Document of The World Bank FLE FOR OFFICIAL USE ONLY Report No. P-3407-KO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$70 MILLION TO THE REPUBLIC OF KOREA FOR A SMALL AND MEDIUM MACHINERY INDUSTRY PROJECT November 15, 1982 LThis domment bas a restuided distibudlon and may be used by reejpikets oW in the perNegaggam l thdr officia duies. Us cok"m may no oherwise be duzhned- witbNt World BsDk- uGb! CURRENCY EQUIVALENTS Currency Unit - Korea Won US$1 = Won 740 WI = US$0.00135 Wl million US$1,351 Wl billion US$1.35 million FISCAL YEAR Government of Korea January 1 - December 31 Small and Medium Industry Promotion January 1 - December 31 Corporation Small and Medium Industry Bank January 1 - December 31 Korea Long-Term Credit Bank January 1 - December 31 Citizens National Bank January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOK - Bank of Korea CNB - Citizens National Bank DFC - Development Finance Company EPB - Economic Planning Board KDB - Korea Development Bank KLB - Korea Long-Term Credit Bank KOPTEC - Korea Production Technology Corporation KTAC - Korea Technology Advancement Corporation KTDC - Korea Technology Development Corporation MCI - Ministry of Commerce and Industry MOF - Ministry of Finance MOST - Ministry of Science and Technology NIF - National Investment Fund PROTIP - Production Technology Improvement Program R&D - Research and Development SAL - Structural Adjustment Loan SMI - Small and Medium Industries SMIB - Small and Medium Industry Bank SMIPC - Small and Medium Industry Promotion Corporation SMIPF - Small and Medium Industry Promotion Fund TA - Technical Assistance TOR - Terms of Reference FOR OFFICIAL USE ONLY KOREA THE SMALL AND MEDIUM MACHINERY INDUSTRY PROJECT Loan and Project Summary Borrower: The Republic of Korea. Be_eficiaries: Small and Medium Industry Promotion Corporation (SMIPC), the Small and Medium Industry Bank (SMIB), the Korea Long-Term Credit Bank (KLB) and the Citizens National Bank (CNB). Amount: US$70 million equivalent. Terms: The proposed loan would be made at the Bank's standard variable interest rate. US$11 million equivalent of the loan would be allocated to SMIPC and would have a term of 14 years including 3 years of grace; US$59 million equivalent would be allocated to SMIB, KLB and CNB, and would have amortization schedules conforming substantially to the aggregate of the amortization schedules applicable to the specific investment projects financed out of the proceeds of the proposed loan by each of the three Development Finance Companies (DFCs). The maximum repayment period of the portion of the loan allocated to the DFCs would be 14 years including three years of grace. Relending Terms: The Republic of Korea would relend the Bank loan proceeds on the same terms as the Bank loan in accordance with the terms of subsidiary loan agreements satisfactory to the Bank as follows: US$11 million equivalent to SMIPC for technical assistance and training purposes; and US$29 * million equivalent to SMIB, US$20 million equivalent to KLB, and US$10 million equivalent to CNB respectively, for relending to small and medium machinery enterprises. The DFCs would relend the proceeds of the loan to subborrowers at a variable interest rate of 2% above the effective rate of the Bank loan for a maximum maturity of 12 years including a maximum of three years of grace. The foreign exchange and variable interest rate risks on SMIPC's portion would be borne by SMIPC, whereas the foreign exchange and variable interest rate risks on the credit component would be passed on to subborrowers. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - li - Project Description: The proposed project provides a basis for improving the sectoral policies affecting the machinery industry sector, supports upgrading their technological capabilities, and provides credit for financing productive investments in the sector. It would consist of: (a) Technical Assistance: Institutional development for SMIPC to assist it in providing technical assistance to small and medium machinery producers to upgrade their skills and to improve their productivity in using existing technology at the plant level; (b) Training: On-the-job training for top managers, engi- neers, middle managers and foremen in small and medium machinery enterprises to be provided by SMIPC and by other institutions through arrangements made by SMIPC; and (c) Credit. Lines of credit to SMIB, KLB and CNB, respectively, to finance the investment requirements of the small and medium machinery industry. About 660 individual enterprises would receive technical assistance under the project and about 3,300 managers, engineers and supervisors would be trained in manufactur- ing processes and management techniques. The participating DFCs are expected to finance about 100-150 subprojects, some of which would also be recipients of technical assistance under the project. There are two risks associated with this project. First, there are institutional risks that SMIPC's Production Technology Improvement Program (PROTIP) activities would not prove effective for the provision of technical assistance to the machinery industry and that SMIPC would not properly coordinate the provision of training and technical assistance to the machinery industry. Second, there are risks that the credit component would disburse more slowly than expected due to the recent reductions in domestic interest rates below foreign exchange lending rates. The institutional risks would be minimized through substantial support to be provided to SMIPC by consultants, and because SMIPC has already appointed a capable director to oversee its PROTIP activities. Furthermore, several provisions have been included in the project to strengthen SMIPC's institutional capabilities. Finally, the disbursement risks are mitigated by the fact that the Government has issued rules that require that only foreign exchange loans can be used to finance the importation of foreign equipment and the demand of the - iii - machinery industry for imported equipment is likely to far exceed the credit f inancing provided for under the proposed loan. Moreover, the Government expects the discrepancy between foreign and local interest rates to be temporary. Estimated Project Cost: Local Foreign Total --- - $ million -------- Technical assistance 3.0 8.4 11.4 Training 1.4 0.7 2.1 Contingencies: Physical 0.2 0.5 0.7 Price 1.8 1.4 3.2 Technical Assistance and Training 6.4 11.0 17.4 Credit 43.4 59.0 102.4 Total Project Costs 49.8 70.0 119.8 Financing Plan: Local Foreign Total ------- $ million -------- SMIPC 6.4 - 6.4 DFCs 43.4 - 43.4 Bank Loan - 70.0 70.0 Total Sources of Financing 49.8 70.0 119.8 Es timated Disbursements: Bank FY 1983 1984 1985 1986 Annual 1.8 27.9 29.7 10.6 Cumulative 1.8 29.7 59.4 70.0 Staff Appraisal Rteport: No. 3871-KO, dated November 10, 1982 I REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUJTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF KOREA FOR A SMALL AND MEDIUM MACHINERY INDUSTRY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Korea, for the equivalent of US$70 million for a Small and Medium Machinery Industry Project. The loan would be made at the Bank's standard variable interest rate. US$11 million equivalent of the loan would be allocated to the Small and Medium Industry Promotion Corporation (SMIPC) and would have a term of 14 years including 3 years of grace; US$59 million equivalent would be allocated to the Small and Medium Industry Bank (SMIB), the Korea Long-Term Credit Bank (KLB) and the Citizens Natjional Bank (CNB) and would have amortization schedules conforming substantially to the aggregate of the amortization schedules applicable to the specific investment projects financed out of the proceeds of the proposed loan by each of the three Development Finance Companies (DFCs). The maximum repayment period of the portion of the loan allocated to the DFCs; would be 14 years including three years of grace. The Government would reletnd the Bank loan proceeds to SMIPC, SMIB, KLB and CNB on the same terms as the Bank loan. PART I - THE ECONOMY 2. The latest Economic Report entitled "Korea: Adjusting to a New World Environment" was distributed under cover of Sec M82-514 dated June 1, 1982. The following summary is based on this Report together with updating information obtained during a Bank mission in August 1982. The Country Data Sheets are attached as Annex 1. Past Performance 3. Twenty years ago, Korea was one of the poorest developing countries, heavily dependent on agriculture, with a weak balance of payments financed almost entirely through foreign grants. By the early 80s she had become a semi-industrial, middle-income country with a fairly strong external payments position. During 1960-81 GNP grew by over 8% p.a. and per capita income more * than tripled in real terms. The share of the manufacturing sector in GNP rose from 14% to 29.5% while the share of agriculture fell from 36% to 18%. Merchandise exports, principally manufactured goods, accounted for almost 41% of GNP as against a mere 4% two decades earlier. 4. Rapid industrial growth also brought about a marked shift in the structure of employment. In the early sixties well over half the labor force had been employed in agriculture. By 1981, employment in this sector had iallen to a third, while manufacturing absorbed over 20% of the econo- mically active population. Heavy migration from the rural areas to the cities combined with deliberate Government policies to improve the agricul- tural terms of trade and a steady increase in agricultural value added helped to ensure a growth in per capita rural incomes more or less in line with the rest of the economy through the first half of the 70s. There are indications of some deterioration in the income share of the rural population in the last four years, but Korea still compares favourably with most countries, the ratio of the population below the poverty line in the rural sector having declined from 40% in the early sixties to 11% in the late 70s. Adjustment to Oil Crises and Domestic Shocks, 1974-82 5. A number of measures enabled Korea to not only surmount the first oil crisis which raised the cost of imported fuel by US$700 million within a matter of a year, but also to average a growth rate of 10% between 1973 and 1978. These included, increased borrowing from abroad, combined with a devaluation of the currency, export diversification in products as well as markets and an increase in public sector savings. However, the very success of the Korean planners in stimulating the economy generated serious inflationary pressures. Real wages rose at an average annual rate of 18% between 1975-78, well in excess of the growth in productivity, and by 1978 the Consumer Price Index (CPI) was increasing at over 18% p.a., compared to a rate of 10% in 1977. In addition, the large volume of subsidized credit which was made available to the heavy and chemical industries by the financial system under the Government's direction, brought about an excessive expansion of capacity in subsectors faced with weak demand while the traditional light industries were frequently starved of funds. This trend was in line with the Government's view of Korea's changing comparative advantage, but it created structural imbalances in the manufacturing sector and in conjunction with exchange rate rigidity and a rising price level, had a dampening effect on the expansion of exports. 6. To tackle these problems, the Government announced, in April 1979, a far-reaching program of stabilization-cum-restructuring, but the program was overwhelmed by a series of unexpected shocks. The oil price hikes in 1979 and 1980 raised Korea's petroleum import bill from about US$2.3 billion in 1978 to US$6.2 billion in 1980 with the price-induced increase equal to nearly 6% of GNP in 1980. In October 1979, President Park Chung Hee, the chief architect of Korea's "economic miracle" since the midsixties, was assassinated. This was followed by a period of the severest political uncertainty and social unrest in twenty years (with the situation returning to normal only after the ascendancy of a new Administration under President Chun Doo Hwan in September 1980). On top of these developments, the unfavorable weather resulted in a drop in agricultural output of about 22% in 1980, or over 4% of GNP, and a 15% decline in investment led to a worsening of deflationary pressures which could not be offset by the 10% growth of export volume. As a result GNP fell by 6.2% in 1980, unemployment increased to 5.2% from 3.2% in 1978 and the higher costs of fuel, raw materials and foodstuffs pushed up consumer prices by 29% in spite of a 5% cut in real wages. - 3 - 7. The reduction in wages resulted primarily from the Government's income policy which along with the 26.7% devaluation of the won vis-a-vis the IJS dollar, were the two most important measures introduced in 1980 to stabilize the domestic economy and promote external adjustment. With the won depreciating by a further 12% in 1981 and real wages decreasing almost 4%, the effects of these policies on the adjustment process have been very positive, although recovery has been less rapid than after the first oil shock. Export volume increased by another 19% in 1981 and together with only moderate real import growth (5%) reduced the current account deficit from US$5.3 billion in 1980 (10% of GNP) to US$4.4 billion (7% of GNP). At the same time, on a year-end basis, inflation was a little over 12% compared to 29% in 1980 and GNP grew by 7.1%, although some 3% of this reflected a recovery of agricultural production. Inflationary pressures continued to subside through the first nine months of 1982 and the current account BOP deficit which was forecast at US$4.4 billion, has been revised downwards to US$1.8 billion, about 2.7% of GNP. This is partly because of a 3% improvement in the terms of trade, a reduction of oil imports due to conservation measures, and slower than anticipated growth in GNP. 8. the Government's original GNP growth target of 7% for 1982 has been reduced by 1%, and actual growth may not exceed 5%. Employment growth in this period also slowed to 1.4% p.a., with all the job creation being outside agriculture and manufacturing. With capacity utilization in the manufacturing sector averaging 70% and the interest burden having risen, there has been a persistent deterioration in the financial position of enterprises. The ratio of net profits to sales decreased from 2.2% in 1978 to -0.7% in 1981, and the ratio of financial expenses to net sales rose from 4.8% to 8%. Recent Reflationary Measures 9. In mid-1982, the Government encouraged by the imporvement in the balance of payments and the fall in inflation through the first half of the year, introduced measures to spur economic activity and