoftware capabilities. This program was developed jointly by the Bank andIndian software experts in January/February 1989 after consultation withexperienced software firms, DOE, Exim Bank (which has extensive experiencein software financing), and other agencies concerned with softwaredevelopment and export.

3. The program would combine research, seminars, and projectidentification in two phases. A first phase would develop neededinformation about trends in markets, technology, competition and Indiansoftware capabilities and constraints using international and domesticconsultants. Through a program of seminars, a week seminar in the U.S. andseveral shorter seminars in major Indian cities this information would bedisseminated and feedback obtained from industry, Government and otherconcerned agencies. The second phase would identify specific projects andpropose measures to help alleviate constraints and bottlenecks, and expandcapacity.

4. It is expected outputs of this program would include: (a)detailed information regarding both foreign and domestic markets, theirsuitability for the Indiar. industry, and how best they can be penetrated;(b) guidelines for training and skill development; (c, recommendationsregarding software standards; and (d) recommendations regarding level ofservice, pricing, and standards in data communications; and (e) mechanismsfor helping to import, absorb and diffuse technology. Specific areas forpossible project proposals would be export marketing, training, andinformation and productivity centers.

-75-ANNEX 3Page 2 of 6

5. This program wili require about nine months to complete. Theestimated base costs are US$815 thousand. The program will be commissionedby DOE in close consultation with the Bank in accordance with a schedule,organizational arrangements and procedures to be agreed with the Bank. Itis expected that a steering committee representing DOE, the softwareindustry, the computer hardware industry and selected other interestedoxganizations will assist in selection of consultants, and provide guidanceand assistance during the conduct of the study. Detailed draft terms ofreference have been prepared (Project File No. 3). Following are the stepsneeded to implement this program: (a) reach formal agreement between JapanGrant Finan-ing Facility. Government of India and the Bank on itsfinancing; (b) reach agreement on the schedule, organizational arrangementsand procedures; (c) finalization and agreement on detailed terms ofreference; and (d) selection of teams of international and localconsultants satisfactory to the Bank. It is expected that (a) would becompleted by July 31, 1989, (b) and (c) by September 30, 1989, and (d) byNovember 30, 1989, which would allow the study to commence inJanuary, 1990.

B. Seminar Program for Government and Industry

6. The objective of this program is to improve the informational andanalytic basis for informational and policy decisions concerning theelectronics industry. Given India's relative isolation, and the foreignexchange constraints that limit both travel abroad and the ability to bringexperienced speakers and trainers to India, policy and project discussionsoften fail to reflect an adequate understanding of internationaldevelopments and their implications for India. The first phase of thiscomponent, therefore, would be a two week seminar in 'Silicon Valley" inwhich about 30 key senior Indian Government, banking and industryrepresentatives can learn first-hand, without interruptions, of importantworldwide developments in the electronics industry and then try to applythis knowledge to the Indian situation. This would be followed, in thesecond phase, by three to five short seminars in India in different citiesattended by a wider group. Each seminar in India would be focused onspecific topics for which discussion materials would have been developed inthe course of studies prepared by local and/or international consultantsfinanced under the project. The output of the initial two week seminarwould provide background material and a common set of assumptions regardingworldwide developments for the follow up seminars in India.

7. The preparatory studies which would be inputs for the seminars inIndia would not themselves be directed at trying to formulate policy butwould review priority areas where a better factual or analytic basis isneeded. Some of the priority areas identified for possible studiesinclude:

(a) assessment of scope for increased design standardization andreview of effectiveness of different types of supporting measures;

(b) evaluation of the likely revenue and foreign exchange impact inthe short and longer term of lowering of customs tariffs andelimination of QRs in the electronics sector;

-76-

Page 3 of 6

(c) evaluation of economic costs, benefits and risks of alternativeindigenization goals for key electronics products likely to beproduced locally in the next five years;

(d) assessment of the potential for productivity improvement inindustry through the dissemination of informatics technology andan indication of priorities for further attention;

(e) identification of the scope for further application of informaticstechnology in the financial sector and an evaluation of the socio-economic impact of such application;

(f) mechanisms of Government/industry cooperation in other countriesand their applicability to India, including role andresponsibilities of industry associations; and

(g) implications of selected major technical developments such assurface mount technology for existing industry and the supportingpolicy framework.

8. This program would be launched in mid-1990 when results from thesoftware study could be used as inputs. The program would be undertaken byDOE in close consultation with the Bank in accordance with a schedule,organizational arrangements and procedures to be agreed with the Bank. Inpresenting the initia' seminar DOE ard the Bank would be able to draw uponBank experience developed in connection with a similar program for thePeople's Republic of China held in the fall of 1987. It is expected thatthe program in India would be organized by local consultants financed bythe project, under sponsorship of a suitable organization such as theInstitute of Electrical and Telecommunications Enginee.s which hasindicated its interest in playing such a role, assisted by DOE withguidance from a steering committee representing Government, the sponsoringorganization, and industry.

9. The estimated base costs of this program is US$610,000. Thefollowing steps are needed to implement this program: (a) reach formalagreement with the Government, Japan Grant Facility, and the Bank on itsfinancing; (b) selection of consultant to prepare draft program for U.S.seminar; (c) appointment of a Steering Committee, (d) finalization of U.S.seminar program and initiate background studies for India based seminars.It is expected that step (b) selection of consultant for U.S. seminar couldbe accomplished by end-October 1989 after Bank/DOE discussions duringSeptember, 1989; and that step (d) would be accomplished during January/February 1990. The U.S. seminar could be held in the fall of 1990.

