TECHNICAL ASSISTANCE FUNDING PROPOSAL FOR ASEM TRUST FUND. B. PROJECT NAME AND ID# China Social Security Reform Trust Fund

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1 November 22, 2003 TECHNICAL ASSISTANCE FUNDING PROPOSAL FOR ASEM TRUST FUND A. COUNTRY China B. PROJECT NAME AND ID# China Social Security Reform Trust Fund C. TECHNICAL ASSISTANCE SUMMARY The objective of this grant would be to: (i) provide expert advice in establishing a strategy for the development of management systems and information technology for public pension systems using two provinces as pilots for national policy; and (ii) undertake surveys, analysis and related training on pension policy reform options utilizing liability modeling techniques. Grant components would include: (a) an Information Technology Needs Assessment evaluating the information processing, control and communications needs for the principal municipalities in Liaoning and Sichuan provinces, for the provinces themselves, and for linkages with the national authorities; (b) an Administrative Systems Review evaluating the administrative needs required in the same entities covered by a above including a staff skills and requirements assessment; (c) design, execution and analysis of actuarial assessments for 31 provinces and 5 special cities in order to complete a PROST projection of policy reform options for all such entities on a nationwide basis; (d) financing of local costs for counterpart attendance at World Bank managed training programs in PROST; and (e) specialized training in pension policy reform options for senior Chinese policymakers at the Harvard University -World Bank workshop on Pension Reform. Name of Sector Board Reviewer: Robert Holzmann, HDNSP Reviewer s Comments: On behalf of the Social Protection Sector Board of the Human Development Network, I hereby endorse the proposed use of $777,000 of funds from an ASEM Trust Fund for Social Security Reform in China. The proposed use of funds is consistent with our view of the critical areas where very modest resources can have a substantial impact on Social Security reform in China, namely by the concentration on establishing a strategy for development of information and management systems (using two targeted pilot provinces as a starting point) and by projecting policy and administrative reform options with the assistance of more widespread use of PROST. Attendance by a small number of Chinese experts at the Harvard course would also prove useful and carry through with efforts which have been attempted for several years. The reform agenda in China is substantial and the decentralized character of the social security system places particular onus on The World Bank and the ASEM Trust Fund to target and leverage their efforts with a statesponsored reform agenda. The proposed use of funds meets such a test. D. AMOUNT OF GRANT REQUESTED US$777,000

2 TECHNICAL ASSISTANCE FUNDING PROPOSAL FOR ASEM TRUST FUND November 22, 2003 A. COUNTRY China B. PROJECT NAME AND ID# China Social Security Reform Trust Fund C. TASK MANAGER Mark C. Dorfman D. FINANCING PLAN IBRD/IDA 15,540 Government ASEM Trust Fund $777,000 TOTAL $792,540 E. BACKGROUND 1. Sector Reform in China. The Chinese pension system has undertaken a series of reform measures beginning in the early 1990s. Since decentralization during the Cultural Revolution, in 1992 the Government began experimentation with a combination of a small defined-benefit pension combined with larger individual accounts. In 1997, such parameters were formalized and mandated nationwide in a State Council decision. Yet actual management of accounts and funds however, has remained largely in the hands of individual enterprises rather than being transferred to municipal and/or provincial level government authorities. As such, it has proved difficult to institute unified policies with such decentralized administration. In 1999 a decision was taken to integrate the subsectors of social security (pensions, death, disability, health and unemployment) at the municipal, provincial and national levels, respectively, as well as create a nationally integrated information system that links these three levels of Government. Government authorities have recognized that establishing such a system for a covered population of over 120 million people will require careful strategic thinking, including extensive needs assessments and feasibility studies, development of administrative systems and staff development plans, as well as extensive procurement of equipment, hardware and software. 2. Role of the World Bank. The World Bank s role in social security reform in China dates from the Enterprise Housing and Social Security Project (1994) which aimed to support technical assistance and studies in four pilot cities (Beijing, Chengdu, Ningbo and Yantai) as well as provide support to the Ministry of Labor and Social Security (MOLSS) and Ministry of Finance (MOF). In 1996, The World Bank undertook a national level assessment of pension reform options which led to the 1997 publication, Old Age Security, Pension Reform in China. Subsequently, three pension reform seminars were then organized in 1998 and 1999 by the World Bank Institute which were well received. A Pension Reform Learning and Innovation Loan was approved by the Bank in 1999 providing assistance in one municipality and one province. During 2000, three sector notes were prepared by the Bank: China Pension Policy Reform, Linking SOE and Pension Reform, and China: Social Security Reform - Technical Analysis of Strategic Options. The last note projected pension liabilities and reform options and resulted in requests for similar support from the Bank.