improve both the liquidity as well as the profitability of enterprises. These measures are aimed at stimulating aggregate demand and strengthening the liquidity of firms. The liquidity and profitability of manufacturing is to be raised by means of a 4% cut in interest rates introduced in July 1982 and a 15% reduction in corporate taxes planned for 1983. These changes are also likely to have a favorable influence on investment. However given the h eavy reliance of the Korean economy on trade, a full recovery also requires a resurgence of export demand, which, given the economic climate in the OECD countries, is likely to be slow in materializing. Thus, both growth and trade prospects over the next twelve months remain somewhat uncertain. With money supply increasing at 30% p.a., Korean planners will have to be very vigilant so as to ensure that the increase in consumer prices estimated at 7% in 1982, does not surge back to double digit levels. -4- Medium-Term Prospects 10. It is in this environment of uncertainty that Korea's Fifth Five Year Plan covering the years 1982-86 has been launched. The basic objectives of the Plan are to restore growth momentum along with the achievement of price stability and equity. For this purpose, the Plan puts emphasis on (a) economic stabilization, (b) export promotion and import liberalization, (c) establishment of an internationally competitive industrial structure, (d) promotion of the market mechanism, (e) liberalization of the financial sector, and (f) expansion of social development expenditure. The goal of price stabilization is to be pursued mainly through fiscal discipline, a prudent monetary policy and monitoring of wage contracts. Export promotion efforts will be helped by price stability and a flexible exchange rate policy as well as by quality improvement and product innovation. The Plan also proposes a program of import liberalization as well as tariff reduction to improve price competitiveness. An important change in industrial policy during the Plan period will be the reduction of the Government's role in promoting the so-called strategic industries. Investment choices will be left increasingly to the initiative of the private sector with the Government providing only the general framework. To promote the market mechanism, the Government has started a program for liberalization of the financial sector, including denationalization of the commercial banks. However, the pace of this program is likely to be slowed by the continuing sluggishness of the economy which has exacerbated the weaknesses of the corporate sector. The Plan also pro- poses that relatively more Government resources will be allocated to meet the "basic needs" of people such as education, housing, social security and improved sanitation and water supply. The basic strategy of the Fifth Plan, which is to expedite structural adjustment and make greater use of market forces, is sound, but the transition is going to be difficult and the growth target of 7.6% p.a. might not be achieved. In any case, during the 80s Korea will have to adjust to a lower growth rate than in the past two decades and find ways of increasing the employment intensity of its growth to keep unemployment rates at acceptable levels. The projected export growth of 11% does not appear unreasonable in terms of the country's past performance, but the near-term prospects are less favourable than assumed in the Plan. Consequently, the realization of export projections for the Plan period will depend on the success of policies to improve export competitiveness. 11. External Resource Balance. As discussed above, provided appropriate policies are followed and world trade expands as projected, an increase in total exports to the extent projected under the Plan, does not appear unrealistic. The projected reduction in import elasticities is also consistent with the import liberalization program, provided the energy efficiency and oil substitution programs are implemented as planned and appropriate exchange rate policies are followed. In the area of invisibles, an important factor is the Plan projection of a significant reduction in international interest rates in nominal as well as real terms; this expectation is broadly consistent with the forecasts made by the World Bank and the IMF. The gross borrowing program envisaged in the Plan (about $9 billion p.a.), though large in absolute amounts, is realistic in terms of - 5 - availability and prudent in terms of Korea's debt service capacity, provided export projections are realized./l With the projected level of borrowings, Korea's external debt as a ratio of GNP would decline from about 50% at present to about 45% in 1986. If the Plan expectation of a decline in interest rates materializes and the export projections are realized, the total debt-service ratio (including interest payments on short-term debt) would decline from about 20% of exports in 1981 to 14% in 1986, which is considerably lower than the debt service ratio projected for other non-oil developing as well as newly industrializing countries. However, in relation to GNP, Korea's debt-service burden is high and there are risks with regard to the availability and cost of external capital over the next few years. Thus it is desirable to assure that the current account deficit does not exceed the 3% of GDP p.a. projected in the Plan. PART II - BANK GROUP OPERATIONS 12. As of September 30, 1982, Korea had received 62 Bank Loans (inc:luding one Third Window Loan) and 8 IDA Credits, totalling UJSS3,765 million in loans and USS106.8 million in credits (taking into account cancellations and the refinancing of one IDA Credit in a subsequent Bank Loan). As of that date, US$1,045.61 million remained undisbursed on effective Loans, mostly from commitments in the past two years. Annex II contains a summary statement of Bank Loans, IDA Credits, and IFC Investments as of September 30, 1982 and notes on the execution of ongoing projects. As indicated in the notes, progress on project implementation is generally satisfactory, and implementation delays which have occurred in a number of projects - mainly irrigation, highways and population - due primarily to shortfalls in Government budgetary contributions resulting from cost overruns during a period of high domestic inflation are being addressed. The problem was reviewed with the Government during 1981 and the Government subsequently took measures to increase local funding of Bank financed projects. As the Government's budgetary situation continues to be tight, the status and plans for counterpart contributions would remain an integral part of country implementation reviews held jointly with the Government. Nevertheless, despite the recent delays, Korea's disbursement rate remains the highest among major Bank borrowers in East Asia. 13. In recent years, the thrust of the Bank Group's lending operations in Kcorea has been towards assisting the Government's efforts: (a) to secure the external resources required to supplement domestic savings in sustaining a high GNP growth rate by following a policy of rapid export-oriented industrialization; (b) to avoid the emergence of infrastructure bottlenecks; /1 The significant recent improvement of the balance of payment, discussed in paragraph 8 above, which is in part stuctural, is likely to reduce the borrowing requirements and improve the results of the subsequent analysis. -6- and (c) to complement industrial development with agricultural and rural development schemes aimed at bringing about a better dispersal of the fruits of growth through raising incomes and improving the quality of life in the rural areas. 14. A substantial part of Bank financing has been directed towards the vital industrial sector through lending to Korea's four major development banks. The Korea Long-Term Credit Bank has received US$410.0 million, the Korea Development Bank, US$352.5 million, and the Small and Medium Industry Bank, US$205 million in Bank loans for relending to private industry, and the Citizens National Bank US$60 million to meet the financial needs of the small enterprises. The primary beneficiaries of these loans have been the numerous industrial enterprises which have received funds through the financial intermediaries. This has contributed to the overall development of the industrial sector, and also to the achievement of institutional improvements as well as the Government's objective of decentralizing industry. 15. In recent years, the Bank has also been assisting the Government's effort to develop the country's technological capability. The Electronic Technology Project (Loan 1676-K0), approved in March 1979, provided the Korea Institute of Electronics Technology (KIET) with sophisticated facilities to enable it to undertake production-oriented development work, and financed an R&D program that is directly linked to the needs of the electronics industry. In March 1982, the Bank approved a US$50 million loan to the Korea Technology Development Corporation (KTDC) whose main objectives are to accelerate advanced foreign technology imports and support in-house research development and engineering. These previous Bank activities, together with the Bank support for the proposed project, reflect the priority which the Government and the Bank attach to the improvement of the technological level of industry in Korea. 16. As Korea's economy has continued to grow and the pace of industri- alization has quickened, there has had to be a parallel expansion of transport facilities. The Bank Group, through its association with the Government's efforts to modernize and expand the transport sector, dating back to 1962, has played an important role in these developments. Financing of US$432 million has been provided for seven railway projects designed to increase the railroad's capacity and improve its operations; four loans totalling UJS$334.5 million have been made for highway construction and paving of high priority sections of the national network and for a countrywide maintenance organization; and two loans amounting to US$147.0 million have been provided for the expansion of port facilities at Busan and Mugho. 17. Korea's paucity of natural resources and dependence on the manufac- turing segment of its economy have resulted in the adoption of a strategy based on maximizing the advantages of a skilled and hardworking labor force. The Bank Group has been involved in helping to meet the requirements for appropriately trained workers and certain categories of skilled manpower through its lending for four education projects, which have pursued the broad objectives of technical manpower development either through the expansion of relevant subsectors or through specific quality improvements. Together, these projects have catered to a wide range of manpower training needs. 18. Korea's record of achievement in modernizing its agricultural sec- tor, although less spectacular than the gains made in the industrial sphere, is nevertheless commendable. The past 15 years have seen agricultural output grow at an average 4.2% p.a., which has resulted in the country becoming nearly self-sufficient in its staple food, rice, and made possible a steady and perceptible improvement in the living standards of the 35% of Korea's population who live in the countryside and rely primarily on agrarian pursuits for their livelihood. The Bank has lent US$375.5 million for the improvement of irrigation facilities, land and seed development and the provision of agricultural credit to farmers and processors of agricultural products. In addition, US$155.0 million has been provided for two rural infrastructure projects in support of the Government's rural development program, initiated in 1971, to improve the quality of life and the standard of living in the rural areas. In 1979, a JS$125.0 million loan was provided by the Bank to help meet the growing demand for municipal, industrial and irrigation water in the Han Basin southeast of the capital city, Seoul; reduce flood damage; and generate electricity to augment and provide peaking capacity for Korea's power system. 19. The Bank's first essay into the field of regional development in Korea, through the project approved in January 1975, has proved successful. The project was designed to support Government policy by financing high priority investments in the poor, primarily agricultural, southwest region. A loan of US$65.0 million for a second project for the development of the region was approved by the Executive Directors in September 1979. A loan for US$90.0 million was approved in April 1981 for a National Urban Land Development and Housing Project. 20. In order to revitalize the economy while ameliorating inflation and promoting social equity, the Government has taken a number of policy measures described in Part I above. Some of the most important of these measures are incorporated into a structural adjustment program for which a US$250 million structural adjustment loan was approved by the Executive Directors in December 1981. 21. The share of the Bank Group in Korea's total external MLT debt disbursed and outstanding at the end of 1981 was about 10%, and its share of MLT debt service was of the order of 8% at that time. These ratios are expected to be around 9% and 7% respectively by the mid-eighties. PART III - SECTOR BACKGROUND 22. As discussed in Part I above, Korea's growth strategy has been based on the expansion of industrial activity with emphasis on the promotion of -8_ manufactured exports. In 1965, commodity exports totalled a mere US$181 million, of which manufactured exports accounted for just over half. By 1981, commodity exports had reached US$21.3 billion, more than 90% of which consisted of manufactures. Although Korea's export pattern has continued to display a high degree of reliance on a few labor-intensive traditional exports (textiles, clothing, footwear, plywood and certain miscellaneous manufactures), there has also been a discernible movement toward more sophisticated skill-intensive products. Items such as electrical machinery, machine tools, electronic goods and components, and ships have been added to Korea's range of exports. The transition from labor-intensive manufactures towards products requiring higher levels of technology and labor skills, however, has been pursued too abruptly and has led to overinvestment in heavy and chemical industries at the expense of the light manufacturing sector. With overinvestment in heavy industries, demand for skilled labor has sharply increased and the consequent increase in labor costs has outpaced productivity gains. Shortages of skilled labor, high rates of labor turnover and rising labor costs combined with underinvestment adversely affected productivity levels and technology absorption in the small and medium industry (SMI) sector, including small and medium machinery industries, and have resulted in the erosion of SMI firms' domestic as well as international competitiveness. The Machinery Industries 23. The machinery industries subsector, defined as firms engaged in the "manufacture of fabricated metal products, machinery and equipment," accounted for only 13% of manufacturing value added and 11% of manufacturing exports in 1972. During the period 1972-80, the volume of output of the sub sector grew at an annual rate of 37% compared with 19% for the manufacturing sector as a whole and by 1980 the subsector accounted for 22% of manufactur- ing value added and 21% of manufacturing exports. In terms of size distribu tion, small and medium machinery producers (generally defined in various law and decrees as enterprises having either less than W 500 million in assets or less than 300 employees) accounted for 94% of enterprises, 38% of employ- ment, 24% of gross output and 28% of value added of the machinery subsector in 1980. The Government's Fifth Five-Year Plan (1982-1986) places emphasis on continued rapid expansion of the manufacturing sector. The Plan calls for increases in machinery exports from US$3.5 billion in 1980 to US$17.3 billion in 1986, when exports of machinery are expected to account for more than 32% of total exports, compared with about 20% in 1980. These ambitious targets will be difficult to achieve, but are indicative of the key role the Government has assigned to machinery industries in Korea's future economic growth. 