C. Training and Technical Assistance for the DFIs

Obiectives

10. To complement the "single window" line of credit, this projectwould also provide technical assistance to the two DFIs. Its objectivewould be to upgrade their capability to identify and appraise viableprojects in this industry, including projects to restructure and improveefficiency of existing client firms that need to adjust to increasedcompetition brought on by deregulation.

-77-AN=U; 3Page 4 of 6

Program Elements

11. For this purpose, agreement has been reached with the DFIs on athree year program consisting of the following elements.

(a) Access to Data Bases and Related Services. This element wouldprovide firm level information needed in checking claims ofproject sponsors; information about tecLnology, internationalplant sizes, and the latest technology developments; and currentinformation about international production, trade, prices, etc.It would draw upon specialized consulting servi -s and on-linedata bases.

(b) Identification studies for selected future groducts that might befinanced by the DFIs. These studies would be undertaken bydomestic and/or international consultants in close collaborationwith DFI professional staff. The studies would provideinformation about worldwide devel 2ments regarding markets andtechnology, suggest appropriate gSu'lelines regarding scale,technology arrangements etc. to be viable projects in India. Thepurpose of these 3tudies would be to allow the DFIs to developneeded information and judgements about the technology andeconomics of important future products financing. Productstentatively identified for such studies include: glass shells,surface mounted devices, bipolar ICs, VCRs (both assembly and withmanufacture of deck mechanism, process controls, control systemsand factory automation, and advanced medical instrumentation.

(c) Training Program for fteXational Staff. This program would exposeexperienced operational staff to new products and processes in theelectronics sector and thereby upgrade their capability toidentify and appraise new projects. It would combine shorttraining seminars, and visits to selected plants and internationalexhibitions and would be focused on specific products and productgroups likely to be important to the financial institutions in thenext three or four years.

(4) Diagnostic Assistance. This element would finance domestic andinternational consultants to assist the institutions in dealingwith client electronics firms that need to upgrade technology orimprove efficiency. Consultants would be available for up to aweek per firm, becoming part of diagnostic teams from the DFIsthat would assess a client firms' problems and help them todevelop an implementable plan to improve. With such plans thefirms themselves could seek financing or more extensive technicalassistance from other sources.

Resources and Level of Surport

12. During the three year commitment period of this project, theinstitutions will be provided with the following funds: US$650,000 forIDBI, and US$650,000 for ICICI. These funds will be provided from theJapan Grant Facility and passed on to each institution as a grant. Supportwill cover 100% of the foreign exchange and local cost elements of eligibleexpenditures.

-78-ANNEX 3Page 5 of 6

Eligibility Criteria

13. Eligible Activities. Technical Assistance support will be givenfor the following activities:

(a) purchasing of information abroad in support of advisory andappraisal functions including specialized consulting services;

(b) hiring of both domestic and international consultants withrequired skills under specific terms of reference to assist withproduct identification studies and with the provision ofdiagnostic assistance to client firms;

(c) training of operational and research staff concerned withelectronics.

14. Eligible expenditures. Technical assistance grant support will begiven for expenditures on services and travel specifically on eligibleactivities. No "sunk costs" such as salaries or rentals will be supported,nor will hardware purchases.

Implementina Arrangements

15. Close coordination. The program will be more effective if thiscomponent is planned and implemented by the two institutions in closecoordination. Preparation of the initial work plan, identifying andaccessing data bases, conduct of identification studies and the carryingout of training programs for operational staff should to the extentpossible be undertaken jointly by the two institutions.

16. Work Plan Preparation. The DFIs will prepare a detailed work planby September 30, 1989 in conformance to the general guidelines which havebeen agreed to covering the three year commitment period of this component.Preparation of this work plan will require a small team from the DFIs tovisit potential information and technical assistance resources for thisprogram located in the U.S.A., Europe, Japan, and possibly other developingcountries.

17. Annual Budgets. Each institution will be required to submit toIBRD an annual budget for each 12-month period of tle project, timed toreach IBRD two months in advance. The budget for the initial year shouldbe provided to the Bank within two months of submission of a satisfactorywork plan.

18. The estimated cost of this program is US$1,400,000 of whichportion of which US$1,300,000 would be financed by the Japan GrantFacility. The following steps are needed to implement this program: (a)reach formal agreement between the Government, the Japan Grant Facility,and the Bank on financing; (b) DFI completion of a work plan by September30, 1989, satisfactory to the Bank.

-79-ANNEX 3Page 6 of 6

E. Costs and Financing

19. The estimated costs of the technical assistance in current priceswould be Rs 45 million (US$3.0 million). Physical contingencies (10%) havebeen added to the base costs of the technical component to allow forpossible increases in the scope of consultants or other support work. Theexpected price contingencies have been based on projections of annualinflation rates as follows: for local costs--8.0% for FY90, 7.0% forFY91-93; and for international costs--5.3% for FY90, 5.0% for FY91 and 4.1%for FY92 and PY93.

TECHNICAL ASSISTANCE COSTS

(Rs mLllton)

_1989920 1990191 1991/92 Total

l.ogal, LSualM Igl Local Forn T otl gg' FoMr otl Local Forei.n s

Software Study 1.3 9.2 10.5 0.7 1.0 1.7 - - - 2.0 10.2 12.2

Seminars & Studies 0.8 2.3 3.1 1.5 4.5 6.0 - - - 2.3 6.8 9.2

DPI Tech. Assistance 1.1 6.1 5.2 1.3 6.2 7.6 5.8 4.!f 4.5 3.2 14.1 17.3

Total Bae Costs 9.3 15.6 18.8 3.6 11.8 15.3 3.8 4.5 4.5 7.5 31.1 38.6

Physicl Contingencies 0.3 1.6 1.9 0.4 1.2 1.5 0.4 0.4 0.4 0.8 *.1 3.9

Price Continsen Lea 0.1 0.4 0.5 0.4 0.9 1.3 0.1 0.5 0.6 0.7 1.8 2.5

Grand Total 3.7 17.5 21.2 4.3 13.9 18.2 0.9 4.3 5.5 9.0 36.0 45.0

20. Financing for the technical assistance component (US$2.7) millionis expected from the Japan Grant Facility (JGF) of which an estimatedUS$2.4 million would be in foreign exchange costs. The JGF financing wouldbe made available through the Bank as Administrator. The balpnce offinancing from the Government ($0.2 million) and the DFIs ($0.1 million)would cover primarily the salaries of participating staff and part of localcost contingencies.