3 Link to Country Assistance Strategy. The Bank Group s strategy and objectives of 1997 (and progress note of 1998) was grouped around five major themes, one of which was human development, comprising poverty alleviation, health, education and social protection. A new CAS is currently under preparation and support to the social sectors will likely be a central theme to the Bank s strategy. The proposed assistance would contribute to the CAS objective of social protection by assisting Government in developing a social security system which can operate more efficiently, establish more financially sustainable parameters, and provide a stronger foundation for old age income and other social risk protection. 4. Proposed Assistance and Links with Assistance from Other Sources. Given the breadth of the reform agenda and the overwhelming complexity and cost for achieving a reform on a nationwide basis, there are a number of ongoing interventions, each of which aims to contribute to a wider objective. Reform initiatives are being undertaken in various cities and provinces, many of which aim to contribute to national guidelines. The proposed grant would undertake an in-depth analysis in two areas: administrative systems and policy projections. This would be carefully coordinated with analysis undertaken with the support of other World Bank projects, bilateral support programs (including Australian and UK support) and the ADB. Prior support has been provided by a PHRD grant used to assist in the preparation of the Pension Reform Project. The proposed grant would also be coordinated with other ASEM support in China including learning from the experience of a previous ASEM grant for China SOE reform. F. PROJECT DESCRIPTION 5. The objective of this grant would be to: (i) provide expert advice in establishing a strategy for the development of management systems and information technology for social insurance management using two provinces as pilots for national policy; and (ii) undertake surveys, analysis and related training on the modeling of pension policy reform options. The components would be as follows: (i) Information Technology Needs Assessment ($260,000) This assessment would entail a systematic survey and evaluation of information processing, control and communications needs for the principal municipalities in Liaoning and Sichuan provinces, for the provinces themselves, and for linkages with the national authorities. Liaoning province has been identified by the central authorities as a target for piloting changes in information technology and administrative systems. Sichuan province would also be analyzed as a pilot province in Western China with its significant population and social liabilities. The assessment would include a review of existing systems at a municipal level in key cities and at the provincial level as well as a review of the intended collections, data processing, control, financial processing, information disclosure and disbursement processes and requirements posed by integration at a provincial level. Consultants would be expected to review existing hardware, software, database management functions, funds processing capabilities, policies and procedures. Based on their assessment, the consultants would be expected to recommend basic parameters for system architecture, hardware specifications, network and computer operating systems and software design. Such recommendations would aim to reconcile the needs of all the parties surveyed and be consistent with national policy. In general terms, consultants would also be required to briefly explore how such provincial recommendations might be replicated elsewhere in China. Consultants would be expected to exercise sound judgement in recommending how to