24. The recent economic recession has highlighted the structural imbalances and inherent weaknesses in the technical and technological capa- city of the machinery subsector. For the large heavy machinery producers, the recession closely followed and exacerbated the problems created by the massive expansion program fostered by generous Government financial and taxa- tion benefits. This expansion resulted in the creation of capacity consider- ably in excess of market size, and consequently, capacity utilization rates -9- have been extremely low. Excess capacity has not been a major problem for most small and medium machinery producers, however, largely because of the constraints they faced in obtaining resources for upgrading or expansion of facilities during the 1970s. Nevertheless, they face serious technical and managerial difficulties (in areas such as choice of equipment, operating practices, labor training, product quality and level of absorption of techni- cal know-how, etc.) which must be overcome if they are to play the key role envisaged for them in Korea's industrial development strategy. Unless these are resolved, Korea will have difficulty progressing beyond exporting rela- tively simple, standardized but low value added machinery products for which prospects for continued rapid export expansion appear limited, and domestic industry will have to continue to rely heavily on imported machinery and equipment. Policy Issues 25. The Government has recognized these problems and has instituted a number of policy adjustments. In a Letter of Development Policy for 1982-86, which provided the basis for the Bank's first Structural Adjustment Loan (SAL) of US$250 million to Korea (Loan No. 2071-KO, approved December 17, 1981), the Government outlined a structural adjustment program which included the following measures related to the manufacturing sector: a comprehensive review of industrial incentives and protection policies with the aim of developing policies for promoting more competitive conditions and reducing the role of Government in directing resource allocation; development of programs for restructuring and consolidation of large industries currently suffering from substantial excess capacity; and the strengthening of project appraisal capacity in Government agencies and key financial institutions for the better evaluation of major projects. 26. The Government has submitted to the Bank a Letter of Development Po]Licy for the Machinery Industries which summarizes the various policies and proposed courses of action in the areas discussed below to the extent they apply specifically to the machinery subsector. While the reforms in the financial, trade, and investment policies, are essential to the long-run efficient development of the machinery industries, the explicit attention to improving operating efficiency to be provided by this project would yield immediate positive results. (a) Financial Policies. The Government has initiated action under Loan No. 1932-Ko approved December 24, 1981 (8th KDB Project) and Loan No. 1933-Ko approved December 24, 1981 (KLB Project) to limit the scope of directed lending. Plans are also underway to expand the operations of Korea EXIM Bank to enable it to provide suppliers credits for machinery exports, on terms comparable to those avail- able to overseas machinery exporters. The Government has also taken a number of steps to increase the access of small and medium scale entreprenuers to investment credit. - 10 - (b) Technology Development Policies. Foreign direct investment has been opened up across a much expanded range of industries and minimum investment and conditions for foreign participation in equity of local firms have been relaxed to foster accelerated technological development. The import of foreign technology under license also has been substantially liberalized. In addition, tax and financial incentives for research and development (R&D) and technology upgrading have been increased and the provision of financial resources for local R&D and its commercialization has been expanded. (c) Extension Services and Technical Assistance. In the context of the fourth loan (Loan No. 2004-Ko of May 26, 1981) to the Small and Medium Industry Bank (SMIB), the Government agreed to undertake a review of the small-scale industry sector extension services delivery system. On the basis of this review, the Government took action in January 1982 to rationalize the system by reducing the number of extension service agencies dealing with SMIs from 19 to 4, which now comprises the Small and Medium Industry Promotion Corporation (SMIPC) and three financial institutions: SMIB, Citi- zens National Bank (CNB), and Korea Credit Guarantee Fund. The Government's detailed action program based on its recent review focusses on, among other things, establishing and monitoring performance targets for the four extension agencies and improving the services available from each agency. (d) Protection Policies. Machinery industries appear to have been given significant protection against imports. Although average tariff protection (net of tariff exemptions) for these industries is only about 10%, the proportion of machinery items on the restricted list (i.e., which can be imported only if no similar locally-produced item is available) is the highest among manufac- turing industries (almost 50%, in 1981/82). The Government is undertaking a detailed review of overall industrial incentives and protection policies, giving priority to a review of the machinery subsector, as part of the agreements reached under the SAL. A report is to be submitted to the Bank by June 1983. Detailed action programs for further import liberalization and tariff reform for machinery industries would be formulated and discussed with the Bank in the context of its ongoing program of structural adjustment lending to Korea. (e) Subcontracting Policies. Subcontracting is critical for efficient development of the machinery industries since competitiveness of large end-product producers, and the subsector as a whole, depend heavily on the development of close working relationships with suppliers of parts and components. Present Government policies promote these relationships not only through the provision of financial and technical assistance to subcontractors, but also through selection of subcontractors eligible for assistance and - 11 - pressures on large assemblers to subcontract to them. This approach is contrary to the Government's policy to limit inter- vention in the economy and to rely on market forces for economic decisions and is detrimental to the efficient long-term develop- ment of subcontractors. The Government has agreed under the SAL to evaluate its subcontracting policies and procedures and to review alternative policies to foster efficient subcontracting arrangements. This review, which will form part of the SAL related studies, will be completed by June 30, 1983. On the basis of this review, a detailed program of action would be developed and discussed with the Bank within the context of SAL. The Bank's Role 27*. In the past, the main thrust of the Bank's industrial lending strategy for Korea has been to promote strong development finance companies (DFCs) capable of acting as efficient financial intermediaries. Project Comr- pLetion Reports on loans to the DFCs have concluded in each case that the Bank's twin objectives of resource transfer and institution building vis-a-vis these DFCs have been satisfactorily achieved. This conclusion is supported by Project Performance Audit Reports. The significant maturity attained in the Korean financial sector, partly as a result of the Bank's assistance in sitrengthening institutional capabilities, coupled with the Government's willingness to address directly industrial and financial sector issues, has made it possible for the Bank to shift its lending objectives from institution-specific issues to broader sectoral issues. This broad-based approach will lead to reforms that ultimately improve the responsiveness of the financial system to the requirements of Korean industry and will help imnprove investment efficiency. As noted in para. 27, the Bank is supporting the implementation of this strategy through the SAL and the recent loans to KDB and KLB. The Bank is also assisting the establishment of new service institutions for private industry, especially the more skill intensive industrial enterprises which are expected to provide the main impetus for export growth in the 1980s. In support of this latter objective, the Bank approved a loan (No. 2112-KO) to the Korea Technology Development Corporation (KTDC) in March 1982 to help finance domestic RD&E projects originating from private industry as well as the proposed project in support of SMIPC's Production Technology Improvement Program (PROTIP). Furthermore, IFC has recently made an investment (No. 628-KO approved March 10, 1982) in the Korea Technology Advancement Corporation (KTAC), whose primary objective is commer- cialization of production technology developed by the Korea Advanced Institute of Technology. The future lending program provides for policy-based struc- tural adjustment lending, lending to the financial sector and lending to improve the technological capabilities of the Korean economy. - 12 - PART IV - THE PROJECT Project Background 28. Strong institutional support for the development of the machinery industries was originally recommended in the Bank's Sector Report (Report No. 2130-KO dated March 19, 1979) on the machinery industries, which was undertaken by the Bank at the request of the Government. As a result, the Government completed in early 1981, a report entitled "A Study on Small and Medium Machinery Project" which identified the problems of the machinery industry. As no existing agency was particularly well-suited then to meet the specialized technical assistance needs of the machinery industry sector, the Government established the Korea Production Technology Corporation (KOPTEC) in 1981 for this purpose. The project was appraised in January/ February 1982 with KOPTEC as executing agency. However, the Government decided in May 1982 to consolidate further the provision of extension servi- ces to the small and medium industry sector by merging KOPTEC into SMIPC. A post-appraisal mission visited Korea in June 1982 and determined that the original objectives of the project were not adversely affected by the merger and that in fact, the consolidation will contribute to better overall coordi- nation of extension services in Korea. Discussions and negotiations were held in Washington, D.C. between September 27 and 30, 1982. The Korean delegation was led by Mr. Lee, Hwan-Kyun, Director of the Economic Cooperation Division, International Finance Bureau, Ministry of Finance. A report entitled "Staff Appraisal Report - The Small and Medium Machinery Industry Project" (No. 3871-KO), dated November 10, 1982, is being distributed separately. Supplementary project data are provided in Annex III. Project Objectives and Description 29. The proposed project addresses the sectoral policies affecting the machinery industry and would help strengthen the institutional framework for providing technical assistance to small and medium machinery enterprises between 1983-86. It would upgrade the technology, production practices and efficiency of the small and medium machinery enterprises by financing investments for the establishment, modernization and balancing of machinery enterprises and equipment, and upgrading of production skills. Specifically, the project would consist of: (a) Technical Assistance: Institutional development for SMIPC to assist it in providing technical assistance to about 660 small and medium machinery producers, to upgrade their skills and to improve their productivity in using existing technology at the plant level in selected technical areas such as metal cutting and forming, forging, casting, heat and surface treatment, welding, dyeing and finishing; (b) Training. On-the-job training for an estimated 3,300 top managers, engineers, middle managers, and foremen in - 13 - small and medium machinery enterprises in such general areas as industrial safety, quality control, plant layout and standard machine tool usage and specialized areas such as tool-and-die- making, gauge design, and heat treatment; (c) Credit. Lines of credit to SMIB, KLB and CNB, respectively, to finance the investment requirements of the small and medium machinery industries. Project Implementation 30. The technical assistance and training components of the project would be implemented by SMIPC, which has selected the technical areas menr- tioned above for special attention, in addition to providing general assis- tance pertaining to industrial engineering and manufacturing management. SMIPC would draw heavily on both foreign and domestic experts to provide services to individual enterprises. Substantial reliance on foreign experts will initially be necessary since there is at present limited capability within Korea itself to provide highly specialized expertise in many of these fields. Local consultants will, however, also be used in those cases where the appropriate expertise is available in Korea. SMIPC's longer-term objec- tive is to develop Korean skills that will substantially decrease the need for expatriate specialists, through the training of domestic counterparts as an integral part of every expatriate specialist's terms of reference. SMIPC staff would also be trained in overseas institutions to build up their tech- niLcal capabilities. To implement the training component, SMIPC will assign staff to its Extension Service Department II to coordinate training with the technical assistance being provided. Expatriate specialists, in collabora- tion with staff in the training unit, would identify specific training needs associated with the technological/managerial improvements proposed for a fLrm. SMIPC will provide training either at its own specialized facilities at Banwohl, or would utilize those of other agencies in Korea or overseas. 