-80-ANNEX 4Page 1 of 4

INDLA

ELECTRONICS INDUSTRY DEVELOPMENT PROJECT

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBZ)

1. IDBI, which was established in 1964 as a wholly owned subsidiaryof RBI, is now fully owned by GOI. As the lead institution for industrialinvestment finance, IDBI operates as a direct lender and as an apexrefinance institution for the state financial institutions and thecommercial banks in their investment lending operations. It also acts asthe central coordinating agency for the operations of the other All-IndiaDFIs (ICICI and IFCI) and the term lending activities of the Life InsuranceCorporation (LIC) the General Insurance Corporation (GIC), and the UnitTrust of India (UTI). Its importance as a direct lending is demonstratedby the fact that is accounted for 40% of total industrial investmentlending by the All-India and state level financial institutions during theperiod 1985-88. Its promotional role covers a wide range of activities atthe national level and, through specialized institutions, on the locallevel. These activities aim at the development of both sound industrialinvestments and financiai practices, and include industrial potentialsurveys, entrepreneurship development programs, consultancy and advisoryser.iices, and expanded development banking training programs.

2. IDBI's 21 member Board, appointed by Government, represents across section of GOI officials, industrialists and commercial anddevelopment bank executives. While the Board is responsible for internalpolicies and reviews IDBI's overall operations and its interaction with thepublic and private industrial sectors, full powers are delegated to an11-person Executive Committee. Management is headed by Mr. S. S. Nadkarnias Chairman and Managing Director, an experienced and internationally-recognized development banker. Since October 1985, when he assumed hisposition, Mr. Nadkarni has sought to make IDBI a more commercially orientedinstitution.

3. IDBI's organizational structure comprises six administrativeunits, each headed by an executive director/advisor. The Direct FinanceOperations grotip is responsible for appraisal, disbursement, supervision,billing, collection, and recovery of all direct lending operations. Italso conducts product market research to support appraisal assumptions.The Development Finance Operations group is in charge of refinance and billrediscount operations for the state financial and commercial bankinstitutions, and the supervision of these activities. The Personnel andAdministration department looks after personnel, administration and alsosupervises IDBI's regional/branch offices. The Small IndustriesDevelopment Fund is a specialized activity for the promotion and funding ofsmall scale enterprises at the national and state levels. The CorporateFinance Group handles the secretariat, accounting, and planning functions.In addition, it reviews, develops, and implemenats methods andorganizational changes throughout IDBI. The Technical Department hasinternal functions assisting appraisal with technical reviews of projectproposal and external functions carrying out studies to provide advise to

-81-ANNMEL 4Page 2 of 4

industrial enterprises. It includes a new venture capital operationdirected at specialized techinology projects. The Legal Department acts inan advisory capacity to the board and management and in an operationalcapacity in dealing with iaternal legal matters.

4. IDBI's profasss0onal staff, numbering 1220, is well qualified,since IDBI is able to recruit top university graduates because its salariesare competitive with other private and public institutions and careerprospects within the institution are attractive. Turnover of staff isminimal. The Corporation has been successful in limiting staff increasesto about 10% over the last five years although loan sanctions and assetshave more than doubled. Another noteworthy feature is that IDBI hasimproved the staff mix of non-professionals to professionals from 1.6:1 to1.2:1 over the same period. The aim is to reach a ratio of 1.1.

5. Ogerationa. IDBI's financial assistance to the industrial sectoris effected through three basic areas of operations: a) Direct finance,available to projects costing at least Rs 50 million (approximatelyUS03.4 million), accounts for about 44% of IDBI's portfolio. DirectFinance takes the form of loans, underwritings, direct capital subsriptionsor guarantees. Directly-financed projects are generally cofinanced withother All India term lending institutions; b) Refinanced loans account for31% of portfolio. These are originated as loans to small and medium-sizedbusinesses by state-level institutions and banks which bear the risk onthese operations; c) Rediscounted bills, constituting 19% of portfolio,cover the sale of machinery, financed by banks on a deferred payment basis,and bear corresponding bank guarantees.

6. Resource and Onlending Terms. IDBI's resources include equitycontributions by the Government, RBI borrowings, bond issues, internalgeneration through collections and earnings and foreign currencyborrowings. Rupee bonds and debentures constitute the largest source offunds, for 52% of all external resources. The rate on these bonds has beengradually raised to 11.5%, close to a market rate. RI loans, the otherimportance source of funds, at 30% of total resources mobilized, arepresently available at 8% p.a. The weighted average cost of domestic fundsfor IDBI has increased from 6.8% p.a. in 1983 to 7.73% p.a. in 1988.Foreign borrowings constitute only 5.8% of IDBI's total resources, althoughthey have been growing rapidly in recent years.

7. Interest rates on domestic currency loans range from 11.5% to 14%depending on the type of loan. Although the basic lending rate forindustrial term financing has remained unchanged during the past few yearsat 14%, IDBI's basic gross operational spread has been reduced in recentyears.1/ The full effect of the squeeze on operating margins, throughhigher cost funds and rather stable lending terms, has yet to show in theprofit statements inasmuch as the greater portion of IDBI's portfolio isstill supported by earlier bond issues and RBI borrowings, some at rates aslow as 7% p.a.