4 - 3 - balance centralized control mechanisms with decentralized flexibility so as to accommodate varying conditions throughout China. (ii) (iii) (iv) Administrative Systems Review ($310,000) This assessment would entail a systematic survey and evaluation of administrative and management requirements consistent with the technology strategy identified in i above. An in-depth analysis would be undertaken of the administrative apparatus in three key cities in Liaoning province (Shenyang, Dalian and another city) as well as at the provincial level. Similarly, consultants would undertake an in-depth analysis of the administrative apparatus in three key cities in Sichuan province (Chengdu, Deyang and Mianyang) as well as at the provincial level. In these studies, consultants would be expected to: (a) develop a detailed outline of the administrative systems and procedures which would be expected at the municipal and provincial levels, respectively, including specific references to procedures manuals which would be needed; (b) develop and recommend a detailed staff development and organizational development program for each of the entities surveyed including recruitment skill requirements, required staffing adjustments, changes required in organizational design, and initial and on-going training programs; (c) develop a detailed work program for the establishment of national parameters for administrative procedures which would be applied at the provincial an municipal levels, respectively; (d) outline the linkages between the administrative procedures applied in the municipal labor bureaus and social insurance agencies with the finance bureaus, banks, post offices, government auditors and tax authorities, respectively so that the administrative and oversight systems are linked to flows of funds; and (e) outline a program for the development of checking and control systems including sampling and fraud detection, including remedial actions. Actuarial Data Survey and Liability Analysis ($152,000). This component would provide support for surveys to be conducted in 31 provinces and autonomous regions and five special municipalities in order to develop individual databases of actuarial data necessary for projecting pension liabilities on a provincial and select municipal basis. Such data would include wage/age profiles for the covered population and employment patterns. Such data would then be utilized with the Pension Reform Options Simulation Toolkit (PROST) to project liabilities for a 75 year period and evaluate selected policy reform and financing options. The analysis would be carried out as follows: (a) compilation of published data; (b) design of surveys; (c) execution of surveys; (d) compilation of resulting data and entry into PROST input templates for analysis; (e) sensitivity analysis and evaluation; and (f) dissemination of analysis and output. The output would be PROST projections for all 31 provinces and five municipalities discussed and evaluated together with World Bank economists and provincial social security and finance bureau authorities. Local Costs of PROST Training ($30,000). This component would provide funds for the local costs (domestic transport and lodging) so that technical staff from all of China s provinces and key municipalities can learn, be licensed and be prepared to further train others in the use of PROST. The actual training would be carried out by World Bank staff. Training would be carried out in a sequenced plan by which individuals would be carefully selected to be trained and, upon successful completion of the training of trainers program would then carry out subsequent training of staff in their respective provinces.

5 - 4 - (v) Training in Policy Reform and Implementation Options ($25,000). This component would provide policy training for key Chinese policymakers by the attendance of an annual workshop offered by Harvard University and the World Bank on Pension Reform. Senior policymakers would be selected to attend from among the Ministry of Finance (MOF), Ministry of Labor and Social Security (MOLSS), State Development Planning Commission, State Council Restructuring Office and National Social Security Foundation. This program is a unique opportunity for exposure to multiple subsector reform issues and in-depth case studies from throughout the World. In addition, this program offers an opportunity to compare pension reform options with representatives of many other countries. This program offers a strong cross-country complement to the assessment undertaken in iii above. G. DESCRIPTION OF PROPOSED TECHNICAL ASSISTANCE (IMPLEMENTATION ARRANGEMENTS) 6. This grant would be administered by counterparts as follows: Units in the Provincial Social Security bureaus for Liaoning and Sichuan provinces would administer their respective portions of components 1 and 2. Components 3, 4 and 5 would be administered by the World Bank Operations Office of the Ministry of Labor and Social Security in close collaboration with the Ministry of Finance Social Security Department. The Bank would provide detailed input into the terms of reference for each study, would oversee quality control in the execution of surveys, and would provide direct assistance through PROST training and training at the Harvard program. Given the background of the World Bank working directly with both MOF and MOLSS in strengthening information and administrative systems as well as in undertaking PROST projections, we expect very strong client ownership and support for the activities proposed. The proposed trust fund support reflects both on-going collaborations with the Bank and requests for assistance received from both ministries. 7. The nature of the consultancies and analysis proposed requires recruiting key people that are able to combine both international best practice with an in-depth understanding of the Chinese pension system and Governmental administrative and technological apparatus. The Bank is uniquely positioned to provide guidance in the selection of such teams through its multiyear experience in pension and social security reform in China, its experience with an international roster of high quality consultants in the very technical key areas identified, and in its exposure to local expertise through its China office. As such, the Bank will work closely with local counterparts in the identification of consultants. H. TECHNICAL ASSISTANCE TIMETABLE 8. The following schedule is proposed for use of the Grant: Appointment of Specialists April May, 2001 TA Implementation Period June, 2001 February 2002 Final Reports January February 2002 I. USE OF GRANT FUNDS