31. The credit component would be implemented by the three participa- ting DFCs, namely, SMIB, KLB and CNB. Each of the DFCs has had extensive relationships with the Bank and has experience with lending to the machinery industries. The Bank considers them fully competent to carry out their res- ponsibilities under the proposed project. Under this project, each of the DFCs would consult with SMIPC on the more specialized aspects of technical assistance. As SMIPC would need time to build up the size of its clientele, the initial overlap between SMIPC's clients and those of the financial insti- tutions would be small; but it is expected that such an overlap would increase significantly toward the end of project implementation. Agreement has been reached that SMIPC and the DFCs, together with appropriate represenr- tatives from the Government, would form a coordination council which would periodically review the implementation of the project and report to the Bank annually, commencing December 1983, assessing the coordination by SMIPC and the DFCs, in the provision of technical assistance and credit (Sections 3.03 of the draft Loan Agreement; 2.08 of the draft SMIPC Project Agreement, and 2.10 of the draft DFC Project Agreement). - 14 - Small and Medium Industry Promotion Corporation (SMIPC) 32. SMIPC was established by the Government in January 1979, under the Small and Medium Industry Promotion Act, as an autonomous public corporation to carry out a wide range of financial and technical assistance programs for SMIs in Korea. SMIPC has responsibility for administering the Small and Medium Industry Promotion Fund (SMIPF). Major SMIPF programs include, among others, the provision of: (i) financial assistance (through financial insti- tutions, primarily SMIB) and field services to support modernization plans of SMIs and SMI cooperatives, including modernization of folk art and crafts manufacturers and leasing of equipment; (ii) industrial extension services to upgrade management and technology capabilities of SMIs; (iii) training for SMI managerial and technical staff and extension workers; and (iv) col- lection, analysis, and dissemination of business and technical information for SMIs. In 1981, the Asian Development Bank (ADB) extended to SMIPC a US$13.0 million loan to construct and support the institutional development of the Training Institute in Banwohl. Project implementation has progressed satisfactorily, and the first phase of the construction of the Training Institute is expected to be completed in 1982. Training courses for entrepreneurs and extension workers will be moved to Banwohl by end 1982, and technical training courses, for which the workshop complex at Banwohl is being built and equipped, will be moved to Banwohl in early 1984. 33. Since its inception, SMIPC has assisted over 2,500 SMI enterprises and has achieved a respectable record in its assistance activities. In May 1982, the Government delegated to SMIPC the additional responsibility for activities previously undertaken by the Korea Production Technology Corpora- tion (KOPTEC). SMIPC's role, its objectives and functions, policies and procedures, and its relationships to other institutions servicing the industry are elaborated in its Policy and Strategy Statements, which were approved by SMIPC's Board of Policy in November 1982. 34. Organization and Management. The Board of Policy is the highest decision-making body within SMIPC consisting of a Chairman and a maximum of 20 members. The Chairman is the President of SMIPC and is appointed by the President of the Republic upon recommendation of the Minister of Commerce and Industry (MCI). SMIPC's President is Dr. Chong-Yul Yoo, who has advanced engineering degrees. His most recent post has been economic advisor in the Office of the President of Korea. Other Board members are appointed by the Minister of MCI from among Government agencies concerned, financial insti- tutions, business associations, and private sector representatives who are knowledgeable and experienced in the field of SMIs. There are seven private sector and two academic representatives on SMIPC's Board, which is sufficient at present to represent private sector views in SMIPC's operations. SMIPC expects to increase further private sector representation on its Board of Policy, especially from SMI machinery producers, when vacancies occur during the next three years. 35. The day-to-day operational activities of SMIPC are guided by the President and four Directors of varied backgrounds who provide overall - 15 - guidance to SMIPC's eight departments. The Dean of the Training Institute is the Director supervising the Training Department and the Training Administra- t:ion Department. These Departments are responsible for programming and implementation of training for the SMI sector. The Director of Extension Services supervises the Extension Service Department I, which is responsible for providing extension services for SMIs primarily with the assistance of domestic consultants, and the Extension Service Department II, which performs a similar function including PROTIP utilizing foreign consultants. These organizational arrangements are temporary. SMIPC has agreed to resorganize the Extension Service Departments by March 31, 1983 along subsectoral lines with Department II focussing primarily on the machinery industries and Department I focussing on priority industries other than machineries (Section 3.05 of the draft SMIPC Project Agreement). 36. As of June 1982, SMIPC had a staff of 312 including six executives 58 managers and deputy managers. Of the total staff, 32 are in the Extensio Service Department II which will be in charge of SMIPC's PROTIP activities. Amnong the staff of Department II are 20 engineers all of whom have had sub- stantial working experience either in government or private industry in the areas in which PROTIP would concentrate. Nevertheless, SMIPC intends to expand the staff in its Extension Service Departments as necessary to cope with future workload. SMIPC has worked out a comprehensive five-year over- seas training program of 2 to 6 months in order to upgrade its staff's professional expertise and nontechnical skills such as foreign language and consulting. SMIPC's pay scales are comparable to those of the Government research institutes and banks but are higher than most Government agencies. SMIPC has agreed to hire staff and carry out its staff training programs in accordance with plans agreed with the Government and the Bank (Section 3.01 of the draft SMIPC Project Agreement). 37. In the first 15 months of operations since the program's inception in January 1981, PROTIP as administered by KOPTEC had assisted 119 firms in the machinery industries and 15 firms in the textile industry. SMIPC, through its Extension Service Department II, has been continuing KOPTEC's P'ROTIP activities by providing technical assistance through its own staff and foreign and domestic consultants. In order to conduct its rapidly growing operations more effectively, SMIPC needs to retain a consultancy firm to assist it in recruiting foreign experts with detailed terms of reference for individual assignments, supervising the individual consultants' perform- a'nce, training SMIPC staff in consultancy skills, coordinating training with technical assistance, and monitoring benefits of the technical assistance provided to firms. Terms of reference for such a consultancy firm were finalized during negotiations, and SMIPC has agreed to hire a suitable con- sultancy firm by March 31, 1983 on terms and conditions satisfactory to the Bank (Section 2.02(c) of the draft SMIPC Project Agreement). Training staff will also be assigned to the Extension Service Department II by March 31, 1983 to coordinate training and technical assistance (Section 2.07 of the draft SMIPC Project Agreement). - 16 - 38. Financial Prospects of SMIPC. SMIPC's main income source stems from revenues generated from financing activities using the proceeds of the SMIPF, of which SMIPC is the implementing agency. Financing activities are carried out by handling banks on SMIPC's account. Another major source of income is SMIPC's activities from its leasing projects. SMIPC makes avail- able production and testing equipment to small and medium industries on an installment rental basis. SMIPC's revenues are expected to decline from W 12.2 billion in 1982 to W 9.4 billion in 1983 due primarily to a decrease in revenues from cooperatives and thereafter would experience a steady growth from W 11.9 billion in 1984 and W 17.9 billion in 1985 to W 52.3 billion in 1991. SMIPC is expected to incur losses through 1988. Losses would peak in 1984 at W 10.4 billion, but will steadily decrease thereafter until 1989 when SMIPC is expected to earn a modest profit of W 0.2 billion. SMIPCGs major expense items stem from: extension services, training and leasing project costs, and overhead. SMIPC's total annual fund requirements are projected to increase from W 53 billion in 1982 to W 80 billion in 1985 and to W 148 billion in 1991. The major source of SMIPC's funds is expected to be Government budgetary contributions which are forecast to increase from Won 24.9 billion in 1982 (including W 2.9 billion for PROTIP) to W 58.8 bil- lion in 1987. The Government has agreed to exchange views annually with the Bank on the level and timing of the Government's financial support to SMIPC for the following year, taking into account SMIPC's financial prospects and work program (Section 4.02 of the draft Loan Agreement). 39. The primary reason for SMIPC's reliance on budgetary funding during its early years of operations is the limited revenues being recovered from SMIPC's extension service and training activities. For extension services provided by its domestic consultants, SMIPC would not charge any fees between 1983-86, but would charge 10% of direct costs after 1986. For extension services provided by foreign consultants, SMIPC would charge about 30% of direct costs by 1986 and would increase the charge by 10% a year until it reaches 80% in 1991. For training, SMIPC would charge 70% of direct costs during 1983-86 and 80% of direct costs during 1987-91. For SMI staff train- ing, SMIPC plans to charge 30% of direct costs during 1983-86 and 50% after 1986 (Section 3.04 of the draft SMIPC Project Agreement). Even though the Government and SMIPC realize that SMIPC needs to charge for its services, full cost recovery is not now feasible because SMIPC's PROTIP activities are new and are directed at SMIs which are not yet accustomed to paying for technical assistance. Full cost recovery would be feasible only after full PROTIP benefits materialize and the SMI entrepreneurs adjust to paying for technical assistance. SMIPC's cost recovery strategy is to increase base charges gradually and differentiate charges using criteria such as an enterprise's size, frequency of use, and ability to pay. These cost recovery arrangements are considered satisfactory. 40. SMIPC-s Auditor, appointed by the Minister of Commerce and Industry, audits SMIPC-s financial accounts and operations and reports to the Minister through the President of SMIPC. SMIPC-s financial statements are also exter- nally audited by the Board of Audit and Inspection. In order to facilitate the administration of the proposed loan and monitor the extent of Government - 17 - local currency support to the project, SMIPC has agreed to maintain a separate account for the Extension Service Department II and to continue to employ independent auditors acceptable to the Bank (Sections 4.01 and 4.02 of the draft SMIPC Project Agreement). 41. Participating DFCs. The credit component would be implemented by SMIB, KLB and CNB for relending to small and medium machinery enterprises. All three institutions have borrowed substantial amounts from the Bank and ADB and are performing well under ongoing projects. (a) SMIB is a Government-owned bank, incorporated under the Small and Medium Industry Bank Act of 1961. In addition to term lending and the extension of technical assistance, SMIB engages in a wide range of commercial banking activities. SMIB's lending to projects in the machinery sector accounted for 14% by number and 29% by amount of its total outstanding loan portfolio as of December 31, 1981. (b) KLB was established in 1967 as the Korea Development Finance Corporation (KDFC) with the active support of the World Bank Group as a joint venture between domestic and foreign investors including IFC. In 1979 KDFC was converted into a Long-Term Credit Bank. KLB's overall lending to projects in the machinery sector irrespective of size accounted for 21% by number and 18% by amount of its total outstanding loan portfolio as of December 31, 1981. (c) CNB was incorporated in December 1962 under the Citizens National Bank Act as a broad-based financial institution which caters to the financial needs of the general populace and small businesses and attracts small household savings as part of a national effort to mobilize domestic capital for economic development. CNB's lending to projects in the machinery sector accounted for 9% by number and 11% by amount of its total business loan portfolio (including working capital loans) as of December 31, 1981. Project Cost and Financing Plan 42. Total project costs are estimated at $119.8 million equivalent, including a foreign exchange cost of US$70 million. The estimated total costs for the technical assistance and training components of the project amount to US$17.5 million, including US$11.0 million in foreign exchange. The estimates were derived from SMIPC's proposed PROTIP activities elaborated in its operational plan and financial statements and based on the following assumptions (in 1982 base prices): US$8,750 per man-month (inclusive of fees and round-trip air tickets) for foreign consultants; US$1,750 per man-month (fees only) for domestic consultants; training costs ranging from W 2,650 per trainee hour using Korean instructors to W 7,760 per trainee hour using expatriates. Taxes are expected to be negligible. The cost estimates include 5% physical contingencies to cover unforeseen technical assistance - 18 - and training needs and 24% price contingencies based on domestic and international inflation rates in 1982-86. The cost of the credit component is estimated at US$102.4 million equivalent, of which US$59.0 million represents the foreign exchange costs. 