/ This basic spread does not apply to all of its portfolio, inasmuch asmany loans are booked at concessional rates, on which a lower spread isobtained. About 21% of direct finance operations are at concessionalrates of interest.

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Page 3 of 4

8. Pollss. Following the appraisal of the Industrial Finance andTechnical Assistance Project (Loan 2928-IN), IDBI adopted a general PolicyStatement which outlines its institutional objectives, the areas of itsactivity, and the operations in which It engages. It also providesguidelines on risk management such as enterprise and exposure limits. ThePolicy Statement mentions the stimulation of desired investment, thegeographical dispersal of industry, the promotion of small-scaleindustries, the promotion of new financial activities and the developmentof entrepreneurs, as the key areas of IDBI's activity. it also eophasizedthe soundness of its financial condition as a main policy objective to beachieved through high portfolio quality, adequate operating spreads, soundprovisions for operating losses, tight expenditure control, continuedreinvestment of profits and build up of equity. The preservation of theenvironment and ecological balances receive adequate treatment in theStatement, which clearly states that IDBI will not finance projects thatmay adversely affect the environment and will actively encourage existingindustries to adopt pollution-free processes and carry out investments inenvironment-protection equipment.

9. Procedures and Standards. The quality of appraisal reports isgenerally satisfactory, and there is adequate staffing to handle projectappraisal work. Economic indicators such as internal economic rates ofreturn and financial rates of return are standard features of appraisalreports. In accordance with the priority of the Government's industrialreform policies, IDBI is increasingly giving attention to appropriateeconomic scale of investments, adoption of competitive technology andinvestments which create production that approach world price and qualitystandards.

10. Recent Performance. IDBI's total commitments grew at a high rateof 25% p.a. during FY83-FY88, attaining a level of Rs 57.2 billion inFY88. Cumulative disbursements since 1964 total Rs 217 billion. In itsdirect finance operations, even though IDBI is a government-ownedinstitution, it lends principally to the private sector. Of total IDBIdirect operations, 74% were to private industrial enterprises, 23% topublic sector corporations and 3% to cooperative ventures. About 63% ofits assistance is to medium and large enterprises and about 32% is forloans to small scale enterprises channelled through the commercial banksand state-level institutions and 5% is accounted by investments in sharesand bonds of other financial institutions. Sectorwise, its operations arefairly evenly distributed, with the services sector accounting for 18%,textiles 13%, chemicals and power generation each 10% and cement and food.processing 5% each. New projects account for 40% of all IDBI financing,modernization and rehabilitation operations 27% and expansion anddiversification projects 33%.

11. Loan collections and arrears. IDBI's overall collectionperformance is satisfactory. Principal and interest collected on totaldv.es2/ have averaged 93% during the last five years. The collectionperformance of refinanced loans and discounted bills payable has been 100%.as state financial institutions and commercial banks have always met theirguarantee liability on these operations. However, the average collectionratio of the state-level institutions themselves was only 43% in FY88,

2/ Amounts due during the year and amounts past due on direct and indirectlending.

-83-ANTNEX 4Page 4 of 4

requiring important capital infusions by the state governments to enablemany of these entities to service their debt obligations. To correct thissituation, IDBI is reinforcing its program for assistance to the state-level financial institutions to improve loan recoveries and profitability.A program has been adopted that placed emphasis on consolidation of theselending operations and providing technical assistance to the SFCs inimproving collection performance. The Asian Development Bank isselectively supporting IDBI in this effort through an ongoing project.

12. The collection performance in MDEI's direct lending presents moreconcrete difficulties but has gradually improved in recent years from57% in FY83 to 68% in direct lending (before rescheduling). Many of IDBI'searlier investments took place under a policy regime which was notconducive to creation of efficient and modern facilities, which would beviable in today's increasingly competitive environment. Under a highlyprotected environment and because of pressures from the labor sector, ithas been difficult for IDBI and other DFIs to take concerted correctiveaction opportunely and or to press creditor claims successfully.Consequently, a hard core of problem projects developed for the DFIs, andwhile for IDBI this constitutes less than 1% of its total loan portfolio,it needs to be resolved. The Government has recognized this problem andcreated a new organization, BIFR, to assist the DFIs in cutting throughregulatory restrictions constraining the DFI's ability to eitherrestructure still viable companies or to foreclose on enterprises whichcannot be salvaged.

13. Financial Results and Conditions. IDBI has had a history ofsatisfactory profit performance and its overall financial condition issound, with a consistent high level of liquidity and debt servicingcapacity. Assets have more than doubled over the last five years toRs 138 billion as of FY88, while revenue has grown at an average rate of20% to Rs 12.4 billion in FY88. Total income over the five-year periodending FY88 grew at an average rate of 27.1% per annum. The growth ofincome has been accompanied by control over general and administrativeexpense, kept at a commendably low 0.2% of total average assets in FY88.The net final result of operations in FY88 was an 18.5% return on averagenet worth, up from 16.5% in FY87 and a return on average assets of 1.5%compared with 1.4% in FY87. The debt to equity ratio (including contingentliabilities) was 10.0 in FY84, and rose temporarily to 10.5% in FY88. Thedebt service coverage ratios have been strong, averaging 2.7% over the pastfive years. IDBI has also maintained a high level of liquidity, with thecurrent ratio averaging about 3.0 over the past five years. Current assetsrepresented almost one-fourth of total resources at the end of FY88,indicative of IDBI's liquid:ty level. The corporation's financial resultsare given in tables 1 and 2.

