ECONOMIC ANALYSIS. lacking implementation details and therefore potential benefits, and four project management and capacity building subprojects.

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1 Guangxi Regional Cooperation and Integration Promotion Investment Program (RRP PRC ) ECONOMIC ANALYSIS A. Introduction 1. The economic analysis of the Guangxi Regional Cooperation and Integration Promotion Investment Program covers four of the 10 subprojects in tranche 1. 1 The four subprojects are (i) construction of Fangchenggang training center for People s Republic of China (PRC) and Vietnamese workers and small and medium-sized enterprises (SMEs); (ii) development of Pingxiang cross-border labor cooperation demonstration park; (iii) development of the smart port for Longbang border economic zone; and (iv) expansion of Pingxiang border trade service center. 2. Standard cost benefit analysis has been applied to the individual subprojects using withand without-project alternatives to determine whether the minimum required economic internal rate of return (EIRR) is achieved. 2 Least-cost analysis is prevented since the subproject costs and scopes are predetermined based on detailed needs assessments. B. Cost Benefit Analysis 1. Economic Costs 3. Costs associated with the subprojects are drawn from their corresponding feasibility studies. 3 Costs are valued in local currency, measured in 2016 prices. The shadow exchange rate factor conversion factor used to derive economic values of the subprojects from their financial values is 1.08, and this ratio is assumed constant over the period of analysis. It is estimated that about one-third of capital and recurrent costs will be made up of tradables, and that the remaining two-thirds of those costs will consist of non-tradables. 4. Construction of Fangchenggang training center for PRC and Vietnamese workers and small and medium-sized enterprises. The technical and vocational education and training (TVET) subproject comprises the construction of new facilities for training students in auto repairs, machinery, electronics, trade, and commerce. 4 Investment costs allocated to the subproject total CNY million, of which ADB will contribute about 50%. Construction will take place over a 2-year period ( ) and annual operating costs are estimated to be CNY12.1 million. 5. Development of Pingxiang cross-border labor cooperation demonstration park. The subproject will establish a complex in Pingxiang Friendship Gate Industrial Park to support cross-border labor cooperation. 5 Total investment cost of the project is CNY63.7 million, of which ADB will cover about 50%. Operating costs are estimated at nearly CNY9.6 million a year. 1 The excluded subprojects are for SME financing, where detailed information is lacking, short-term training program lacking implementation details and therefore potential benefits, and four project management and capacity building subprojects. 2 ADB Guidelines for the Economic Analysis of Projects. Manila. 3 Where capital expenditures in the subprojects differ from those in the original feasibility studies, investment components have been prorated according to their value in the total investment. 4 Chongqing Design Institute Feasibility Study Report on Training Center of Poly Technical Vocational School of Fangchenggang City for Vietnamese Workers. Chongqing, People s Republic of China. 5 Pingxiang City Industry and Information Bureau. Pingxiang Friendship Gate Industrial Park: Across the Combined Area of Cross-Border Labor Cooperation Supporting Services Pilot Project Feasibility Study Report. Pingxiang, People s Republic of China.