43. The Government would onlend US$11 million of the Bank loan of US$70 million to SMIPC to finance project-related technical assistance and training in 1983-86. The Government would onlend the balance of US$59 million to the three participating DFCs for the credit component and finance about 40% of their combined foreign exchange requirements of their machinery loan commitments in 1983-85, and would be allocated as follows: US$29 million for SMIB, US$20 million for KLB, and US$10 million for CNB. The balance of the projected lending by the three DFCs for the machinery industries would be met from their own resources, some of which may be borrowed from external sources. Features of the Proposed Loan 44. The Bank loan would be relent to SMIPC and each of the three DFCs in accordance with the terms of subsidiary loan agreements to be entered into between the Government and each of SMIPC and the DFCs, satisfactory to the Bank (Section 3.01(b&c) of the Loan Agreement). Ratification of the subsidiary loan agreements would be a condition of loan effectiveness (Section 6.01 of the draft Loan Agreement). The portion of the Bank loan allocated to the technical assistance component would have a repayment term of 14 years including three years of grace (Section 2.09(a) of the draft Loan Agreement). The credit component would have an adjustable composite amortization schedule, reflecting the aggregate amortization schedules of the subloans made by the DFCs, and would be fully repaid within 14 years, including a grace period of 3 years (Section 2.09(b) of the draft Loan Agreement). Individual subloans would have a maximum maturity of 12 years, including a grace period of three years (Section 2.04(a) of the draft DFC Project Agreement). 45. The foreign exchange and variable interest risks on the portion of the loan earmarked for SMIPC would be borne by SMIPC while subborrowers of DFCs would bear the foreign exchange and variable interest risks for the credit component (Section 4.03 of the draft DFC Project Agreement). The participating DFCs would each relend the proceeds of the proposed loan at an interest rate of 2% above its own effective borrowing cost including the front-end fee, in line with the Government's guidelines and the general practice of DFCs in Korea. Based on the current Bank lending rate of 11.4% p.a., a frontend fee of 1.5%, and the 2% spread, the nominal relending rate to subborrowers would be around 13.6% p.a. The 2% interest spread is adequate to cover the cost incurred by the participating DFCs in processing subloan applications and supervising subprojects. The interest rates on subloans from proceeds of the Bank loan are expected to be positive in real terms. The interest rate under the project would be higher than the rates on domestic currency loans currently at 10% for term loans. The domestic interest rates are nevertheless positive in real terms compared with - 19 - projected inflation rates of 7%-8% during 1982-85. However, this divergence between domestic and foreign interest rates is not expected to have a significant adverse effect on the disbursement under the project because of the! Government's rules that require that only foreign exchange loans can be used to finance the importation of foreign equipment and the demand of the machinery industry for imported equipment is likely to far exceed the credit financing provided for under the proposed loan. 46. Eligibile enterprises for assistance under the proposed loan would be defined as those engaged in the "manufacture of fabricated metal products, machinery and equipment". Small and medium industries would be defined in terms of maximum size of employment. The official definition would be applicable to the clients serviced by SMIPC. The definition for small and medium enterprises for the DFCs would be made according to their respective charters. For CNB, the maximum size of employees of its subborrowers would be 100; for SMIB and KLB, the maximum size of employees of their subborrowers would be 300, except for those specific activities provided by law (Section 1.01(j) of the draft Loan Agreement and the Schedule to the DFC Project Agreement). The subloan ceilings for the three DFCs would be US$2 million for SMIB and KLB and US$500,000 for CNB which would be similar to subloan ceilings under previous Bank loans for CNB and SMIB; KLB has agreed to lower its subloan ceiling for this particular project to pay attention to the needs of its smaller machinery industry clients (Section 2.02(b) of the drraft Loan Agreement). Since the proposed project is the first of its kind in Korea, the participating DFCs would submit the first five subprojects regardless of size to the Bank for prior review (Section 2.02(b) of the draft Loan Agreement). Thereafter, the free limits would be US$500,000 for SM][B and US$300,000 for CNB (Section 2.02(b) of the draft Loan Agreement). K'LB will not be subjected to any free limit. However, all of its subprojects, like those of SMIB and CNB, would be subject to an ex post reviiew. KLB will be required to calculate the economic rate of return for al:L subprojects above US$1 million while SMIB and CNB will undertake similar analysis for subprojects above the free limit. Under such an arrangement, the Bank expects to review about 20 subprojects (accounting for approximately 15% of the total amount of the credit component and 15% of the number of subprojects) prior to approval. 47. All consultant contracts with SMIPC to be financed out of the loan proceeds would be undertaken in accordance with Bank guidelines. SMIPC and the Government have agreed that all consultancy contracts above US$100,000 would have consultants, TORs, and terms and conditions subject to the Bank's prior approval while those below US$100,000 would be subject to post-approval (Section 2.02(d) of the draft SMIPC Project Agreement). Standard TOR forms for routine jobs below US$100,000 have been prepared. TORs for repeater contracts above US$100,000 where changes are minimal would normally be exempt from prior approval. With these thresholds, the Bank expects to review 20% of the consultancy contracts prior to approval. With regard to SMIPC's imports of equipment and materials, which are expected to total less than US$1.75 million, Government procurement procedures, which require bids from at least three potential suppliers would be followed. These Government - 20 - procedures are satisfactory to the Bank. As the machinery and equipment contracts are expected to be numerous and small, international competitive bidding would not be appropriate. For the credit component, the three DFCs would follow their standard procurement procedures. These procedures, which are based on strict competitive bidding practices that require at least three bids from competitor suppliers, have been examined and found to be satisfactory under previous Bank loans. 48. The loan amount earmarked for the technical assistance and training components would be disbursed against 100% of the cost of consultancy services retained by SMIPC; 100% of the costs of overseas training; 100% of foreign expenditures for directly imported equipment and materials; and 60% of local expenditures for locally manufactured/procured equipment and materials, (Schedule 1 of the draft Loan Agreement). The credit component would be used, as in previous Bank loans to the three DFCs, to finance 100% of the foreign exchange costs of goods and services directly imported by subborrowers and 60% of locally manufactured/procured equipment and materials (representing the estimated foreign exchange cost) (Section 2.02(b) of the draft Loan Agreement). This loan is expected to be disbursed in four years; the disbursement profile for this project is realistic based on the projections provided by SMIPC and the three DFCs. The standard Industrial Development Finance (IDF) disbursement profile is not relevant for the portion to be allocated to SMIPC, whereas the credit component is expected to be completed one year earlier than the disbursement profiles for the IDF sector in the region because of the efficiency of the participating DFCs and because the demand for investment funds by machinery enterprises far exceeds the amount of credit available under the loan. Benefits and Risks 49. Expected Benefits. This project is expected to generate substantial economic and institution-building benefits. The major immediate benefits of the project would be improved export performance and increased import substi- tution by the machinery industries. On the enterprise level, it is antici- pated that about 660 individual enterprises would be assisted by SMIPC in 1983-86. In addition, about 3,300 managers, engineers, and supervisors would be trained by SMIPC in manufacturing processes and management techniques dur- ing the period. Moreover, an additional 100-150 subprojects, some of which would also be recipients of technical assistance, would receive financial assistance from the participating financial institutions to increase economi- cally and financially sound investments in the machinery sector. A limited sample of the DFCs' machinery subprojects showed that their economic rates of return ranged from 19% to 55% with an average of 25% and their financial rates of return ranged from 14% to 65% with an average of 33%. The project would foster improved coordination in the provision of financial and techni- cal assistance to SMIs as well as improved access to financial assistance of subprojects currently not having such access. The proposed project is also expected to generate a number of external economies relating to productivity and product quality of the machinery industries. Finally, the strategy of on-the-job training fostered by the project would rapidly disseminate improved - 21 - technologies at the plant level, and a group of production technology consultants would be trained domestically to carry on the functions which must now be performed by expatriate consultants. 50. Risks. The risks in this project are two-fold: (a) institutional risks; and (b) disbursement risks. With respect to institutional factors, the major risk is that SMIPC's PROTIP activities will not prove effective as the primary institution for the provision of technical assistance to the machinery industries in Korea and/or will not be able to coordinate its technical assistance and training activities with the provision of credit. The anticipated benefits from the project would thus be diminished. The funds available under the line of credit would nevertheless be disbursed, and output and exports of the machinery industries would expand, though not at such rapid rates as might occur if the technical assistance aspects of the project had been carried out properly. Such a development is unlikely, however, since SMIPC has already appointed a competent Director to supervise the Extension Service Departments and would seriously embark on a program to improve its institutional strength prior to and during project implementation. In addi- tion, there are risks that the credit component would disburse more slowly than expected due to recent reductions in domestic interest rates below foreign exchange lending rates. However this risk is mitigated by the fact that the Government has issued rules that require that only foreign exchange loans can be used to finance the importation of foreign equipment and the demand of the machinery industry for imported equipment is likely to far exceed the credit financing provided for under the proposed loan. Moreover, the Government expects the discrepancy between foreign and local interest rates to be temporary. The Bank is continuing its review of the recent financial measures in the context of overall dialogue in conjunction with the proposed financial sector loan. On balance, the benefits of the project are likely to be substantial and the risks involved manageable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 51. The draft Loan Agreement between the Republic of Korea and the Bank, the draft Project Agreement between the Bank and the Small and Medium Industry Promotion Corporation, the draft Project Agreement between the Bank and the Citizens National Bank, the Korea Long-Term Credit Bank, the Small and Medium Industry Bank, and the Report of the Committee provided for in Article III of the Articles of Agreement of the Bank are being distributed separately to the Executive Directors. Additional Conditions of Effective- ness are ratification of the Project and Subsidiary Loan Agreements. Additional special conditions of the loan are listed in Section III of Annex III. 52. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 22 - PART VI - RECOMMENDATION 53. I recommend that the Executive Directors approve the proposed loan A.W. Clausen I President Attachment Washington, D.C. November 15, 1982 ANNEX I - 23 - Page 1 of 5 KoREA REPUBLIC OF - SOCIAL INDICATORS DATA SHEET KODRA REPUBLIC OF REFERENCE GROUPS (WEIGHTED AVERAGES AREA (THOUSAND SQ. HM.)OST RECENT - HMOST RCENT ESTIMATE)- 7-(YrAL 99.5 MOST RECENr MIDME ~~~~~INCOME MIDDLE INCOM AGRICULTURAL 22.5 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC LATIN AMERICA & CARIBBEAN GNP PER CAPITA (US$) 190.0 430.0 1520.0 890.1 1902.0 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 208.0 657.3 1472.5 701.7 1259.9 POPULATION AND VITAL STATISTICS FOPULATION, MID-YEAR (THOUSANDS) 25012.0 32241.0 38197.0 URBAN POPULATION (PERCENT OF TOTAL) 27.7 40.7 54.8 32.4 65.7 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 52.2 STATIONARY POPULATION (MILLIONS) 70.1 YEAR STATIONARY POPULATION IS REACHED 2065 POPULATION DENSITY PER SQ. KM. 254.0 327.4 381.8 255.9 35.2 PER SQ. KM. AGRICULTURAL LAND 1168.8 1389.1 1669.4 1748.0 92.5 POPUIATION AGE STRUCTURE (PERCENT) 0-14 YRS. 42.9 42.1 35.1 39.9 39.7 15-64 YES. 53.7 54.6 61.1 56.8 56.1 65 YRS. AND AEOVE 3.3 3.3 3.8 3.3 4.2 POPULATION GROWTH RATE (PERCENT) TOTAL 2.1 2.5 1.9 2.3 2.4 URBAN 4.7 6.4 4.9 3.9 3.8 CRUDE BIRTH RATE (PER THOUSAND) 42.7 30.3 25.3 31.8 31.4 CRUDE DEATH RATE (PER THOUSAND) 13.4 9.1 7.9 9.8 8.4 GROSS REPRODUCTION RATE 2.7 2.1 1.6 2.0 2.1 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 671.0 686.0/c USERS (PERCENT OF MARRIED WOMEN) .. 32.0 49.1 36.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-10D) 89.0 99.0 113.0 115.6 110.