14. IDBI's medium term forecast shows that the corporation's financialcondition will remain strong - with return on assets maintained at 1.5% orover and a healthy debt:equity ratio of around 10.0. The corporation isconscious of the likely impact of falling interest spreads due to highercosts of local borrowings and is taking steps to improve its profitabilityto meet this contingency. These include improved money management, controlof administrative costs and improved collection rates.

-84-_~~~~~~~~~

Table 1

INDUSThIAL DnVLLOniinsi SC 01 oIDIA

ACA AND P m INE s Tn~i

(84. lUllh)

tEAR UNDID 8UN 303 312| 151 1951 1956 151 151 12 1 12 12--------------- l )---------------------------- --------- - -(frc stt)--------------

Total oeom S.8" 4.90 6.48 8.14 9.90 12.27 13.30 18.34 21.80 25.85

ototest 2.65 3.40 4.43 5.53 6.83 S.6 10.19 12.60 15.42 18.81F'l anLal Cazaz0 0.03 0.04 0.04 0.06 0.08 0.09 0.10 0.11 0.12 0.14P.ev&OW M 0.49 0.68 1.04 1.20 1.33 1.43 1.9" 2.18 2.48 2.78

Am1 4,1 LII LII 0.20 LI2 0.2tgL _2. .. IQ.3 . 0.40 0.47

total Eapalseaa LaI ii LaZ A22 LOLh 11.019 11 24 18.42 22.20

Rot Inceoo 0.36 0.65 0.81 1.13 1.44 1.80 2.71 3.10 3.38 3.65

DLvLd**ds 0.15 0.22 0.3k 0.00 0.44 0.49 0.50 0.54 0.54 0.54

Rasavwa 0.41 0.43 0.49 1.15 1.00 1.31 2.21 2.56 2.84 $.11

RATIO$

ROB 14.02 12.12 12.32 14.91 15.8X 18.32 21.92 20.2S 18.82 17.52ROA 1.2X 1.1 1.2X 1.42 1.42 1.5S 1.81 1.72 1.62 1.5X

biawxaa I051

q-85AM=NX 4Table 2

VA MM im sm MU n2~~i auSEA nuM.K num W nu ilan nu(En. Stllam)

WEA JlED JOUR 2013 1921 15p 9J 1 131 7M IS! L l 19 190 1221 1123________----------- (etoJl)------------------- ------------ ~~~ ~~~~~~(forct)--------------__

Ceab and Eank Ealanace 0.52 1.97 5.02 4.51 5.4" 7.12 4.55 4.55 4.33 4.35Other assets & advances ALM0 12.!7 159 11.9 1121 2L1 29.25 8L.U LU 44.17

Current Asets 11.11 1*J* 1iA9 2&1I I7.2 IAJZ 1h.E IQfiA *hL26 A

L..an & ln& e atnta 51.31 55.53 45.37 54.4 U 4.23 50.37 111.40 130.42 157.14 187.1'U11,S ledtaunnted 7.15 10.55 11.40 14.41 17.08 15.71 20.52 23.04 25.45 28.06

Otbers Assets -.L 0.10 02 AI 05 O.45 0.4L 052 0.58 0.64 0.70

TOTAL ASSETS 9.89 6340 76.3 92.40 111.03 11, 1462 12123 226.29 264.'_

LMIALIYIE p UMUr1U

Current Llablltles 2.92 4.94 6.49 8.18 10.29 12.35 19.9f 14.23 15.22 18.01

Lons Torm Debt 42.48 52.25 62.88 75.78 90.96 107.95 131.61 160.24 190.55 222.81snare CapItal 2.56 3.85 4.15 4.45 4.75 4.95 f .40 5.40 5.40 5.40

Reserves _1l -4j 2. u1 -L." ±.9 ALM 6..5 12.26 lS.14 18.30

Total EquIty 4.49 6.21 7.00 8.44 9.78 11.53 15.04 17.46 20.54 23.70

TOMAL LIZIlTXRS & 48 63.40 76.37 2L.40 111.03 131.83 16.62 192413 Z26.29 264.52

Conttn 5 ent LIabilIties .50 0.58 1.48 3.00 3.50 3.53 3.95 4.4 4.9 5.5

RI6TIOS,

DERT:EQUITY (TIKBS) 9.98 8.79 9.54 10.00 10.45 10.46 9.64 9.95 10.23 10.23

Sourc: . 1DI

-86-ANNEX SPage 1 of 5

INDIA

ELCTRONICS INDUSTRY DEVELOPMENT PROJECT

THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (ICICI)

1. ICICI was established in 1955 to provide term finance to privatesector industrial firms. Since then it has grown into one of India'sleaaing financial institutions and it now provides a broad range offinancial services including: term loans, equity, leasing, merchantbanking, export finance, mutual fund investments and venture capitalfinance. It advises Government on the promotion of industry and thefinancial markets and undertakes other developmental activities. ICICIoperates nationwide from its head office in Bomoay which is supported bythree regional offices in New Delhi, Madras and Calcutta.

2. ICICI has grown rapidly and is responsible for about 45% of allforeign currency loans made by the financial institutions to Indian firms.In keeping with its role as an important source of foreign funds theorganization has established itself in the international financial markets.To date it has raised over US$1.5 billion in multi-currency foreign loansand recent transactions have involved complex capital market techniques andinstruments such as interest and currency swaps. However, as discussedbelow the ongoing liberalization of industry and recent monetary policymeasures will have some negative effects on the institution, at least inthe short term. The Bank has made 15 loans to ICICI, the latest one beinga US$105 million facility under the recently signed Industrial Finance andTechnical Assistance Project (US$360 million). The recently completedProject Completion Report for the 13th loan to ICICI noted that the loanwas committed and largely disbursed within two years of the effective date.It is too early to judge the Project's overall financial performance butresults to-date are mixed, although a major negative factor has been theheavy burden on firms of foreign exchange and interest rate movements.