6 The proposed budget for the preparation work is shown in the table below: Table 1: Proposed Budget Components Activities No. of Unit Cons. 1 Rate 2 Duration 3 Cost (Mnths) (Per Month) (Mnths) (US$) 1. Information Systems Assessment Hardware, Software, Fees: Internat. 4 14, ,800 Communications Systems, Data Local 6 4, ,000 Management and Data Security Travel: Internat. 6 4,650 27,900 Experts Local ,000 Subsistence: Internat. 4 4, ,800 Local 6 4, ,500 Other expenses Total 260, Administrative Systems Development Personnel Management, Skills Fees: Internat. 4 12, ,500 Requirements of Technology, Local 10 3, ,000 Organizational Change Travel: Internat. 6 4,650 27,900 Local ,000 Subsistence: Internat. 4 4, ,800 Local 10 4, ,800 Other expenses Total 310, Actuarial Assessment and Data Surveys Actuarial Science and Fees: Internat. 2 11, ,600 Economics Statistics, Demography, Local 8 3, ,000 Economics, Actuarial Science Travel: Internat. 2 4,650 9,300 Local ,000 Subsistence: Internat. 2 4, ,300 Local 8 4, ,800 Other expenses Total 152,000 1 In the case of travel, the figures refer to the number of roundtrip airfares (international and local airfares in the case of international consultants and local airfares in the case of local consultants). 2 In the case of travel, the unit rate refers to the cost of a roundtrip ticket (international and domestic in the case of international consultants and domestic roundtrip ticket in the case of local consultants). Unit rate for subsistence refers to the cost of subsistence for a 30 day period. 3 This refers to the number of months of a contract per consultant. In the case of subsistence, figures refer to the number of months per consultant in which subsistence can be charged to the trust fund. Figures are rounded.

7 - 6 - Components Activities No. of Unit Cons. 4 Rate 5 Duration 6 Cost (Mnths) (Per Month) (Mnths) 4. Local Costs of PROST Training Fees: Internat. Local 0 Travel: ,000 Subsistence: 50 2, ,000 Other expenses Total 30, International Training Fees: Internat. Local Travel: ,500 Subsistence: 3 6, ,000 Other expenses: Tuition 3 4,500 13,500 Total 25,000 TOTAL TECHNICAL ASSISTANCE (TA) COST Bank managing unit costs (2% of TA Cost) 777,000 15,540 TOTAL ASEM FUND COST 792,540 4 In the case of travel, the figures refer to the number of roundtrip airfares (international and local airfares in the case of international consultants and local airfares in the case of local consultants). 5 In the case of travel, the unit rate refers to the cost of a roundtrip ticket (international and domestic in the case of international consultants and domestic roundtrip ticket in the case of local consultants). Unit rate for subsistence refers to the cost of subsistence for a 30 day period. 6 This refers to the number of months of a contract per consultant. In the case of subsistence, figures refer to the number of months per consultant in which subsistence can be charged to the trust fund. Figures are rounded.

8 - 7 - J. ESTIMATED DISBURSEMENT SCHEDULE Table 2: Estimated Disbursement Schedule Timeframe Cost $ FY01: Quarter 4 $50,000 Total for FY01 $50,000 FY02: Quarter 1 $200,000 Quarter 2 $350,000 Quarter 3 $177,000 Quarter 4 Total for FY02 $727,000 TOTAL TA COST $777,000