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 97.4 107.0 117.2/d 106.4 108.4 PROTEINS (GRAMS PER DAY) 57.1 62.8 72.173; 54.4 66.0 OF WHICH ANIMAL AND PULSE 7.0 8.2 14.37d 13.9 34.0 CHILD (AGES 1-4) MORTALITY RATE 8.6 3.9 2.1 6.7 5.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 54.4 60.3 65.4 59.8 64.2 INFANT MORTALITY RATE (PER THOUSAND) 78.3 50.1 34.1 63.7 64.2 ACCESS TO SAFE WATER (PERCENT OF EOPULATION) TOTAL 12.1 58.0 71.0 32.0 65.6 URBAN 18.6 84.0 85.0 51.9 78.9 RURAL 9.5 38.0 54.9 20.5 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL *- 25.0 64.0/e 37.7 59.3 URBAN .. 59.0 68.07; 65.7 75.3 RURAL .. .. 50./e 24.0 30.0 EOPULATION PER PHYSICIAN 3540.8 2238.3 1978.8/d 8540.4 1617.3 EOPULATION PER NURSING PERSON 3245.1/f 1786.5/f 487.4 d 4829.4 1063.5 EOPULATION PER HOSPITAL BED TOTAL 2513.5 1949.5 642.4/e 1047.5 477.4 URBAN 1286.9 1095.3 754. 8/e 651.6 679.8 RURAL .. .. .. 2597.6 1903.4 ADMISSIONS PER HOSPITAL BED .. 14.9 .. 27.0 27.3 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.6 5.0 4.5 URBAN 5.4 .. RURAL 5.6 .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.5 2.3 2.0/c URBAN 2.8 2.7 2.17 .. RURAL 2.4 2.2 2.0.T ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 28.4 49.9 URBAN 67.3 92.4 RURAL 12.4 29.9 64.9/d ANNEX I 24- Page 2 of 5 KUMIA upu3Zc- of - SOCEAL INOZCATOiS OATA INlET KORIA R1PUILZOf -7 U PR UNCI 5ROMU (WZONHTDAY A tS MOST UCENT N 1160 Lb 1970 1 ISITMATZ I AI/A 6 PACIFIC LATIN AIERICA 1 CARZI3IAN EDUCATION 13MMIO ENROLLMRNT RATIOS nYA1Y: TOTAL 94.0 105.0 111.0 96.2 104.3 MALU 99.0 100.0 112.0 99.8 10.4 FEMALE 89.0 105.0 111.0 92.1 103.3 SECONDARYI TOTAL 27.0 42.0 76.0 37.6 41.3 MALI 38.0 51.0 82.0 41.1 40.4 EM4ALE 14.0 33.0 70.0 34.1 41.8 VOCATIONAL ENROL. (X 0 SECONDARY) 14.2 14.3 19.7 20.8 33.7 PUPIL-TEACU RATIO PRIMARY 58.2 56.9 48.1 35.5 29.9 SECONDARY 34.3 36.5 39.0 25.0 16.7 ADULT LITERACY RATE (PERCENT) 70.6 87.6 93.0 73.1 79.1 CONSUMPSION PASSENGER CARS PER THOUSAND POPULATION 0.5 1.9 6.2 9.8 42.8 RADIO RECEIVERS PER TSOUSAND POPULATION 31.2 124.4 402.2 116.) 270.5 TV RECEIVERS PER THOUSAND POPULATION 0.3 13.1 150.6 37.6 107.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 69.0 136.3 172.8 53.7 63.7 CINEMA ANNUAL ATTENDANCE PER CAPITA 4.0 5.2 2.0 2.8 2.7 LABOR F0RCE TOTAL LA BOR FORCE (THOUSANDS) 8307.2 11285.2 14637.0 FEMALE (PERCENT) 26.1 32.7 32.5 33.6 24.4 AGRICULTURE (PERCENT) 66.0 50.0 34.0 52.2 31.3 INDUSTRY (PERCENT) 9.0 18.0 29.0 17.9 23.9 PARTICIPATION RATE (PERCENT) TOTAL 33.2 35.0 38.3 38.5 33.6 MALE 49.5 46.8 51.3 50.5 50.4 FEMALE 17.2 23.0 25.1 26.6 16.8 ECONOMIC DEPENDENCY RATIO 1.4 1.3 1.0 1.1 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 15.1/h 17.1 16.1/. HIGHEST 20 PERCENT OF HOUSEHOLDS 42.37w 44.5 45.37;e LOWEST 20 PERCENT OF HOUSEHOLDS 5.77 7.1 5.7Tre LOWEST 40 PERCENT OF HOUSEHOLDS 19.Orh 17.7 16.97;i POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 320.0 194.7 RURAL .. .. 270.0 155.1 184.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 370.0 178.2 518.0 RURAL .. .. 310.0 164.9 371.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 18.0 24.4 RURAL .. .. 11.0 41.1 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithletic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c 1975; /d 1977; /e 1976, /f Registered, not all practicing in the country; /I 1962; /h 1965. 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"000 orS 1_ 00 06 014 00000.04 by F0" Io ±0 b.06±0 ±00001. 000040. 0f.0± 0 of 7±.000 ..0 13 00 61 0 0 0±01 tod S-.vo; 190-f.. 1970 .04 1977 0000. ±000 00 W0600 0000 ±0.ft0.-.0.L00.0 0000± os o 0; 1001-45. 1970 .04 1977 dtoo. DITIM ±0±0 40. 001,4 lon 1.00±0600,1960. 1970 5d 1979 d1-±0 o5f bo. .o.holdh. t 11± ±00±0±0000±th (00000 A-- ..000 00.l00 000 f 1±10050.10i mTh. U±0 .010000007 pooat of p00001 levl.. :2 050 ±00 tbcofoeod 11,0 0±0±6..~I-I.dAb.. 000~f oooe±±±oI 000. 00 It0)0± 00001 0..t .1 ±0400 oooooppo 'Otooe 00000oo100 0000 0 00000± 0± ooOt±0004 ± iti-iol01.±o Poot- diot pl 0. (1- 00 0±.--Ibtiot00.1 -f ~- 00±. 0±. 0 00 to.00±000 600±01.0, 01000.80 004 -ot.otr 0010 s 0.1 l.±0±. Poo-ot, Id00±00 .-60 of -nto. p.o ..10±t. 00000000 0 ±010000000,0000010±00.2.0 .00 00000061*p00.01 ±±00 o ±0±0007. TO.. .001 0 .0±.400. 00 i00 0±000 0o.1og 1±0t01±000±o - 41. of00 - 00.1 b.-60. -14 I0.0 -.I dP_ L- L 1u U oo0050 of ;tl.OOp±00 0000±0 ±00.00 i t±.00.1 4 0.01040 P ..l.0o 00Pboit± It -t oio ±1.0 6 o of o000-±0±po-1- Iohyo bycc±o00 000 --.0. -. .-OOoc -0. 4±040 by of .60000`= 70-000±00.0..i .0.04 o. 0004000 nt.P.L.i dj000 d by .000 0 000±00000id 0 h.000.7 9 ANNEX I Populationt 38,445 (mid-1980, thousands) Page 4 of 5 UNIP Per Capita: US1,516 (1980) KOREA - ECONOMIIC INDICATORS Amount (million US$ at Annual growth rates (X) at constant prices current prices) Actual , Projected Indicator 1980/a 1976 1977 1978 1979 1980 1981/a 1985 1990 NATIONAL ACCOUNTS Gross domestic product 59,177 13.9 10.1 11.3 7.1 -3.5 8.0 7.6 8.0 Agriculture 9,754 10.7 2.1 -4.0 6.7 -22.0 23.0 2.5 2.5 Industry 24,396 20.1 15.8 20.8 8.4 -0.5 4.7 10.0 10.0 Services 25,027 10.8 9.7 11.0 6.0 -4.2 2.9 7.0 7.0 Consumption 45,215 8.8 7.1 11.0 7.4 -1.0 4.2 4.8 6.4 Gross investment 17,889 8.0 24.0 35.9 17.5 -24.4 5.6 8.5 7.6 Exports of GNFS 21,145 43.0 25.7 17.5 -3.6 9.9 17.5 11.0 10.6 Imports of GNFS 25,846 26.9 23.8 29.1 8.6 -7.7 7.9 7.4 8.8 Gross national savings 12,268 42.3 17.3 14.1 3.7 -17.7 18.0 - - PRICES GDP deflator (1975 - 100) 116.3 135.8 164.6 197.4 246.7 289.0 - - Exchange rate (US$1 -) 484.0 484.0 484.0 484.0 607.6 - - - Export price index (1975 - 100) 112.8 120.2 137.2 161.2 168.7 179.9 240.9 321.1 Import price index (1975 - 100) 103.0 103.9 108.4 137.3 175.2 170.2 233.5 316.6 Terms of trade index (1975 - 100) 109.5 115.7 126.6 117.4 96.3 105.7 103.2 101.4 Share of GDP at market prices (X) Average annual increase (X) (at current prices) (at constant prices) 1960 1970 1975 1980 1985 1990 1960-70 1970-75 1975-80 1980-85 1985-90i Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 8.6 9.8 8.2 7.3 7.7 Agriculture 36.7 26.9 24.5 16.5 15.9 12.4 4.3 4.9 -1.2 5.3 2.5 Industry 20.1 29.5 33.8 41.3 44.4 49.2 17.4 15.3 13.5 9.1 10.0 Services 43.2 43.6 41.7 42.3 39.7 38.3 8.1 7.7 7.6 6.2 7.0 Consumption 85.3 83.0 80.1 76.4 65.7 58.1 6.7 7.8 7.1 4.8 6.1 Gross investment 11.0 26.9 29.0 30.2 33.2 33.8 23.6 11.2 14.6 9.2 8.8 Exports of GNPS 3.4 14.3 27.6 35.7 43.7 49.6 29.3 25.4 16.1 10.9 10.5 Imports of GNFS 12.8 24.1 36.3 42.7 42.6 43.9 20.2 15.8 17.0 7.2 8.4 Gross national savings /b 8.0 19.5 20.6 21.7 - - 17.2 14.6 - - - As % of GDP 1960 1970 1975 1980 Labor Force in 1980 Millions (X) PUBLIC FINANCE Agriculture 4.7 32.2 Current revenues 18.5 17.8 17.9 19.9 Industry 3.9 27.1 Current expenditures 14.3 13.1 15.4 15.6 Services 5.1 35.5 Current surplus 4.2 4.7 2.5 4.3 Unemployed 0.7 5.2 Capital expenditure 3.4 6.4 6.4 5.9 Foreign financing ... 1.0 1.3 1.0 Total Labor Force 14.5 100.0 1960-70 1970-75 1975-80 1980-85 1985-90 OTHER INDICATORS Annual GNP growth rate (Z) 8.7 9.0 7.9 7.5 8.0 Annual GNP per capita growth rate (%) 5.9 6.9 5.2 5.9 6.4 Annual energy consumption growth rate (%) 14.2 9.6 12.3/c 7.7 I COR 1.9 2.7 5.4 4.7 4.4 Marginal savings rate 0.3 0.3 0.3 0.5 0.4 Import elasticity 2.2 1.6 2.0 1.0 1.1 /a Preliminary. lb Including net transfers. _c 1975-79. East Asia and Pacific Regional Office April 1982 ANNEX I Population 38,445 (mid-1980, tbousands) 2 - Page5of5 GDP per capita: US$1,516 (1980) KOREA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (million US$ at current prices) Indicator Actual _Projected 1970 1975 1976 1977 1978 1979 1981 1981/a 1985 1990 BALANC2 OF PAYMENTS Exports of goods and services 1,379 5,909 9,467 13,059 17,124 19,523 22,577 27,400 55,074 121,077 Of which: merchandise f.o.b. 882 5,028 7,821 10,035 12,678 14,694 17,214 20,850 43,368 97,476 Imports of goods and services 2,180 7,992 10,119 13,272 18,651 24,115 28,347 32,655 59,810 119,694 Of which: merchandise f.o.b. 1,804 6,671 8,407 10,517 14,436 19,266 21,598 24,105 45,557 95,014 Net transfers 178 225 345 222 467 439 449 512 668 893 Current account balance -623 -1,858 -307 8 -1,060 -4,153 -5,321 -4,743 -3,968 +2,276 (% of GNP) (-7) (-.2) (-1.1) (+0.02) (-2.2) (-7.1) (-9.3) (-7.2) (-3.3) (+3.1) Direct investment 66 53 75 72 61 17 96 122 800 1,749 MLT loans (net) 242 1,252 1,238 1,458 2,746 2,944 2,096 3,419 3,821 6,019 Official 147 486 663 594 663 853 689 1,108 893 908 Private 95 765 575 864 2,083 2,090 1,408 2,311 2,927 5,111 Other capital 372 929 308 -167 -1,039 2,090 4,362 1,792 1,682 -7,436 Change in reserves -57 -376 -1,314 -1,372 -707 -898 -863 -326 -1,348 -2,611 International reserves 610 797 1 985 2 992 2 828 3 112 3 975 4 301 9,352 19,370 Reserves as months imtports 3.4 1.2 2.4 2.7 1.8 1.5 1.7 1.6 1.8 1.9 EXTERNAL CAPITAL AND DEBT Gross disbursements Official grants - - - - - - - - - - Concessional loans 123 123 238 163 184 193 138 159 205 - 200 DAC 122 108 226 132 167 173 121 158 205 200 OPEC - - - 21 13 20 17 1 - _ IDA 1 14 10 9 3 - - - - - Other - 1 2 1 - - - - Non-concessional loans 317 1,511 1,518 2,040 3,729 4,448 3,655 4,779 7,457 13,855 Official export credits 18 151 132 262 219 341 606 844 711 1,054 IBRD 7 189 286 190 321 426 254 306 611 1,075 Other multilateral 5 87 83 85 89 91 90 104 168 255 Private 287 1,083 1,017 1,503 3,101 3,591 2,705 3,525 5,968 11,471 Medium- and Long-Term Debt Debt outstanding and disbursed 1,797 5,540 6,817 8,593 11,937 14,553 16,585 19,766 36,538. 59,291 Official 613 2,657 3,359 4,121 5,016 5,667 6,531 7,806 12,102 16,440 Private 1,185 2,883 3,458 4,472 6,921 8,886 10,054 11,960 24,436 42,851 Undisbursed 902 1,629 3,459 4,793 6,294 5,337 11,293 5,047 5,828 9,208 Debt Service on MLT Loans Total service payments 268 667 910 1,201 1,827 2,634 3,192 3,505 7,083 13,444 Interest 70 283 392 475 659 936 1,442 1,791 3,242 5,408 Payments as X exports 19.4 11.3 9.6 9.2 10.7 13.5 14.2 12.9 12.8 11.1 Short-Term Debt Debt outstanding and disbursed ... 2,409 3,045 3,239 3,575 6,279 10,047 13,658 18,649 15,864 Interest payments ... ... ... 152 236 377 907 1,810 2,237 2,261 Interest as X exports ... ... ... 1.2 1.4 1.9 4.0 6.7 4.1 1.9 Average Interest Rate on New Loans (X) Official 4.5 7.9 7.1 7.9 7.4 7.6 - - - - Private - 7.1 9.3 8.3 8.4 9.7 11.5 - - - - Average Maturity of New Loans (years) Official 28.0 19.3 21.7 18.3 19.2 16.8 - - - - Private 10.9 5.7 8.7 8.8 9.3 9.3 - - - - As % of debt outstanding at end of most recent year (1980) Maturity structure of debt outstanding Maturities due within 5 years 35.6 Maturities due within 10 years 61.6 Interest structure of debt outstanding Interest due within first year 6.3 /a Preliminary East Asia and Pacific Regional Office April 28, 1982 ANNEX II -28- Page 1 of 13 pages KOREA THE STATUS OF BANK GROUP OPERATIONS IN THE REPUBLIC OF KOREA A. Statement of Bank Loans and IDA Credits (as of September 30, 1982) Loan or Amount ($ million) Credit Calendar (less cancellations) Number Year Borrower Purpose Bank TW IDA Undisbursed Thirty-one loans and eight credits fully disbursed 1,299.01 40.0 106.81 1203 1976 Republic of Korea Highways III 90.0 0.55 1319 1976 ADC Irrigation 29.0 7.97 1364 1977 ADC Irrigation 95.0 29.03 1401 1977 Republic of Korea Ports II 67.0 14.29 1474 1977 Republic of Korea Vocational Training 23.0 0.80 1503 1978 ADC Agriculture/Irrigation 36.0 23.05 1530 1978 Republic of Korea Rural Infrastructure II 95.0 17.47 1542 1978 Republic of Korea Railway VI 120.0 1.22 1574 1978 KDB III Dev. Finance Co. 110.0 0.21 1635 1978 KLTCB Dev. Finance Co. 100.0 0.37 1640 1978 Republic of Korea Highways IV 143.0 37.04 1666 1979 Republic of Korea Chungju Multipurpose 125.0 58.05 1676 1979 Republic of Korea Electronics Technology 29.0 12.97 1749 1979 SMIB III Dev. Finance Co. 60.0 0.71 1758 1979 Republic of Korea Second Gwangju Regional 65.0 50.74 1774 1979 Republic of Korea Population I 30.0 29.25 1788 1979 Korea Electric Co. Power 115.0 94.32 1800 1980 Republic of Korea Education V 100.0 79.83 1829 1980 CNB I Dev. Finance Co. 30.0 10.78 1836 1980 Republic of Korea Railway VII 94.0 16.50 1851 1980 AFDC Agriculture II 50.0 27.83 1932 1981 KLTCB VIII Div. Finance Co. 90.0 38.65 1933 1981 KDB IV Div. Finance Co. 100.0 22.72 1974 1981 Republic of Korea Third Agriculture Credit 50.0 34.32 1980 1981 Republic of Korea Nat. Urban Land & Housing 90.0 84.32 2004 1981 SMIB IV Dev. Finance Co. 60.0 54.58 2 071 1982 Republic of Korea Structural Adjustment 250.0 80.30 2072 1982 Republic of Korea Water Supply 90.0 90.00 2111 1982 Republic of Korea Agricultural Marketing 50.0 49.27 2112 1982 KTDC Technology Development 50.0 48.47 2144 1982 CNB DFC 30.0 30.00 Total 3,765.01 40.0 106.81 1,045.61 of which has been repaid 362.52 - - Total now outstanding 3,402.49 40.0 103.12 Amount sold 8.83 of which has been repaid 8.83 - - - Total now held by Bank and IDA (prior to exchange adjustment) 3,402.49 40.0 103.12 Total undisbursed 1,045.61 - - 1,045.61 -29 - ANNEX II Page 2 of 13 pages B. Statement of IFC Investments (as of September 30, 1982) Fiscal Amount ($ million) Year Obligor Types of Business Loan Equity Total 1968 KDFC Development Financing - 0.7 0.7 1969 Honam Silk Co. Textiles 1.4 0.3 1.7 1970 Atlas Paper Pulp and paper 4.5 0.5 5.0/a 1971 Korea Investment Finance Corp. Capital Market Development - 0.7 0.7 1974 KDFC Development Financing - 0.4 0.4 1974 Korea Investment Finance Corp. Capital Market Development - 0.3 0.3 1975 Gold Star & Co., Ltd. Electronic Products 16.0 1.3 17.3 1975 Korea Securities Finance Corp. Capital Market Development 5.0 0.6 5.6 1975 Tong Yang Nylon Company, Ltd. Synthetic Fibers 6.9 2.1 9.0 1975 Hae Un Dae Develop- ment Company, Ltd. Tourism 2.8 0.7 3.5 1976 Korea Investment Finance Corp. Capital Market Development - 0.4 0.4 1976 Chungju Paper Mfg. Co. Paper 5.0 0.5 5.5 1976 Korea Zinc. Co., Ltd. Zinc 15.0 4.0 19.0 1976 KDFC Development Financing 17.8 - 17.8 1976 Gold Star & Co., Ltd. Electronic Products 10.0 0.4 10.4 1977 Gold Star & Co., Ltd. Electronic Products - 0.2 0.2 1977 KDFC Development Financing - 0.3 0.3 1977 Korea Securities Finance Corp. Capital Market - 0.5 0.5 1977 Korea Development Leasing Corp. Capital Market 15.0 0.4 15.4 1978 KDFC Development Financing - 1.1 1.1 1979 Gold Star & Co., Ltd. Electronic Products - 1.7 1.7 1979 KIFC Capital Market 0.6 0.6 1979 Korea Development Leasing Corp. - 0.2 0.2 1979 Gold Star & Co., Ltd. Electronic Products - 1.5 1.5 1980 Gold Star & Co., Ltd. Electronic Products - 1.8 1.8 1980 Korea Investment Finance Corp. Capital Market - 0.6 0.6 1980/82 Korea Securities Finance Corp. - 1.1 1.1 1980 KDFC Development Financing - 2.2 2.2 1981 Taihan Bulk Terminal Grain Port Terminal 7.0 2.5 9.5 Co., Ltd. 1982 KIFC Capital Market - 0.6 0.6 1982 K-TAC (Korea Technology Advancement Corp.) Research & Development - 0.7 0.7 Total gross commitment 106.4 28.9 135.3 less cancellations, terminations, repayment and sales 75.2 4.0 79.2 Total commitments now held by IFC 31.2 24.9 56.1 TOTAL undisbursed - 1.2 1.2 /a Cancelled at the request of the Company. - 30 - ANNEX II Page 3 of 13 pages C. STATUS