2 2 6. Development of smart port for Longbang border economic zone. The subproject will be undertaken in three phases from 2017 to 2020 and cover (i) construction, (ii) service development, and (iii) promotion. 6 The total investment cost of the project is CNY258.7 million, and ADB will cover two-thirds of the total. Operating costs are estimated at CNY17.5 million a year for system maintenance, professional fees, and administrative expenses. 7. Expansion of Pingxiang border trade service center. Construction of the Pingxiang border trade service center will take place over a 2-year period ( ). 7 Total investment cost of the project is CNY84.5 million, of which ADB will fund about 50%, while operating expenses are CNY5.4 million a year. 2. Economic 8. associated with the subprojects can be measured using three alternative methods, which reflect standard approaches to building regional and national income and production accounts: (i) the income approach to measuring incremental flow of factor incomes; (ii) the product approach to calculating the incremental real value of production, or productivity, from a subproject; and (iii) the expenditure approach to measuring the incremental demand for goods and services in the region generated from the subproject. When benefits involve tradables, export demand is assumed to be perfectly elastic and world prices are therefore appropriate measures of traded outputs. For TVET subprojects, the training period is assumed to be 3 years, and 95% of trainees are assumed to find employment for at least 5 years following graduation. The shadow exchange rate factor used to derive economic values from their financial values is 1.08, and this ratio is assumed constant over the period of analysis. 9. Construction of Fangchenggang training center for PRC and Vietnamese workers and small and medium-sized enterprises. The TVET subproject benefits are measured using the income approach to measuring incremental flow of factor incomes, i.e., the benefits that the center will provide over and above what there was before. The center will provide training facilities for 1,000 PRC and Vietnamese students, and offer them an opportunity to move up the employment ladder to improve their skills, productivity, and buying power substantially. Wages of graduates are assumed to rise from the average annual wage for unskilled labor of CNY9,524 to the average for skilled labor of CNY26,523 estimated for Development of Pingxiang cross-border labor cooperation demonstration park. The main benefits of training offered to migrant workers and the skills improvement education are incremental flow of factor incomes to the trainees. 8 Migrant worker training is expected to benefit 580 persons a year, while skills training is expected to benefit 1,000 persons each year. The training period is assumed to be one year for migrant laborers and three years for skills training. The wages of migrant workers are expected to equal those for unskilled labor, i.e., CNY7,707, while the wages of existing unskilled workers receiving skilled training are projected to rise from the average annual wage for unskilled labor of CNY9,524 to the CNY23,184 average wage for skilled labor. 6 Guangxi Jingxi Full Rich Investment Company China Longbang Smart Port: Feasibility Study Report (Copy for Approval). Baise Open Border Pilot Area Management Committee. 7 Guangzhou Jiancheng Engineering Company Sino-Viet Nam Pingxiang Border Trade Comprehensive Service Center Project. Feasibility Study Report. 8 The training institute will also receive some revenue gains for fairly modest tuition and room and board fees. However, they represent transfers between the students and the training institute and, as such, a redistribution effect between costs to students and revenue to the training institute.

3 3 11. Development of smart port for Longbang border economic zone. The subproject aims to promote the application of new technology, improved internet access, and electronic pay and delivery systems to reduce transaction costs and accelerate product delivery on business business and business customer transactions between the PRC and Viet Nam as well as other Association of Southeast Asian Nations countries. In addition to expanding and diversifying trade, the subproject will provide considerable net efficiency gains in border trade and lower trading costs. The expansion in e-commerce is assumed to follow a (i) constant market share of all trade in goods and services, and (ii) a 10% annual net efficiency gain over conventional cross-border trade. 9 The result is an 8% annual increase in e-commerce trade over that which would occur with conventional commercial transactions. The benefits are calculated for an initial 10 SMEs, each generating CNY4 million in exports, with two additional companies added each year until the existing capacity limit of 25 companies is reached. 12. Expansion of Pingxiang border trade service center. Four direct benefits will result from the subproject. The first refers to the enhancement of trade resulting from the promotion of border trade among local enterprises. While the initial expansion is likely to be modest, once the subproject services become established, export growth is likely to be substantial. The second benefit arises greater cross-border and export-oriented investments in the form of consumer goods and cross-border supply or value chains. Considerable potential exists for cross-border investments and, to the extent that cross-border value chains can be developed, the potential for Pingxiang exports to Viet Nam will be substantial. The third benefit arises from the reduced processing time, efficiency gains, and associated reductions in trading costs. The fourth benefit is associated with possible net gains from the implementation of sanitary and phytosanitary measures (SPS), without which trade is lower because of certification expenses and disincentives to consume potentially contaminated products. 10 The costs and benefits associated with the presence of SPS measures are contrasted with border trade conditions associated with not having the measures in place. 11 The incremental export value from the four benefits associated with the border trade services is estimated to be CNY426 million a year over the project time horizon, which represents over 8% in additional annual revenue from crossborder exports. 9 The general growth in trade is based on data from Guangxi Zhuang Autonomous Region Bureau of Statistics as reported in Hong Kong Trade Development Council Research Enhanced Border Trade and New BRI Privileges Set to Boost Guangxi. 26 February Projected export growth is assumed to follow International Monetary Fund projected annual export growth for the PRC in World Economic Outlook, plus the efficiency gains generally associated with e-commerce (A. Meola Chinese e-commerce companies are growing by leaps and bounds, but there s still one problem. BI Intelligence E-Commerce Briefing. 17 May). International Monetary Fund World Economic Outlook Update July Washington, DC. The efficiency gain calculation is net of the cost of additional transactions resulting from the larger volume of trade, and assumes that the new SMEs operating in the smart port will benefit from the reduced cost of e-commerce transactions relative to those of conventional transactions. 10 SPS measures can increase the fixed costs for foreign producers as they are required to adapt products and production processes to specific product requirements in the export market and apply conformity assessment procedures that can lead to additional costs. The approach to the estimation of the price effects of SPS measures and the calculate ad valorem equivalents are based on the theoretical framework in H. Deringer Cost benefit analyses in trade regulation: How to assess the health impacts of non-tariff measures? MILE 14. Bern, Switzerland: World Trade Institute. In practice, the estimates for the subproject followed the methodology in F. van Tongeren, J. Beghin, and S. Marette A Cost-Benefit Framework for the Assessment of Non-Tariff Measures in Agro-Food Trade. OECD Food, Agriculture and Fisheries Working Papers. No. 21. Paris, France: OECD In the cost benefit framework, SPS measures are imputed based on the willingness-to-pay method, i.e., the benefits and costs that consumers and producers impute to removing or implementing the measure.