Ownership

3. At inception ICICI was privately owned. However, with 81% of itsshares held by public sector institutions, now it is classified as agovernment company under the Companies Act for exterior purposes such asappointment of its auditors. The breakdown of shareholding is as follows:

Shareholder ProRortion (%)

Public Institutions (including LIC, UTI 81.5and nationalized commercial banks)

Private Indian investors 9.2 (approx. 7,500)Foreign investors (mainly commercial banks) 9.3

Total 100.0

-87-ANNEX 5Page 2 of 5

Hanagement and Staff

4. ICICI's day-to-day operations are guided by the policies laid downby a 15-member Board Of Directors. One of the Board's operating functionsis to decide on individual projects involving exposure of over Rs 35million. The Chairman and Managing Director, Mr. N. Vaghul, came to theinstituti.n in 1985 and has led it through a period of impressive growthand profitability. In recognition of the changed business climate, hiscurrent priorities involve finding new and cheaper sources of funds,developing new projects with better spreads, addressing portfolio qualityissues, and collecting overdues.

5. ICICI has a strong management team which is consistently able toattract, motivate and retain highly competent staff. As at December 1988total staff strength was about 805. The institution is divided into fiveadministrative groups: operations, planning, special operations, financeand administration.

6. The Operations Group consists of lending and rehabilitation. Theformer, headed by a General Manager, is responsible for the lendingfunction including appraising new loans, monitoring existing ones andmaking collections. The regional offices and the market researchdepartment also report to the General Manager. The rehabilitation functionincluding coordination with the Board for Industrial Finance andReconstruction (BIFR) is headed by a Deputy General Manager.

7. Corporate Planning and Resources, headed by . Deputy GeneralManager, develops and coordinates the overall strategy and direction of theCorporation. It is also responsible for funding the institution both indomestic and foreign currencies. The increased importance of this functionhas been reflected in the organization structure.

8. Special Operations is under a General Manager. This group'sresponsibilities include merchant banking and leasing. Finance, Accounts,Administration and Personnel are supervised by two separate GeneralManagers.

Business Strategies

9. ICICI has continually expanded the range of financial instrumentsand services it offers in response to the perceived needs of the businesscommunity and Government's industrial development priorities. Theorganization's latest Policy Statement, which was drawn up against thebackground of the Seventh Plan projections, was adopted in 1987. Itidentified six priority areas for support: modernization and technologyupgradation; export promotion; emerging industries such as electronics andcommunications; core industries; and energy conservation and pollutioncontrol equipment.&Mi. 4.sal of Proiects

10. ICICI's appraisal techniques are thorough and of a high standard.The economic and financial rate of return norms used are usually 12% and15% respectively. For projects of more than Rs 25 million or for which theICICI loan will exceed Rs 25 million, a domestic resource cost calculationis done. However, ICICI officers would benefit from training programsaimed at increasing their awareness of current practices and trends in the

-88-ZX5

Page 3 of 5

international environment. The technical assitance component of theproposed project will play an important part in addresdng this need.

DayelOnmental Activities

11. In addition to Its basic project financing functions ICICI alsoundertakes activities to help the overall developmnt of Indian industryand financial markets. Thus the Institution takes an actlve part in thedialogue on topical issues affecting industry and flnance, throughmemoranda to policy makers and Government coiittees. It regularly carriesout subsectoral studies and provides training and lnstitutional developmentsupport to national and foreign financial institutions. ICICI's has set upa credit rating agency in conjunction with Unit Trust of India. -Such aservice will provide support for any eventual move towards the developmentof a lending system based on varlable idterest rates which are determinedby the level of risk. ICICI has provided since 1988 venture capital-typefinancing through conditional loans. In order to improve and expand itsventure capital services it recently established a venture capital company--Technology Development and Investment Company of India (TDIC)--which willfocus on investments in high technolog ventures. The new firm is expectedto receive support from the Bank under an upcoming proposed TechnologyDevelopment Project.

Financial Prformanes

12. ICICI's financias performance has been impressive, as shown inTables 1 and 2. It has achieved rapid growth and rising profits over thelast five years. Total assets increased to Rs 36 billion at the end ofMarch 1988 from RS 14.3 billion in 1983. This represents an annualcompound growth rate of about 258. During this period the loans andinvestments portfolio increased to Rs 32 billion from Rs 13 billion and netprofits almost quadrupled to Rs 770 million. Consequently return on equityaveraged 23% p.a. during this period. However these impressive figureswill be difficult to sustain in future years unless problems of increasedbQrrowing costs, narrower spreads and deteriorating collections aresatisfactorlly resolved. Gradual deregalation has eant lncreasedcompetition In the industrial sector and higher rlsk to financialinstitutions. Net spreads (before administrative expenses) on the rupeeloan portfolio have fallen from 3.48% in 1986 to 1.90% in 1987/88 due toincreased borrowing costs in the domestic mArket and fixed lending rates.Spreads on foreign currency loans have however, been maintained. Inrecognition of these trends ICICI's management has already embarked on astrategy that involves: (i) greater emphasis on finding new cheaperfunding sources; (ii) increasing non-funded assets and fee incomeactivities; (iil) pursuing new and more profitable lines of business; and(iv) vigorously pursuing collections of arrears.