OF PROJECTS IN EXECUTION /1 AS OF SEPTEMBER 30, 1982 Agricultural Sector Loan No. 1319 Miho Watershed Area Development Project; $29.0 Million Loan of August 5, 1976; Effective Date: October 21, 1976; Closing Date: December 31, 1982 The project comprises irrigation and land development on 10,350 ha together with river channel improvements and village roads. The project area has been reduced from 12,665 ha at appraisal as a result of deleting about 2,300 ha of land development which, because of the sharp escalation in construction costs, have become uneconomic. The project has been divided into eight subprojects, each to be constructed under a separate contract. One of these subprojects has been completed, and four more will be completed by mid-1984; loan disbursements will be limited to these five subprojects. An extension of the closing date is under consideration. Loan No. 1364 Yong San Gang Irrigation Project Stage II; $95.0 Million Loan of February 11, 1977; Effective Date: April 22, 1977; Closing Date: December 31, 1984 The project will provide irrigation and land development on 20,700 ha in the lower reaches of the Yong San River. Project works include an estuary dam on the Yong San river, sea dike, pumping plants, irrigation canals, reclamation of 5,500 ha of tidal lands, conversion of 3,250 ha of uplands for irrigation of paddy, land consolidation on 3,200 ha, and irriga- tion of 1,050 ha of uplands. The main contract for the estuary dam construc- tion, awarded in December 1977, is complete. Other parts of the project have fallen behind due to a shortage of local budget. The Bank and the Government recently agreed that loan disbursements would be limited to the ten subproj- ects under implementation and scheduled for completion in 1984. Loan No. 1503 Ogseo Area Development Project - Stage I; $36.0 Million Loan of January 4, 1978; Effective Date: March 29, 1978; Closing Date: June 30, 1983 The project will provide irrigation and drainage improvements for 10,800 ha, including 5,800 ha of land consolidation and 1,800 ha of land use /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 31 - ANNEX II Page 4 of 13 pages conLversion from upland to paddy. The project has been divided into seven subprojects, each to be constructed under a separate contract. Insufficient budgetary allocations have delayed the project from its start in 1978, but the Government has now approved a funding program which will allow completion of five subprojects by 1984 and Bank disbursements will be limited to these subprojects. An extension of the closing date is under consideration. Loan No. 1530 Rural Infrastructure Project II; $95.0 Million Loan of March 13, 1978; Effective Date: June 8, 1978; Closing Date: June 30, 1983 The project includes about 36 minor irrigation subprojects, con- struction or improvement of 2,500 km of river levees or bank protection, contruction or improvement of water systems for 7,400 villages, and telephone line installation to provide new service for 2,700 villages and 76,000 addi- tional lines to other villages. The river levee bank construction, rural telephones and the water supply components are complete. The minor irriga- tion component is scheduled for completion by the end of 1983, about one year behind schedule. Loan No. 1851 Second Agricultural Products Processing Project; $50 Million Loan of June 27, 1980; Effective Date: September 3, 1980; Closing Date: September 30, 1984: The project provides funds to the Agriculture and Fishery Develop- ment Corporation (AFDC) for medium- and long-term loans to the private sector for the construction and equipping of agroprocessing facilities, and for technical assistance to AFDC. The project has been progressing satis- factorily with lending being directed increasingly towards ensuring that the project would finance a wide range of processing facilities and that medium and small size processors would be the main recipients of the total project funds. Loan No. 1974 Third Agricultural Credit Project; $50 Million Loan of May 13, 1981; Effective Date: August 11, 1981; Closing Date: December 31, 1985 The project would help increase of (a) production of high-value fruits and vegetables; (b) farm productivity; and (c) off-season employment. Over the four-year period, the project would provide credit nationwide for financing a wide range of activities, notably: greenhouses, sprinkler irrigation, orn-farm storage, chilled storage, spraying equipment, small-scale agro-processing and backyard livestock. Project implementation is proceeding rapidly with disbursements ahead of schedule. - 32 - ANNEX II Page 5 of 13 pages Loan No. 2111 Agricultural Wholesale Marketing Project; $50.0 Million Loan of April 5, 1982; Effective Date: August 6, 1982; Closing Date: June 30, 1985 The project provides for construction and equipping of an agricul- tural wholesale market at Garagdong in Seoul, the establishment of an author- ity to run the market, training for wholesale and market officials and carrying out a study of Korea's agricultural marketing system and related public policies. The main civil works contract for construction of the market has been awarded and construction is underway. Multipurpose Loan No. 1666 Chungju Multipurpose Project; $125.0 Million Loan of March 29, 1979; Effective Date: July 11, 1979; Closing Date: June 30, 1985 The project would help meet the growing demand for municipal, industrial and irrigating water in the Han Basin for about 20 years following its completion in 1984, and would substantially reduce flood damage, and generate an average of 770 million kilowatt hours annually for Korea's power system. The principal features of the project are a 90 m high concrete dam and a 450 MW power plant on the South Han River, a reregulating dam about 20 km downstream of the main dam, relocation of roads and a rail- way, and implementation of a resettlement program for some 9,300 families affected by the project. The contract for the main dam and power plant was awarded in December 1979 and construction is proceeding on schedule. The major accomplishments to date are completion of the excavation of the slide zone on the right bank and diversion of the river through the left bank tunnels. Detailed planning is underway for the resettlement program. Industrial Sector Loan No. 1574 Third Korea Development Bank Project; $110 Million Loan of June 21, 1978; Effective Date: September 14, 1978; Closing Date: December 31, 1982 The loan is being used to help cover the foreign exchange require- ments of subprojects to be financed by KDB; apart from direct imports, the loan would be utilized by KDB to finance the foreign exchange component of domestically produced capital goods. An amount of up to $10.0 million of the proceeds of the loan was made available to KDB's subsidiary, the Korea Industrial Leasing Corporation Ltd. (KILC), by way of subloans in order to finance small- and medium-sized leasing projects. Project implementation is proceeding satisfactorily and loan disbursement is nearly complete. - 33 - ANNEX II Page 6 of 13 pages Loan No. 1635 Seventh Korea Development Finance Corporation Project; $100.0 Million Loan of December 7,. 1978; Effective Date: February 6, 1979; Closing Date: June 30, 1983 The loan was made to cover the foreign exchange requirements of subprojects to be financed by KDFC. In order to support relatively labor-intensive enterprises, a component of $20 million was earmarked for financing specifically: (a) enterprises with fixed assets not exceeding $750,000; or (b) projects generating employment at a fixed investment cost per job not greater than $12,500. Also, in order to finance small- and medium-sized leasing projects, an amount of up to $10.0 million of the proceeds of the loan was made available to the Korea Development Leasing Corporation (KDLC), a leasing company affiliated to KDFC, by way of subloans. Progress is good and disbursement is nearly complete. Loan No. 1676 Electronics Technology Project; $29.0 Million Loan of March 29, 1979; Effective Date: June 28, 1979; Closing Date: December 31, 1983 The project comprises two components: (a) the development of Korea Institute of Electronic Technology (KIET) which, through its service, devel- opment and production activities, would stimulate and support the Korean electronics industry's drive into new areas; and (b) the establishment of a program to promote and finance RD&E carried out by KIET for the electronics industry. Project implementation was about 18 months behind schedule due to delays in procurement and shortage of local funds. However, the semiconduc- tor facility, which is the main physical component of the project, is opera- tional. KIET's work program has been prepared with input from industry. The training and expert invitation program has been implemented satisfac- torily. Some shortage of counterpart funds which had affected the project and proposed institutional changes which had given rise to concern have been addressed by the Government. Loan No. 1749 Third Small and Medium Industry Bank Project; $60 Million Loan of July 23, 1979; Effective Date: September 26, 1979, Closing Date: December 31, 1983 Apart from direct imports, the proceeds of the loan would be utilized by SMIB to finance the foreign exchange component of domestically produced capital goods. To ensure that a reasonable proportion of the loan is directed towards small, labor-intensive projects, an amount of $25 mil- lion of the proceeds of the loan will be earmarked to finance: (a) enter- prises with fixed assets not exceeding $300,000; or (b) projects generating employment at a fixed investment cost per job not greater than $8,500. The loan would assist SMIB in its efforts to support the Government's policy of increasing the regional dispersal of employment opportunities and of deep- ening the industrial structure, and also to continue SMIB support of projects which would complement large-scale manufacturing enterprises. About 98% of the loan has been committed and disbursement is nearly complete. -34 ANNEX II Page 7 of 13 pages Loan No. 1829 Citizens National Bank (CNB); $30 Million Loan of May 7, 1980, Effective Date: &gust_5, 1980, ClOsing_Date: December 31, 1984 The loan is being used to cover part of the foreign exchange requirements of subprojects to be financed by the Citizens National Bank (CNB) over a two-year period, and would assist CNB in its efforts to support the Government's policy in increasing regional dispersal of employment opportunities and of deepening the industrial structure. Apart from direct imports, the proceeds of the loan are being utilized by CNB to finance the foreign exchange components of domestically produced capital goods. The project would also enable the Bank to help build up CNB's project appraisal capabilities. The project is progressing satisfactorily. Loan No. 1932 Eighth Korea Long-Term Credit Bank Project; $90.0 Million Loan of January 14, 1981; Effective Date: March 19, 1981; Closing Date: June 30, 1985 The loan is being used to help cover the foreign exchange require- ments of subprojects to be financed by KLTCB over the next two years. In order to encourage increased mobilization of medium-term foreign commercial borrowings by KLTCB, the loan incorporates a special amortization feature, which would permit the blending of Bank and commercial resources. The project incorporates a package of financial sector policy measures which would be implemented by the Government as a part of a comprehensive reform of the financial system of Korea. The project is progressing well. Both commitments and disbursements are on schedule. Loan No. 1933 Fourth Korea Development Bank Project; $100 Million Loan of January 14, 1981; Effective Date: March 19, 1981; Closing Date: June 30, 1985 The loan is being used to help cover the foreign exchange require- ments of subprojects to be financed by KDB over the next two years. In order to encourage a reduction in KDB's reliance on long-term official borrowings, the loan incorporates a special amortization feature, which would permit the blending of Bank and commercial resources. The project incorporates a package of financial sector policy measures which would be implemented by the Government, as a part of a comprehensive reform of the financial system of Korea. The project is progressing well. Disbursements are ahead of schedule. Loan No. 2004 Fourth Korea Small and Medium Industry Bank Loan; $60.0 Million Loan of July 7, 1981; Effective Date: September 1, 1981; Closing Date: December 31, 1985 The loan is being used to help cover the foreign exchange requirements of subprojects to be financed by SMIB over the next two years. Apart from direct imports, the proceeds of the loan are being utilized by SMIB to finance the foreign exchange components of domestically produced - 35 - ANNEX II Page 8 of 13 pages capital goods (estimated at 60%). The loan assists SMIB in its efforts to support the Government's policy of increasing the productivity of Korea's small- and medium-scale industrial sector which plays a vital role in providing employment opportunities and in assisting the country's export effort. It also initiates an attempt to improve and expand extension services for the SMI sector. Commitments and disbursement are slightly behind appraisdl estimates; however, SMIB expects full commitment and disbursement of the loan ahead of schedule. Loan No. 2112 Technology Development Project; $50.0 Million Loan of April 5, 1982; Effective Date: June 10, 1982; Closing Date: December 31, 1986 The project would help foster the technological development of Korean industry by supporting the development of the Korea Technology Devel- opment Corporation (KTDC). Specifically, the loan will finance $1.0 million worth of technical assistance and training of KTDC staff and provide a $49.0 million line of credit to finance industry RD&E. Subprojects are expected to be approved by KTDC up to end-1984. The project is making excellent operational progress. As of June 15, 1982, the Bank had approved subloans of $5.6 million equivalent for 18 subprojects. Loan No. 2144 Citizens National Bank II; $30.0 Million Loan of May 24, 1982; Effective Date: August 24, 1982; Closing Date: December 31, 1986 The project would assist CNB to move toward term transformation, upgrade CNB's term lending capability at the branch level and encourage CNB to diversify its sources of foreign currency. In line with the Bank's con- tinued support of small-scale industries (SSI), at least $15.0 million of the loan is earmarked for financing smaller SSIs employing no more than 50 workers. In addition, at least $15.0 million of the Bank loan proceeds is earmarked for projects outside the city limits of Seoul. The loan became effective on August 24, 1982. Population Sector Loan No. 1774 Population Project;$30 Million Loan of