4 4 C. Economic Internal Rate of Return 13. Major assumptions. Assumptions underlying the economic analysis are: (i) capital investment is spread evenly across the duration of project implementation; (ii) unless otherwise specified, annual operating costs are assumed to be 10% of capital expenditures; (iii) the proportion of tradables inputs in capital and operating expenditures is 30% of the total, and a standard conversion factor of 1.08 is applied to tradables; (iv) project benefits accrue through 2045; and (v) a discount rate of 12% is used to calculate the EIRR. 14. Economic returns. The base-case EIRR calculations for the subprojects and entire project are in Tables 1 and 2. The EIRR is computed at 22.4% for the overall project. The integrated benefits and impacts are expected to outweigh the costs. For the subprojects, the returns are 23.3% for the Fangchenggang training center for PRC and Vietnamese workers and SMEs; 24.3% for the cross-border labor cooperation demonstration park in Pingxiang border economic zone; 20.4% for the development of a smart port for Longbang border economic zone; and 25.2% for the expansion of Pingxiang border trade service center. These estimated benefits are considered conservative because qualitative benefits are excluded from the analysis. The second part of Tables 1 and 2 presents the results of the sensitivity analysis tested for the effects of negative changes in key parameters. The findings show that the project remains economically viable in the face of a 10% cost overrun (21.2%), a 10% benefits reduction (20.7%), a 1-year delay in the program start-up (19.5%), and a combination of all three negative changes in key parameters (17.1%). No. Table 1: Summary of Economic Internal Rate of Return and Sensitivity Analysis Description Subprojects Switching EIRR ENPV a EBCR Sensitivity Value (%) (CNY million) (ratio) Indicator (%) 1. Construction of Fangchenggang Training Center for PRC and Vietnamese Workers and SMEs Development of Pingxiang Cross- Border Labor Cooperation Demonstration Park 5. Development of Smart Port for Longbang Border Economic Zone Expansion of Pingxiang Border Trade Service Center Whole Project (a) Base Estimate (b) Reduced by 10% % (c) Costs Overrun of 10% % (d) 1-Year Delay in Program Start-Up (e) Combined EBCR = economic benefit cost ratio, EIRR = economic internal rate of return, ENPV = economic net present value, PRC = People s Republic of China, SMEs = small and medium-sized enterprises. a At 12%. Source: Asian Development Bank.

5 5 Table 2: Economic Internal Rate of Return for the Investment Program, (CNY million) Costs Year TVET LCDP SPBZ BTSC Total Capital Costs O&M Total Net Decline 10% Capital Cost Overrun 10% 1-Year Delay Combined (222.0) (222.0) (244.1) (222.0) (244.1) (222.0) (222.0) (244.1) (222.0) (244.1) (108.9) (110.0) (118.1) (120.2) (129.4) (34.5) (35.6) Economic Internal Rate of Return (EIRR) = 22.4% 20.7% 21.2% 19.5% 17.1% Economic Net Present 12% = ( ) = negative, BTSC = Expansion of Pingxiang Border Trade Service Center, LCDP = Cross-Border Labor Cooperation Demonstration Park in Pingxiang Border Economic Zone, O&M = operation and maintenance, PRC = People s Republic of China, SMEs = small and medium-sized enterprises, SPBZ = Development of Smart Port for Longbang Border Economic Zone, TVET = Fangchenggang Training Center for PRC and Vietnamese Workers and SMEs. Source: Asian Development Bank.