Funding

13. ICICI funds its rupee assets largely through the public issue ofbonds and debentures. Like the other development banks it has historicallybenefited from access to long term funds at concessional rates. However,it has seen the average cost of its borrowed rupee funds rise dramatically,from 7.P5% in 1983 to 9.3% in 1987/88, for two main reasons. First, itslending growth rate of about 250 p.a over the last five years faroutstripped the 10% official limit on increases in annual capital market

-89-

Page 4 of 5

borrowings at concessional rates and the additlonal requirement has beenfunded at the prevailing non-concessional rates of 12.5-13%. 1/ In 1980,708 of rupee borrowings were at the concessional rate. By 1988 thls figurehad fallon to about 54%. Second, the current concessional rate for issuesby the Development Banks increased from 7.58-8.75% p.a in 1983 to thepresent 11% p.a. (11.5* for 15-year bonds) on all bonds. ICICI's forelgnfunding operations have become increasingly sophistieated as it has takenup the benefits of increased competltiveness and innovatLons in financialengineering on the international capital markets. and the country'sfavorable credit status to lover foreign funding costs. Recenttransactions have established the institution in the Euro-comercial paperand interest rate/currency swap markets. However, the spread charged onall foreign currency loans is set by GOI and is currently 1.5%, and thusthe lower borrowing costs are passed on in full to Indian borrowers withonly indirect benefit to the institution.

14. The Bank has been an important source of funds to ICICI and Bankloans currently account for 36% of all foreign currency borrowings and 148of total borrowings. The Bank's funds under the currently ongoing projectswill be an important source of added profitability for ICICI. Under cheterms of three ongoing Bank projects the institution was given a spread of3% compared to 1.5% on other foreign currency loans. 2/ ICICI will be oneof the financial institutions participating in the proposed Exchange RiskAdministration System (ERAS), which is being introduced to minimize theforeign exchange and interest rate risk of Indian firms on comercialforeign currency loans, obtained through the financial institutions. Thiswill put even greater demands on its funding officers to skillfully manageits foreign currency liabilities and the Corporation is keen to maintainits current impressive performance by strengthening its skill in thisimportant area. ICICI recently requested the Bank to assist it indevelopLng its liability management strategies, systems and staff skills.In response, the Financial Technical Assistance Unit (FTA) of the Bank'sFinancial Operations Department visited India ln November 1988, to identifyareas for supporting ICICI's liability management efforts.

Loan Portfolio

15. As at March 31, 1988, ICICI had disbursed loans and madeinvestments in equities and debentures, totalling Rs 46.3 billion largelyfor large and medium scale firms. Outstanding loans and investments wereRs 31.6 billion and-the sub-sectoral distribution of loans was as follows:engineering sector, including metal products, mechanical and electricalmachinery and transport equipment (24%); chemical and petrochemicalindustries (22%); textiles (13%); basic metal (9%); cement (9%); and pulpand paper (4%). For project sizes up to Rs 70 million ICICI would normallyprovide the debt finance directly. Projects greater than Rs 70 million arefunded through the inter-institutional syndicate mechanism involving IDBI

1/ ICICI is allowed to issue government guaranteed bonds and debenturesfor up to 15 years at an administered rate of 11% and these securitiesqualify for SLR of commercial banks.

2/ The three projects under which ICICI is able to make rupee-denominatedforeign currency loans are the IEP, the Cement Energy Saving Projectand the Industrial Finance and Technical Assistance Project.

-90-ANNEX S_

Page 5 of 5

and IFCI as well as the all-India investment institutions, the StateFinancial Corporations and the commercial banks.

16. Portfolio quality has deteriorated in recent years as reflected infalling collections ratios from 19°3-1986. However, collections beforerescheduling, improved slightly as at March 31, 1988, to 74.4% (15 monthsfigure) as compared with 73.1% in 1985, when the industrial liberalizationprocess gathered momentum. Total arrears stand at 3.1% of portfolioalthough about 64% of these are accounted for by firms in five industries:sugar, textiles, cement, jute and paper, which face long term structuralproblems. The difficulties caused by the more competitive operatingenvironment have, in many cases, been exacerbated by the depreciatingexchange rate which have increased effective interest rates to over 30%p.a., for many firms with foreign exchange denominated loans.

Profitability

17. As a result of the interest rate squeeze, Ir1CI1s spreads havedeteriorated to the extent that, at the margin, it's basic lending businessis barely profitable. At present 12.5% of total assistance is atconcessionary races averaging about 12.0% p.a which yields a negativespread, when marginal borrowing costs of 11.5% p.a., and administrativeexpenses and provisions are taken into account. Furthermore the overallsituation will become worse over time as the older and cheaper funds matureand are replaced with funds at prevailing higher rates. Given thesedevelopwents, ICICI has used a 'chree-point strategy to preserve itsfinancial profitability. First, it has concentrated on increasing volumesin its most profitable activities such as leasing and lines of credit forequipment suppliers. Second, it has successfully held down administrativecosts in the face of rapid growth from 0.4% of total assets in 1983 to 0.3%in 1987/88. Third it has placed increased emphasis on collections, throughthe adoption of a comprehensive collection strategy.

Future Prospects

18. Loans are expected to grow at an average rate of 15% p.a. over thenext five years, compared with about 20% p.a. for the 1983-88 period. Asthe projections in Table 2 show, following five years of steadily risingprofits, ICICI is expected to experience a slow down in profits growth withno change in current cost of funds and lending rates. Between 1983 and1988, there was an almost fourfold increase in profits and return on equityaveraged 23%. Over the next five years, with no change in spreads, ROE isexpected to decline to about 14%. Spreads will narrow due to higherborrowing costs as maturing cheap funds are replaced by higher cost fundsand weak collections squeeze profitability. Profit performance will alsobe influenced by the extent to which ICICI succeeds in its plans todiversify its funding sources (in order to tap cheaper funds), increase feeincome and successfully launch new higher yielding products and services.The debt:equity ratio is expected to stay mostly below 10:1 and minimumdebt service coverage is projected to be 1.5. The key underlyingassumptions behind the projections are that: (i) there will be continuedrapid growth in high profit areas and non-funded business; and (ii) the newdebt collection strategy should improve the collection ratio, presently74.4% (15 months). The declining interest rate margins are a cause forconcern and should be kept under close review by the Government and ICICI.