December 27, 1979; Effective Date: March 21, 1980; Closing Date: June 30, 1984 The project would provide for the construction, furnishing and equipping of 91 Maternal and Child Health/Family Planning Centers in rural areas; 11 Family Planning Clinics in low-income urban areas, expanded infor- mnation, education and communication production and training facilities, and upgraded health centers; providing and equipping 13 mobile family planning units; provision of about 75 vehicles, and training and information, educa- tion and communication equipment; production and distribution of information, education and communication materials; fellowships; research and evaluation; and information, education and administrative staff. Training of multipur- pose midwives is progressing satisfactorily and 400 staff have been trained - 36 - ANNEX II Page 9 of 13 pages to date and training of a further 1,120 multipurpose workers is being under- taken. Construction of 14 maternal and child health family planning centers are in the final stages of completion. Euqipment procurement for these centers has progressed satisfactorily. Education Sector Loan No. 1474 Vocational Training Project; $23.0 Million Loan of July 22, 1977; Effective Date: October 25, 1977; Closing Date: June 30, 1983 The project includes the establishment of eight new Vocational Training Institutes (VTIs), equipment for a National Central Vocational Training Institute (NCVTI) and technical assistance to be provided by UNDP and Germany. After an initial delay implementation is now on schedule. All civil works contracts have been awarded. All eight VTIs and the central VTI are in full operation and performance is satisfactory. All equipment has been awarded. All experts are in post and the fellowship program has been completed. Management performance has also improved. Loan No. 1800 Higher Technical Education; $100.0 Million Loan of February 21, 1980; Effective Date: April 7, 1980; Closing Date: June 30, 1984 The project is the Bank's first subsector loan in education. It finances public and private institutions in higher technical education and will be approximately allocated as followed: $60 million for engineering, $36 million for technicians and $4 million for technical assistance. The project includes about 10 national programs for staff and curriculum develop- ment and 55 subprojects for equipment. The objectives of the project are: (a) to alleviate manpower problems, (b) to improve quality and (c) to reduce the investment gap between public and private institutions. Initial imple- mentation of the project is satisfactory with all 10 national programs and 55 subprojects already prepared. Management capability for implementation has been strengthened with additional staff. Actual performance on teacher recruitment is behind schedule but the anticipated 1980-84 target will be reached as planned. Urban Sector Loan No. 1758 Second Gwangju Regional Project; $65.0 Million Loan of September 27, 1979; Effective Date: February 15, 1980; Closing Date: June 30, 1984 The project is a multicomponent regional development project con- sisting of: housing - 3,950 residential plots in Gwangju, Mogpo and Yeosu; industrial estates - 200 ha of serviced industrial land in Gwangju and Mogpo; water supply - improvements to water supply systems in Mogpo, Yeosu and Narodo; transportation - two bridges to link Dolsan and Jindo islands with the mainland, improvements to a 1.9 km commercial road in Yeosu and ferry - 37 - ANNEX II Page 10 of 13 pages service between Narodo and the mainland; fisheries - an aquaculture develop- ment program and a shrimp storage facility at Imjado; and technical assist- ance. The physical works have been divided into 15 subprojects. Contracts have been awarded on 13 subprojects while 2 subprojects have been cancelled. Four subprojects have been completed on schedule and are being transferred to the cities and county concerned. Land acquisition has been essentially completed and construction is well underway. Only limited construction was possible on both Jindo and Dolsan Bridges during 1981 because of insufficient Government budget allocations; however, construction is now proceeding as originally programmed. A continuous budget has been established for Central Government funded subprojects whereby annual allocations have been determined for the life of the project. Loan No. 1980 National Urban Land Development and Housing Project; $90.0 Million Loan of May 13, 1981; Effective Date: August 11, 1981; Closing Date: December 31, 1984 The objective of the project is to provide affordable housing for low-income families and serviced land for middle-income families in 10 medium-sized cities. The four Phase I sites would provide 4,100 dwellings (low income) and 1,200 serviced lots for middle-income houses. The six Phase II sites would provide more than 6,000 housing lots including about 4,400 lou-income dwellings. Overall project progress is satisfactory. Contract work on nine of the original ten sites have been completed. The tenth site has been ommitted due to the uncertainty of marketability of the site. Further savings due to lower than estimated bids for land preparation and timely implementation have been achieved. KLDC proposed to utilize these savings to finance development of three supplementary sites (Seoul Goduck, Busan Manduck and Gwangju Yeomgju). This has been agreed after review of feasibility studies, and contracts awarded. A fourth supplemen- tary site is under consideration for financing out of cost savings, subject to mutual agreement by KLDC and KNHS and agreement on use and pricing of lou-income land. Loan No. 2072 First Water Supply Project; $90.0 Million Loan of December 22, 1981; Effective Date: April 1, 1982; Closing Date: June 30, 1986 The principal objective of the project is to improve access to safe water supplies to the populations of the municipalities of Daegu and Gwangju and for the Masan Region serving jointly the cities of Masan, Changwon and Jinhae. The project would also support the Government's efforts to improve the organization and coordination of the sector as well as to increase capability of institutions: at the national level where the Water Resources Bureau of MOC would receive assistance and training in project planning and implementation; at the regional level where three cities under this project would jointly build and manage source works for more efficient water - 38 - ANNEX II Page 11 of 13 pages utilization; and at the local level where individual city water bureaus would receive technical assistance to improve their financial and management capabilities. The project is progressing satisfactorily. Transportation Sector Loan No. 1401 Second Ports Project; $67.0 Million Loan of April 28, 1977; Effective Date: July 27, 1977, Closing Date: December 31, 1982 The project provides mainly for continuation of the extenion of the Port of Busan started under the First Ports Project with special emphasis in container handling facilities. The project comprises: (a) a 700 m exten- sion of the container terminal including stacking areas, dredging, access road, container freight station and equipment and ancillary works and equip- ment; (b) rehabilitation of 4 existing general cargo handling berths; and (c) acquisition of two tugboats. The institutional component of the projects provides for technical assistance and training to improve KMPA's capability in port planning and operations and managerial and accounting procedures. The feasibility study and detailed engineering for the proposed third ports project have recently been added to the project and Schedule I of the Loan Agreement amended accordingly. Project completion is expected for June 1983. Loan No. 1542 Sixth Railway Project; $120.0 Million Loan of April 10, 1978; Effective Date: August 3, 1978; Closing Date: December 31, 1982 The project is part of the railroad Investment Plan 1977-81, and includes (a) electrification and double tracking of Seoul City suburban lines; (b) capacity increases in lines and stations; (c) way and structure renewals and improvements; (d) procurement and repowering/remodeling of diesel loco- motives and rolling stock; (e) modernization and construction of repair facilities; (f) improving telecommunications and power supply facilities; and (g) provision of staff housing, training equipment and advisory services. The project is near completion. Loan No. 1640 Fourth Highway Project; $143.0 Million Loan of December 7, 1978; Effective Date: March 14, 1979; Closing Date: December 31, 1982 The project consists of: (a) construction and improvement, including paving and supervision by consultants, of 36 sections of national roads totaling about 950 km; (b) construction and improvement, including paving and supervision by consultants, of 10 sections of provincial roads totaling about 280 km; (c) procurement of additional road maintenance equipment for maintaining national roads; (d) a study by consultants of the institutions involved in the planning, design, maintenance, construction, administration and financing of provincial and county (gun) roads, and the preparation of a program for improving the organization and functions of such institutions, upgrading provincial and gun road maintenance and the - 39 - ANNEX II Page 12 of 13 pages future development of the Gun road system, to be followed by detailed engineering of about 2,000 km of gun roads; and (e) provision of fellowships for training staff of the Ministry of Construction. An estimated 80% of the civil works were completed by end September 1982. Maintenance equipment procurement is underway. The study reports of the Gun Road Development Program and of the Provincial and Gun Road Maintenance Program have been finalized and detailed engineering for Gun Roads have been completed. An extension of the closing date is under consideration. 'Loan No. 1836 Seventh Railway Project; $94 Million Loan of May 21, 1980; Effective Date: August 29, 1980; Closing Date: December 12, 1983 The project is the 1980-81 part of the railroad investment plan, 1977-81, and includes (a) capacity increases in lines and stations; (b) way and structure renewals and improvements; (c) procurement and repowering/ repair of locomotives and rolling stock; (d) modernization and construction of repair facilities; (e) improvement of telecommunications and power supply facilities; (f) implementation of management improvements; and (g) overseas training. The loan also finances training in transport planning and coordination and technical assistance for transport feasibility and urban transport studies. After a slow start, the project is now progressing well. The Management Technical Assistance contract is under way. One of the Transport Studies is about to start and terms of reference for another is 'being finalized. Power Sector Loan No. 1788 Gojeong Power Project, $115 Million Loan of December 27, 1979; Effective Date: March 21, 1980 Closing Date: December 31, 1984 The project provides for (a) a thermal power station with two 500 MW coal/oil-fired units and associated auxiliary equipment; (b) coal 'handling and storage facilities, fuel-oil tanks, ash system and storage area; (c) a fuel unloading dock; (d) a pumping station to transport fresh water to the station; (e) a 160 km of double circuit, 345 KV transmission line and related terminal substations and (f) consulting services for management and organization study of KECO. Execution of works is slightly behind schedule. Completion date of the first unit is estimated to be December 1983/January 1984. Management and organization study was completed and reviewed by the Bank in January 1982. There were substational delays in the preparation of bidding documents, but all contracts have now been placed. - 40 - ANNEX II Page 13 of 13 pages Structural Adjustment Loan No. 2071 Structural AdJ ustment Loan; $250.0 Million Loan of December 22, 1981; Effective Date: March 4, 1982; Closing Date: December 31, 1982 The loan will support the Government's comprehensive structural adjustment program, the principal aim being to keep the balance of payments manageable while restoring the growth momentum of the economy. To achieve these medium-term objectives, specific actions will be taken (i) to save imports (particularly energy-related imports); (ii) to promote exports and improve industrial efficiency through consolidation of investment, further opening of the economy and reducing government intervention; and (iii) to strengthen domestic resource mobilization efforts. The foreign exchange provided by the loan is being used to finance essential imports. Overall progress has been satisfactory and the second and final tranche of $100.0 million was released on August 27, 1982. - 41 - ANNEX III Page 1 KOREA SMALL AND MEDIUM MACHINERY PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: Eleven Months (b) Agency which prepared project: Republic of Korea (c) Date of first Bank mission to consider the project: February 1981 (d) Departure of Appraisal Mission: January 1982 (e) Departure of Post Appraisal Mission: June 1982 (f) Negotiations Completed: September 1982 (g) Planned date of effectiveness: April 1982 Section II: Bank Implementation Action None Section III: Special Conditions (a) Government to exchange views annually with the Bank on the level and timing of the Government's financial support to SMIPC for the following year, taking into account SMIPC's financial prospects and work program (para. 38). (b) SMIPC, the DFCs, together with the appropriate representatives from the Government, to form a coordination council which would periodically review the implementation of the project and report to the Bank annually, commencing December 1983, assessing the coordination by SMIPC and the DFCs, in the provision of technical assistance and credit (para. 31). I LIL _a K. .O9 ID5 N - R.T H K 0 R E A-s \ -fN KOROEEA CHtiN A . 4 . i . / REP OF KOREA JPAN GY 0 0GI /chceon GANG W/vFON 4. 125* ~~~~~~~~26 Bugheag4 - T:o:t-wc Of -. .d4 ' th rrtuOt to winch ,t ft at.hed-' ttintOfl, sp so - S d W IIr ton WtotttW tito., O tt tt d. , , py 0hot cztttsuhctO ,0 trd hot o (f the4)t3. 37.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3' MonriPO ~ / t 5 v eonan ;3- J Wkn _ ;n?St =m9 tf~~~~~I N M . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~geun n< n 35,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o t p*X/~~~~~~~~~~~~~~~~~~~~~~~ Primary roads -36'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 . , Rrl i!wr ys -34- ~~~~~~~~~~~~~~~.. +t-.-,- +Ra lways under construction 'N +< Airports 4.BU Ports _ _ ~~~~~~~~~~Rivers SpSecial clties - - Proviricic boundaries Jeju.-_ . InterEat,onal bounda ries 34-~~~~~~~~~~~~~~~~~~~~~~~- g~~~~~~~~~~~~~~~ 20 40 oP ,0 00 : ,-120 J 40 160 F 2s' Airpogwtpo s * 40 60 en iso Fi ros ye'~~~~ivr spca 1 ie s .