-91-AN=E 5Table 1

m. INDUSTRIAL CREDIT AND INWENVZSTK CORSATIOW OF INDIA LIMIED EIDII

AeYUAL MND PIROJCTED IUOEE STATNS

(Va bLiUona)

F&*ca Yg r End March 3I 1Q 193 1231 1985 US3* AMS 1929 1990 1921-----------------Actual- - ------ -- ------- Projected------

Inca"e

Interest on Loans and Oebeaturca 1.30 1.54 1.96 2.51 3.62 4.05 4.77 5.62

Fees and Cosmieion 0.05 0.07 0.14 0.27 0. 0 0.61 0. 85 1.14

Other ince San g01 0II 0 1 0L 0 gi5U g,26 0 29

TOTAL INCOMB 1i36 1.62 2.11 2.93 4.33 4.91 5.88 7.05

Expensoa

Interest 0.90 1.16 1.44 1.82 3.08 3.40 4.16 5.05

ProvLsionslUrita Offs 1 0.03 0.00 0.00 0.15 0.00 0.17 0.20 0.23

Salaries and Personnel 0.03 0.03 0.04 0.05 0.11 0.10 0.12 u.14

Depreciation 0.02 0.02 0.02 0.11 0.18 0.36 0.50 0.66

Other 1 Ll 0 L5 0I 07 00 0l04 0L14 0 15 0 17_

TOTAL EXPESE 1.02 1.26 1.- 2.20 5.41 4.17 5.13 6.25

Profit Bfore Tax 0.34 0.36 0.54 0.73 0.92 0.74 0.75 0.80

Tax 0.15 0.15 0.16 0.12 0. is 0.11 0.11 0.12

Profit After Tax L 0.21 0.23 0.38 0.61 0.77 0.63 0.64 0.68

Dividends 0.04 0.06 0.08 0.09 0.16 0.15 0.17 0.19

Reserves 0.17 0.22 0.30 0.52 0.61 0.48 0.47 0.49

Ratio*:

1R1 21.2X 23.2Z 24.92 29.0X 27.11 16.7Z 14.81 13.92

ROA 1.62 1.86 1.9X 2.42 2.42 1.5X 1.32 1.22

, Interest incom for 198.1983 is aet of provisions and wit.-offs.

Lk The 1984 f5 ure Imcludea writ bac of Re 70 million frm doubtful debt

reserve.

/g Fiscal Yar End la December 31 up to 1986 ad March 31 frm 1988

onwards. Mareh 1988 figures are for 15 months.

Sourcet s CIC1.

-92-ANNEX 5Table 2

TIH INDUSTRIAL CREDIT AND IsmINT CPOATO0 01 DDr LUMITED fICICI)

ACTUAL AND PRO BACSED UALNCE SHEETS

(Rs bUilleo)

hiueal Year End March 31 /b 18 1986 1985 198 il 1989 1990 1991

-----------------Actual------------------ -------Projected-------Assets

Cash and Bank Balances 0.38 0.42 1.47 1.51 0.75 2.10 2.50 2.50

Othar Assets and Advancer 0.80 1.05 1.27 1.53 3.18 1.16 1.16 1.16

Current Assets 1.18 1.47 2. 74 3.04 3.93 1.42 2.10 2.92

Loans (rupees) 7.70 9.40 11.40 14.12 19.00 22.61 27.92 34.11

Loans (fx) 4.60 5.50 6.83 9.27 11.00 12.33 13.63 15.05

Investments 0.80 1.00 1.20 1.30 1.64 1.80 2.02 2.26

Net Fixed Assets O.OS O.". 0.24 _.1_42 0.86 1.58 2.32 3.07

TOTAL ASSETS 14.33 17.57 22.41 2.8.13 36.43 43.00 51.65 61.07

Liabilities and Rt Worth

Current Liabilities 0.76 0.98 1.09 1.2. 0.98 1.65 1.65 1.65

Rupee Debt 8.41 10.12 13.02 15.27 20.00 23.17 27.82 33.58Foreign Currency Debt 4.08 5.14 6.56 9.16 13.22 14.34 17.48 20.19

Net Long Term Debt 12.49 15.26 19.58 24.43 33.22 37.51 45.30 53.77

Share Capital 0.27 0.41 0.49 0.67 0.80 0.80 0.90 1.00

Reserves .2.11 0.92 .1.25 1.80 2.41 3.04 3.80 4.65

Total EquLty 1.08 1.33 1.74 2.47 3.21 3.84 4.70 5.65

TOTAL LIABILITIES 14.33 17.57 22.41 28.13 36.43 43.00 51.65 61.07

AND NETWORTE

Ratios-.

Debt:Equlty (times) / 10.30 9.80 10.40 9.50 9.50 9.40 8.00 8.20

la Debts EquIty as defined in World Bank Loan Areeets.

lb FISCal Year End is December 31 up to 1966 and March 31 from 1988 onwards. March 1988 figures are for15 months.

Source: ICICI

-93-ANNMEX 6

ELECTRONICS INDUSTRY DEVELOPM = PROJECT

DOCUMENTS IN PROJECT FILE

1. World Bank, India - Levelonment of the Electronics Industry: SectorReport No. 6781-IN, dated June 26, 1987.

2. Manpower Component Working Papers

3. Realizing Indian Software Potential: Proposal for a Study

4. Seminar Program for Government and Industry Representatives

5. Technical Assistance for the Financial Institutions

6. Guidelines for DFI Financing: Suggested Scale and Technology| ~~~Standards.